Q4 2019 Earnings Call
Leaders from scratch.
Ladies and gentlemen, thank you for standing by and welcome to the U.S. food fourth quarter fiscal 2019 earnings call.
Time, all participants are in listen only mode Safra speakers presentation, there will be a question answer session.
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It's now my pleasure to turn to calibrate your speakers or D National Lisa Napier now. Please go ahead.
Thank you good morning, everyone welcome to our fiscal 2019 fourth quarter and yearend earnings call.
I'm here today with Pietro century, I know, our CEO and Dirk Locascio our CFO.
Catherine Dirk will provide an update on our results for the fourth quarter and for the full fiscal year.
We'll take your questions. After our prepared remarks conclude please provide your name your firm and limit yourself to one question.
During today's call and unless otherwise stated, we're comparing our fourth quarter and full year fiscal results to the same period in fiscal year 2018, our earnings release issued earlier. This morning, and today's presentation slides can be accessed on the Investor Relations page of our website.
Also during today's call, we will refer to certain organic financial result.
As a reminder, organic results exclude contributions from S.G.S. food group of companies, which we acquired in September 2019.
In addition to historical information certain statements made during today's call arc considered forward looking statements.
Please review the risk factors in our 2018 form 10-K filed with the FCC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements and lastly, I'd like to point out that during today's call, we will refer to certain non-GAAP financial measures.
All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release, and now I'll turn the call over to Pietro.
[noise]. Thanks, Melissa good morning, everyone and thank you for joining us we're going to begin on slide two with an overview of our full year results.
In fiscal 2019, we continue to profitably grow our business, while expanding our operating leverage.
So first about organic results for the year, following which I will cover our total results, which isn't always says that include the impact of yesterday food group acquisition, which closed in September.
Oh organic business continued to show growth in all key financial metrics. We grew we grew total cases, 1.1% and continued to gain share in the independent restaurants space with 4.4% growth.
We delivered 6.2% adjusted EBITDA growth.
And grew adjusted diluted EPS by 11.1%.
Our organic operating leverage increased by eight cents per case, the fourth consecutive year in which we increased operating leverage.
Did we expanded our return on invested capital by hundred 30 basis points to 19.6%.
I'm happy to report that all of our organic results either met or exceeded our guidance for the 2019 fiscal year.
On a total company basis, which includes the results from the food group acquisition, we delivered strong case and EBITDA.
Several cases grew 4.6% and independent restaurants grew 7.1%.
Full year adjusted EBITDA grew 8.3%, while adjusted diluted EPS grew 9.7%.
The combination of growth in our organic business and our continued focus on working capital, resulting in a 24.8% increase in operating cash flow, which contributed to bring our leverage down to 3.9 times.
We're very pleased with our full year results and look forward to continued growth in 2020.
Moving to slide three I'd like to highlight some of this years progress in our great food made easy strategy as well as provided an update on the integration of food.
So let's start with a great food part of our strategy.
On the left hand side, our innovative products continue to resonate with customers and 2019, we bought 56, new innovative and exclusive products to market, including a number of sustainable products under our served good program.
Scoop continues to drive higher basket and better stickiness with customers as evidenced by our most recent analytics.
This coming spring, we're launching our 25th edition of the school, which remains at the heart of our differentiation strategy.
Private brands continued to be a key driver of our gross profit dollar roll.
Turning 2019 private brands as a percentage of our total sales grew by 70 basis points, which is our fourth consecutive year of significant private brand expansion.
Private brand sales now comprise more than 35% of total revenue.
And we continue to see significant runway on this front.
Sustainable products represented one pill liver, one pillar of our corporate social responsibility for E.S.G. program. During 29, T.. We expanded our served good product offering and we don't have over 500 sustainably sourced products available.
More details on our E.S.G. efforts can be found on our website and we will be publishing our new corporate social responsibility report later in Q1.
Oh were made easy part of the strategy is all about making it easy for our customers to do business with us foods, and making it easier for them to run their business.
Currently over 70% of sales revenue comes to our ecommerce site, which drives both higher basket and better stickiness.
Our more recent focus has been on enhancing the mobile experience, which is where more and more customers live and work.
Well the last call, we talked about our omni channel strategy, you Us foods direct pronto and chef store provide us with additional ways to reach existing customers and reach new customers.
Bronto was active in eight markets in fiscal 2019, and we plan to add to new markets in the first quarter of the year.
For our direct for Us foods, Iraq, endless aisle or online marketplace. We're focused on extending the number of products available. We currently have over 30000 products on your switch direct products that are not not stocked in our warehouse and we expect this number to double by year end.
Our portfolio value added services or check business tools are designed to help customers run their businesses more effectively and 29 team the number of unique customers using our check business tools increased by 24% the third consecutive year of over 20% growth last year, we further strengthened our portfolio when we.
Announced or exclusive partnership with toast toast as a cloud based point of sale solution that is one of the fastest growing in the U.S. and then integrates seamlessly with a myriad of restaurant management solutions, including some tools in our own portfolio.
On the right hand side of page three I'd like to highlight some of the progress we've made since closing the food group acquisition in late Q3.
The new leadership organization for the Northwest region is now in place at both the region and at the area level, we completed rebranding of nine facilities in over 500 tractors and trailers, we train new sales associates in our programs and initiatives, including rolling out some of our best selling scoop products to food markets. This was.
Very well received not only by customers, but also by associates.
In the first quarter of the coming here, we will begin the process of converting food groups systems to the us foods operating platform.
And we expect to have the first location completed in Q2.
Beyond system conversions are key priorities and Twentytwenty include implementing our team based selling model and continuing to integrate the processes of the two organizations.
We are on pace to achieve the $65 million of run rate synergies that we previously outlined and we expect to generate 10 million of these synergies and twentytwenty.
As a reminder, we expect synergy synergies to accelerate and 21 and 2022 coincident with us with the completion of our systems conversions.
Let's now turn to page four.
For a look at our volume growth for the fourth quarter.
We experienced slower case volume growth during the month of December across all customer types industry data such as Black box also showed a fairly significant slowdown in restaurant traffic during this time.
Which we largely attributed to the shorter holiday season between Thanksgiving and Christmas.
As to our own results in the fourth quarter organic case growth was up 40 basis points and total case growth was up 12.3% due to the addition of food.
Organic case growth with independent restaurants was 2.9% in large part due to the December holiday season, I just discussed.
Total case growth with independents was 11.9%, reflecting the addition of food group for the full quarter.
Organic healthcare and hospitality group growth was down 20 basis points in the fourth quarter generally inline with expectations discussed on our last call plus the impact of the December slowdown.
And lastly, with the all other customer type organic case, both was down 60 basis points as our existing chain business mirrored the mirror the industry data that I just referred to.
Gains from new customer wins generally came in as expected.
Looking ahead to Twentytwenty, we are assuming full year organic independent case growth of 5%, which includes the addition of the 50 Threerd week in 2020.
Inorganic case growth across all segments of 2% to 3%, which also includes the 50 Threerd week. The 50 Threerd week is worth about 1% of organic case growth.
I would now like to turn the call over to Dirk who will walk through our financial results and discuss our 2020 outlook in more detail.
Thank you Petro and good morning.
In fiscal 2019, we profitably grew with our target customers and pretty strong earnings growth.
As Patrick noted organic independent case growth for the year was 4.4% and total organic case growth was 1.1%.
Organic adjusted EBITDA grew by over 6% inline with our guidance for the year.
Inorganic adjusted diluted EPS increased 11%.
We continue to operate in a higher cost environment, but have continued to expand our operating leverage through our disciplined approach to growing gross profit.
We also further increase our organic return on invested capital or ROIC, approximately 130 basis points for the year.
Starting on slide five fourth quarter net sales were $6.9 billion, an increase of 14.8% from the prior year.
We experienced 2.5% year over year inflation and grew case was 12.3%.
The addition of the food group contributed 11.8% to net sales for the quarter.
We saw inflation across multiple commodity categories, including cheese poultry and beef.
Inflation in the fourth quarter took a modest step down from the 2019 peak that we saw in the third quarter and remains very manageable, while providing a modest tailwind to gross profit dollars.
We continue to see moderate inflation import.
Commodity team does continue to monitor airsep closely and we are prepared if we do see higher pork inflation.
Looking ahead to 2020, we expect inflation to remain manageable and similar to what we saw in fiscal 2019.
On slide six we continue to deliver strong gross profit results in the fourth quarter.
Gross profit was $1.2 billion, a 13.3% increase over the prior year period on a GAAP basis, and 14% increase on an adjusted basis.
As a percent of sales gross profit was 17.8% on a GAAP basis, an 18% on an adjusted basis.
This is 30 basis points lower than the prior year on a GAAP basis due to unfavorable year over year change our LIFO reserve.
The 10 basis point decrease in adjusted gross margin is due to the mixed impact of adding food group results to our organic results and is inline with what we expected.
While the independent mix a similar between US foods organic business on the food group business. The food groups remaining customer mix is weighted more towards national chain business, and as less healthcare and hospitality volume than us foods organic business.
This changing customer mix as well as food groups lower gross profit rate was in approximately 30 basis point negative impact to our adjusted gross margin rate in the fourth quarter, meaning gross margins improved 20 basis points versus fourth quarter 2018 on an organic basis.
The change also impacts our total company operating leverage per case, which I'll discuss in more detail in a few minutes.
Our strong organic gross profit performance continues to be driven by private brand growth and inbound freight optimization as we previously discussed.
For the full year, our private brand growth was 70 basis points.
Moving to operating expenses on slide seven Opex increased 14% from the prior year quarter to $1.1 billion, driven primarily by higher case volume from the addition of food group higher supply chain wages and higher acquisition related costs.
Adjusted operating expenses increased $113 million or 14.1% over the prior year fourth quarter.
And as a percent of sales was 13.2% flat to the prior year fourth quarter.
As I mentioned last quarter, we continue to work toward embedding continuous improvement culture, our daily operations, which will help mitigate the higher wage increases we've seen it also believe our strategy to improve supply chain is the right one.
On slide eight our operating leverage gain for the quarter was one cents per case and our organic operating leverage gain for the quarter was 10 cents per case.
On a full year basis, our operating leverage increased by four cents per case in total and eight cents per case on organic basis, completing our fourth straight year of significantly expanding our operating leverage.
As I discussed earlier, the food group business operates at a lower gross profit profile, primarily due to the different customer mix and a lower rate per case part of which we plan to address overtime through cost of goods synergies expansion of private brand sales growth with our target customer types.
Now on slide nine.
Fourth quarter, adjusted organic EBITDA was $317 million, an increase of 6.7% over the prior year period, and total adjusted EBITDA was $335 million up 12.8% over the prior year period.
Food groups adjusted EBITDA was modestly below our initial expectations due primarily to deferral of some promotional income combined with some nonrecurring costs largely to move business around related to the divestitures.
We expect these costs to remain until we complete system conversions and optimize the customer base, but don't expect these cost impact of business over the longer term.
As a percent of sales total adjusted EBITDA was 4.8% a decrease of 10 basis points from the fourth quarter 2018.
That 10 basis point decline is due to the addition of food group with the organic business, increasing 20 basis points for the quarter.
Overtime, we also expect to expand food groups EBITDA margins to the $65 million of synergies that Pietro discussed.
Our adjusted diluted EPS for the fourth quarter increased six cents or 10% to 66 cents per share as we continue to grow our adjusted diluted EPS faster than adjusted EBITDA.
On a four year basis, adjusted diluted EPS was $2.38, an increase of 9.7% over the prior year.
And finally on the far right fourth quarter GAAP net income decreased $8 million, while adjusted net income increased $14 million.
The decline in GAAP net income was primarily due to an $8 million higher LIFO charge from the addition of food group integration related costs.
Turning to slide 10, operating cash flow for the year with $760 million compared to $609 million in the prior year.
The increase is related to not repeating a $70 million prior year pension contribution that I previously discussed combined with earnings growth and improved working capital results.
Our business continues to produce strong operating cash flow that supports our ability to de lever net debt at the ended the year was $4.6 million an increase of approximately $1.3 billion from the prior year end.
Due to the acquisition of food group.
Net debt declined $188 million in the end of the third quarters, we continue to focus on reducing outstanding debt and our net debt to adjusted EBITDA leverage ratio at the ended the year was 3.9 times, which is down from 4.2 times at the end of the third quarter.
She did the same calculation with a full your trailing 12 months of adjusted EBITDA Food group, our pro forma leverage would have been closer to 3.6 times.
As a reminder, we expect to return to a three times leverage ratio in 2021, and we'll continue to demonstrate a disciplined approach to delevering based on our solid operating cash flow.
On an organic basis, our ROIC as I mentioned earlier increased 130 basis points in 2019 in over 250 basis points over the last two years.
This discipline and efficient use of capital has resulted in consistent expansion of ROIC over the last four years.
Moving now to slide 12, we're providing our initial view of 2020 guidance, which includes the expected impact of a 50 threerd week in 2020.
The 50 Threerd week is expected to add approximately 1% to both case growth and adjusted EBITDA growth.
For fiscal 2020 total case growth is expected to be between 911% with organic total case growth expected to be between two and 3%.
Specific to independent restaurants, we expect case growth of approximately 5% for the year also inclusive of the 50 Threerd week.
Total adjusted EBITDA is expected to be between 12, and 15% inorganic adjusted EBITDA growth is expected to be between six and 8%.
We do expect Q1, EBITDA growth to be modestly lower than our full year guidance due to the lower expected case volume as we've discussed.
Cash capex that expected to be $325 million to $335 million interest expense between 210 at $220 million and depreciation expense of between 330 $340 million.
And our adjusted effective tax rate to be between 25 in 26%.
And finally, we expected adjusted diluted EPS growth of approximately 13% to 18% or $202.70 to $2 in 80 cents for fiscal Twoq 2020.
Summary, we're pleased with our results for 2019 and excited about the future growth opportunities. The food group acquisition provides and confident achieving our 2020 guidance.
Now I'd like to open up the call for Q1 day.
As a reminder, asked a question seem please press star one on your telephone keypad clearly drawing a question fresh the pound or hashi. Please standby lowly compiled beginning roster.
Your first question comes from Chris Mandeville from Jefferies potential.
Hey, good morning.
Mark in terms of eat through just hi, good morning Hot in terms of the guidance that the 2% to 3% for total organic cases I'm.
I think I just heard you reference something with respect to I expect lower case volume in hockey. One can you just walk us through the cadence for the year and maybe give us some color on quarter to date trend and then I believe I also heard P. intrastate something along the lines of all other segments should be growing 2% to 3% for the full year. So if that's the case.
Maybe you can give us just some additional commentary with respect to the mix and how that plays out for the full year. Thanks.
Sure. So for the full year, we do we expect total case growth to grow 2% to 3% inclusive of roughly 1% for the 50 Threerd week, so meaning roughly 1% to 2% overall he didn't make any comment on the overall all other guide for 2020 as opposed to total and independents.
I think the the lower Q1 was really as we've talked about with the exit of the larger health care hospitality customer and then as we onboard new customers throughout the year, we expect that Q1 growth rate to be a little bit lower but then accelerating and as we go through the year well, we're not going for.
My specific commentary on a quarter by quarter basis, but do expect the year to grow in line with though the outlook that we provided.
Your next question comes from Kelly Bania trend BMO capital Your line is open.
Hi, Good morning, Tony Thanks for taking my question I.
I guess, just kind of furthering I, just think of adding to the case growth. So the 1% to 2% I think what would maybe be helpful. Just a little bit more in terms of puts and takes and what you're thinking on an organic basis across the three segments and independence in particular in with with healthcare and hospitality you mentioned.
The exit just can you help us understand why and what impact that has.
And in any new customer wins, you're planning for it in 2020.
Those kind of cemented our those you know things that you're planning to secure over over the next you know course of several months.
Sure I think so if you come back to with the independence the.
The 4% for the year again, you can have some quarters, a little higher little lower but we expect that to be relatively consistent as you go throughout the year, the healthcare and hospitality and all other that Theres always a pipeline that you are working and so a different theres different customers that are different stages that pipeline as far as summer onboarding.
Now some of your continuing to work with and you expect to onboard at different points I think the healthcare and hospitality.
The large customer we talked about a few times in the fourth quarter, so that shouldn't be a big surprise and so really as you lap that through the kind of earlier part of our 2020 at site. It's obviously going to get a lower growth rate as a result of that but we feel good about the pipeline and our ability continue to grow and grow with our target customer.
Types throughout 2020.
Okay, and then in terms of some of the metrics you were giving with I think scoop and E commerce, particularly on the basket size. It seems to be creeping up a little bit I'm just looking at my notes from the past. So maybe you can just help US understand you know how you see that going forward, what's driving that 10.
Some of the other retention rates that you're seeing if that's it seems like that's still very steady just maybe talk about that a little further.
Yes.
So this is general Kelly.
I think the.
Main reason for the kind of continued skewed towards creeping up of the impact on baskets and retention is just a cumulative impact on our customers of school right. So I think we've set of all the.
I think over 400 products, we've launched over over over time, and $1.25th addition, cost 80% or still in market somewhere not necessarily market, but somewhere so those items you know become an important part of customers menu and as we continue to add and as sake as customers continue to add.
Items from screw to their menu, which is creates greater stickiness overtime.
And I think there was a second part to your question that you'll have to remind me of Oh, just just wanted to touch on the retention rate.
Yes, so similar similar impact.
In terms of both basket and retention coming from the cumulative impact of of all those products.
Okay and then can you also just let us know what you're planning in terms of debt pay down for 2020 or interest expense seemed a little bit lower than we were thinking.
So we would expect I'm not a particular number that will guy, but we would expect cash flow to continue to grow relatively commensurate with earnings growth after taxes and I think the other thing. If you remember is so over the course of 29 chain. There were some rate costs. We also did some refinancing.
And that helped reduce some rates on our existing debt. So Scott Melissa can probably help you out a little bit more afterward, but we forgot about our outlook on that and in our ability to continue to de lever toward the three times and 2021 that we've talked about.
Okay. Thank you.
Your next question comes from Andrew I tell you from Wells Fargo. Your line is hoping.
Hi, guys good morning, and.
Good morning, and lower looks to be.
Continued solid execution.
I did want to ask you about.
Food group feature under.
Maybe can you just provide a bit more color on the shortfall in EBITDA in Q4, and then and then 2020.
And then absent that any changes in the underlying assumptions as to how you're thinking about the performance of that business ex synergies.
Yes, so when I talk about fourth quarter, maybe dark and talk about the the full year.
Let's start with the last for your question so no changes in the underlying.
Strength of the business.
And.
As we as we've said before and continue to believe feel really good about the assets, we acquired and and the people and I think the the progress we've had in the first few months has been really.
Really exemplary so what happened in the fourth quarter, if you walk down the PM now.
Volume was where we expected probably in fact, maybe a little bit better if you'll remember from the pro forma as that we presented when we made the acquisition we assumed a little bit of erosion in volume that you often get with with post an acquisition did not see that in this case. Despite the answer the prolonged uncertainty so feel good about the.
The.
The volume side of things the the negative impact or is really to temporary things one was a deferral of.
Promotional income, which moves and as a result of just.
Not wanting to take on too much of that comes back to us in a in 2020 and the other temporary thing is I will just take a minute to explain this.
So as a result of the divestitures the suite of the three divestitures you remember we kept about half the business that came with Ken, but we had to move that business out of camp to other facilities and in some cases that business that we had to move is in not necessary. The facility is going to be long term again, because we need.
You know to be on one system to have the optimal network and so we are incurring some incremental distribution cost, which go away when we optimize and network as result of being on one platform and so when we go on one platform not only do we realize the anticipated synergies some of these kind of temporary.
The additional distribution costs also go away and that's really as a story of the fourth quarter direct you want to talk about 2020 sure. So I think when we think about 2020 food group. That's good for Saturday, we feel just really good still about the outlook for the business. The progress we're making both on the core business and on synergies I think the contrail.
Fusion that suffered in our guidance is about 6% to 7% of growth or about 95 to roughly 110 million a total food group EBITDA for the for the year I.
I think the.
One of the things that may contribute to the little lower than some of you expect it is post the transaction closing when we're able to do some more work on the divestitures the impacted divestures as little bit bigger than we had.
Contemplated upfront there was some impact on some of the specialty businesses and their sales, which took that impact from 25 to about $30 million from those divestitures and in that case.
It does impact 2020, but over time as we've talked about we do expect to get more gains from the meat and produce business as we integrated across our broader us foods. So we still don't feel like that impacts us over the longer term.
Outside of that again feel good about the the 10 million and then the range similar to an organic range contemplates a range of outcomes for example, or macroeconomic factors and and impacts from business losses as one might expect in an acquisition, we've talked about and an increased competition. So feel good about the outlook.
Okay, and then I wanted to ask you about gross profit per case.
First off I I don't know, but can you provide the impact that food group had on gross profit per case in the quarter and then excluding that performance looks really good.
And I'm just kind of curious if you could probably a little bit more color on that maybe you know as part of it talk about inflation and what you're seeing from a pass through perspective.
Okay.
Sure.
So it's a it's about a nine or 10 cents lower on on adjusted gross profit per case I think there overall rate is around a dollar sort of a lower again because of the things that we've talked about.
We feel again over time that through the focus on.
Mix and then the synergies and all the things we've talked about that that will continue to improve we knew going and it was a lower.
EBITDA margin business, so not again not a lot of surprise there I.
I think the.
Otherwise as we've talked about the the core business pretty stable and yes on the organic side really all throughout 2019, we had strong gross profit performance and really as we've talked about its up front about profitable sales growth for us. So it's managing sort of that rate and that volume growth and we're very pleased with the outcomes for the year.
Okay, and if I if I can just squeeze one more in a from a leverage standpoint third I mean, if I do the numbers on sort of like guidance cash flow and all that and it looks like you get the three times by the end at 28, maybe not 21, just I guess thoughts on capital allocation, maybe once you get that three times and potential for returning cash to shareholders as.
Any any thoughts there.
Sure I think it's we get pretty close two or three times because its you know it's pretty close it's whether it's a later this year into 2021, where we feel good about our ability to significantly de lever over the course of this year to your point and I think what we've sat is as we get closer or will reconsider.
As we've talked about before at our Investor day, just to whether it's a buybacks dividends et cetera, but nothing really more share other than as we get closer it definitely a remains on our radar.
Great. Thank you.
Thanks.
Your next question comes from Jeffrey Bernstein from Barclays. Your line is open.
A couple of questions as well the first one just on the.
The organic case growth from the fourth quarter going into 20.
I think you mentioned that the fourth quarter might've been a little bit below expectation due to the shortened timeframe between Thanksgiving and Christmas Im just wondering.
The fact that you are guiding to a higher level for 2020 is that at least seems to imply that trends of bounce back in January and February quarter to date or are you assuming an acceleration as we move through 2020 based on any specific factors.
So I think that as you think so the calendar impact you do see that that piece rebound in January we have seen that I think what you think throughout the year, though from the guide there's a lot of moving parts. So there is the combination of again that actually that we talked about in the fourth quarter that.
Sort of fully comes to fruition here in early 2020, and then you also as I said with the pipeline you have new customers that onboard as well so.
Really it's a our outlook is a combined version of those and again, it's less about quarter to quarter guidance as opposed to just because of the exit calling out the.
A little bit lower Q1, and then feel good about our ability to grow the core business, 1% to 2% overall this year, excluding the impact of the 50 Threerd week.
Understood and then as you're thinking about the at least your restaurant industry clients. Some of your foodservice peers have spoken actually favorably about the fundamentals of the restaurant industry.
But what we see in terms of traffic growth challenges at least chains and.
While the and labor inflation. So I'm just wondering how do you characterize.
The underlying health of the restaurant the stream, maybe distinguishing between chains person dependence or QSR versus casual dining or whoever you might slices.
Right.
So I think thats, a good way to to slice that as you said, which is a distinction between chains and independence our outlook for independence.
Remains.
Positive and consistent with what we've talked about in the past and and what we see from either outlooks from technomic or other sources continues to be very consistent and the story of the fourth quarter. As you said is really that the timing of of the holidays and early part of Q1 looks in line with.
Full year guidance.
Chains is a different story.
Blackbox continues to report I think minus 2%.
Traffic with the chains, which is our kind of best products for change so.
And again, we saw in December was the minus to go down at minus six I think it's back to around minus two in January. So it's just the chains really depends on.
The nature of that the concepts year associated with some do well some do not.
The good news with that is that is from a margin profile perspective, much less accretive than the independents and so while there is little bit more volatility to at the impact on the bottom line is much more muted.
Got it and then my last question is just as you think about the longer term.
Is it fair to assume the.
Lease guidance for 2020 was for organic case volume growth of two three and.
I guess, that's one to 250, Threerd week and organic adjusted EBITDA growth of.
Six to eight.
That's appropriate metrics the food to think about long term guidance are there other perhaps unusuals in 2020 other than that 50, Threerd week that would maybe make those growth estimates meaningfully different from a reasonable long term view.
So were.
In the future will come out with long term updated long term guidance, but what I would say, though to answer your question is on 2020.
There aren't other than the 50 Threerd week, a lot of anomalies in the year and I think if you actually tie this back to our Investor day, and we talked about more of a 7% to 9% organic growth to the two things just as a reminder, we've talked about that really so GP and independent restaurant growth really largely on track with that outlook. Its overall volume.
About 100 basis points, lower mostly healthcare and hospitality, which we still feel good about our long term ability to accelerate growth there as well as the 100 basis points roughly an opex from the tougher supply chain operating environment. So many areas of the business still continuing to grow healthy.
Very helpful. Thank you.
Your next question comes from John Heinbockel from Guggenheim Securities Your line children.
So let me start with.
Maybe give us a sense of the the spread right between you as food independent case growth and food group.
I hope, it's a couple of hundred basis points of something like that but roughly speaking that that spread.
And then where do you think.
When do you think that's right you can get food group up to your level of growth.
And what would be the one or two things that draws that most notably.
Sure Good morning, John So I think the.
It's probably not a fair compare right now to compare our case growth with there's going to given the if I think back to our uncertainty from several years ago. What they went through so to the fact that they were kind of flattish to some modest growth here in the fourth quarter on independents and.
I think as a positive we think overall.
From there we think it continues to accelerate through 2020, and 2021 and there is really.
Various things that that contribute to that one is petro talks about.
Our selling model getting our selling model in place there, which we believe is the differentiation as markets continued to cut over.
Cost to our systems than some of our tool more of our tools and technology become available and then finally on the product side. So as he mentioned, we did sort of a best of Scoop and they will now be when we do our spring School. For example, there will be part of that broader in that product innovation will continue to come to life. There. So we think it's really the same.
Three things that we've talked about in our core business that is they'll continue to get more ingrained in their business over the course of the next year or two that we continued to see acceleration in there and then feel good about based on that marketplace, our ability to grow their independence overtime are at or faster than our core business.
And then what's your what does the your current outlook can you think about so warehouse labor.
Cost pressure and freight you think about 2020 versus 19, where we both of those.
Oh, probably pretty similar I think when we think through a warehouse pretty similar so we remain you know not quite where it was a couple of years ago, but but still elevated above where it was historically as far as year over year wage increases and alike, and the overall difficulty and retaining.
Warehouse associates, especially so that continues to be a focus for us into 2020.
I think the.
On the second part rates I, we expect afraid to be fairly stable. So as we've talked about it was a meaningful headwind for us in 2019, I think in 2020 as more of a kind of stable.
For us, there's some things rates get a little more challenging, but we think with some of the activities were doing internally that again, it largely mitigate set so so not not a big impact.
Okay. Thank you.
Thanks, John.
Your next question comes from Julianna Frommer from Credit Suisse line children.
Good morning due to.
Again. Your next question comes from June to Frommer from Credit Suisse Caroline children.
Sorry can you hear me right.
Yep.
Yeah. So so first maybe just to start.
Obviously, some big changes your two largest competitors.
On the management on on the M&A sides have you seen anything in your local markets changing in terms of competition or go to market strategy.
We have not.
We always characterized our our industry as being.
Competitive.
And and hot spots to flare up in those those tend to happen.
Mark result of.
Changes in local local leadership, so we have not seen any any changes.
Okay makes sense and then we've gotten kind of a mixed read on inflation pass through in Q4 on kind of expectations heading into 2020.
Would you say that you've had the ability to kind of fully pass on inflation in those.
Commodity heavy categories and I think Dirk mentioned that the expectation for 2020 is at a level would be similar to 2019 that seems like a good thing kind of coming down from that 3% level, maybe to something more in the twos.
Sure. So you know.
We don't see anything in the current environment really indicate a significant change in inflation as I mentioned, we expected to be.
Consistent with where we ban and to your point somewhere in the twos, but I think grocery we expect to be study as it's been commodities are a little harder to tell as they can be more volatile, but just a reminder of these categories for us tend to be more fixed markups, so less impact on EBITDA with inflation or deflation and in those cases also.
As our a good portion of our businesses contract related any cost increases or decreases get resets on a weekly to monthly basis. So overall, not a big change and we didnt see anything different in the quarter, that's a really impacted our ability to pass through.
And we don't expect can we don't expect to going forward at this point.
Okay, great. Thanks.
Your next question comes from John Ivankoe from JP Morgan Your line is open.
Hi, Thank you a couple of follow ups I think a couple of new ones as well you didnt make the comment that the divestiture that healthcare hospitality customer happened in the fourth quarter and and I think that impact is going to trough in the first quarter I'm kind of asking me what that specific sequential changes for the healthcare hospitality segment is between the fourth.
Quarter in the first quarter because of that customer losses to make sure that we have a right.
So I think what.
What we've talked about is it happened in the quarter. So the first quarter is sort of the first full quarter that it's out. So we expect Q1 to be a little bit softer than than where it was but overall.
Continued to.
Accelerate as we bring on new customers from there and again, our ability to really bring new customers on to grow that at a faster pace and achieve our 1% to 2% overall case growth that we talked about for the year, Oh, Okay, <unk> and I'm, sorry to push and I understand if you don't answer that is a little bit softer or is that 50 basis points 100 basis.
Points 200 basis points I mean, that's a.
Obviously can interpret.
Qualitative comment like that a number of ways.
I think at this point, John we've shared or we're going to share and I think the thing I would hope you take away is just our our confidence in our ability to really accelerate that case growth to achieve the 1% to 2% overall, we've talked about okay understood I thought I thought it was worth at least trying on.
There's a little bit of I comment on a specific customer which is a public companies. Obviously talked about you kind of up you're pursuing some supply chain efficiencies and distribution.
Efficiencies, but you know what do you kind of view as has era mark in the ban dry it's kind of tight talked about their business. I mean is this an opportunity for you guys to kind of increase your business. I mean is there anything in the near term that we should be seen a sensitive too is there.
An opportunity to kind of take that they got that contract long longer term and actually grow your business. If there's anything that we can you talk about.
In terms of thought you that customer just because it is publicans made some public comments would be interesting here.
Hi, John So this is jetro. So I think when we talked about EUR. One were asked about the the acquisition of the vendor by our Mark as we said.
Two things, we have very strong relationship with of Andhra.
You have serve them very well over the course of time, and we believe that could could parlay into opportunities into broader opportunities, but we were not a position and it's premature to really talk about what that could be.
Okay, but given that those comments are helpful in that and the final question.
As you guys didn't thank you for that to the Capex plus capital leases in fiscal 20 does that include facility modernization for Sta or do you should we anticipate some potential step ups in 21 and 22 as you start to improve some of that physical plant.
Within the acquired facilities that after you've integrated some of the us systems and not fiscal 20.
Sure. So overall for 2020, our guidance does contemplate the increase Capex, we would expect for food group being part of US foods. So at this point, we wouldn't expect a significant step up from there and just overall as part of our overall.
Capex number yes, each year there. They are typically is that a large portion of that comes with whether it's new facilities facilities expansion et cetera to allow us to continue to grow.
Thank you so much.
Again to ask the question Press Star one on your telephone keypad.
Your next question comes from no. They said, it's still dividends from Bank of America. Your line children.
Hi, good morning, Thanks for taking the question I'm just a follow up on commentary on expenses and I think you reference some expense control initiatives in your prepared remarks can you just give us a little bit more color on that where you're seeing the greatest impact and then what do you see are the biggest opportunities to ticket.
More expense leverage and 2020.
Sure. Good morning. This is Derek I think the overall the cost initiatives are really balanced and the numbers across the business, so supply chain, which we've talked a fair bit about that although it's not at the level. We're we're striving for stills identifying opportunities for improvement across their through whether.
It's a routing systems implementation process enhancements et cetera.
In other areas around our shared services and continuing to optimize the work around there the balances quality and cost and then others are just smaller pieces throughout the business and different.
Hi, admin functions. So it's really a I'll call. It a constant stream of improving those opportunities as we go as we go forward I think the biggest opportunity to step up in its you know its.
Maybe tool beyond 2020 to lesser sent the 2020 is as we've talked a lot of the supply chain as we gets continuous improvement really embedded in our and our environments and really get more these improvements embedded we believe there's an opportunity to step up our level of productivity that we drive on an ongoing basis to mitigate more of our annual cost increases we incur.
Her.
And then of course, there's also continued opportunities whether its cross shared services or others, but I think of supply chain would be the biggest step up opportunity. So we think ahead.
Got it and then if I could just follow up quickly I'm on fuel how should we think about fuel was that tailwind or headwind as you move throughout the year. Thanks.
I would think it really has neither it's pretty pretty flat compared to 2019. So we have a large portion of our fuel locked and already in the fuel cost will be similar to what it was last year.
Of course that there are other smaller pieces market level and that would be tied to the market.
Thanks, so much.
Hi, guys go ask the question. Please press star one on your telephone keypad.
Your next question comes from Carla Casella from JP Morgan Your line is open.
Hi, just one clarification on their prior question about you talked about the percentage of your business that was.
Contract related where there's some pass through cost mechanism I missed that percentage and I'm. Just curious if it's if that's a broad cost base or is that based on at this specific mechanisms for fuel versus other input costs.
Sure. So this is good morning. This is we've talked about in the past roughly two thirds of our businesses. Some form of a contract is with our customers.
So that predominantly relates to pass through of product cost.
And so other things if there is something around fuel et cetera. Those are in a number of our contracts, but there is a different structure versus product cost is very direct.
With with the pass through on that.
And with the path to be similar on the fuel others in terms of like how much of your business or is it in more of the contracts.
A few will be in more of the contracts and it is so if you think about directionally. It works the same but it's not.
As director as I've gotten a strike quite as quick a timing of some contracts.
Okay, Great and then just one you had a bunch of questions on your capital structure, but I'm just the any thoughts about refinancing the bonds sounds their callable.
And on your balance between secured and unsecured debt.
Sure. So we continue to look at the capital structure and most other had other than being our head of IR is also our treasurer. So we're we're always looking at those and just as we took advantage of some market conditions in 2019 to re Fi. We will continue to look for those opportunities for that and or a fixed variable opportunities in 2020. So.
So it's definitely on our radar.
Okay, great. Thank you.
There's no further questions at this time I would now like to Transicold over to better.
Okay, well, thank you for all the questions and thanks for.
Your participation today just to summarize quickly we're very pleased with 2019 independent case growth adjusted EBITDA growth.
Ruminant ROI C and a very successful beginnings to the integration of the food group.
We're very confident our outlook for 2020, which includes growth and EBITDA and EPS and finally I'd like to thank all our associates across all the company, whose hard work and commitment makes these results possible. Thank you for joining us today and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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