Q3 2020 US Foods Holding Corp Earnings Call
[music].
After the speaker presentation, there will be a question and answer session.
Question on the session you may need to press star one on your telephone please.
Please be advised that todays conference is being recorded if you weren't you need assistance. Please press star Zero I will now like the hand, the conference over to your speaker today Miss Melissa Nappier. Thank you. Please go ahead ma'am.
Thanks, Carl Good morning, everyone welcome to our third quarter fiscal 2020 earnings call.
Joining me on today's call are Pietro century, onno, our CEO and Dirk Locascio our CFO.
Good trend or will provide an overview of our results for the third quarter and the first nine months of fiscal 2020 as well as provide some details on volume trends that we saw during the month of October 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 third quarter results to the same period in fiscal 2019.
Our earnings release issued earlier this morning, and today's presentation slides can be accessed on the Investor Relations page of our website.
References to organic financial results during today's call exclude contributions from smart foodservice, which we acquired in April of 2020, and also exclude ex exclude contributions from the food group for the time period prior to the anniversary date of the closing of the acquisition.
In addition to historical information certain statements made during today's call are considered forward looking statements.
Please review the risk factors in our 2019 form 10-K, and our last quarter's 10-Q filed with the FCC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in the statement.
Lastly, during today's call, we will refer to certain non-GAAP financial measures.
Reconciliations to the most comparable financial measures are included in the schedule on our earnings press release as well as in the appendix season. The presentation slides posted on our website I'll now turn the call over to Pietro.
Thank you Melissa and good morning, everyone.
Before we get started I would like to thank all our associates for their dedication and commitment that they have displayed in helping our customers navigate this challenging environment referred to have truly been second to none.
I'm going to begin on slide two with an executive summary of what will cover today.
First as evidenced by the continued appetite of consumers to eat out and take out as long as the continued ingenuity of restaurants across the country. We remain confident that our industry will return to pre cobot levels overtime.
Second the third quarter saw a marked improvement in our business case volumes have steadily improved.
Our profit, we gaining market share.
Third.
Recent acquisitions.
Okay. Good that's smart foodservice have performed in line with expectations and the integration of food food group sorry is on track.
And finally, the steady improvement in our case volume combined with our cost reduction actions.
Glad to adjusted EBITDA that was a marked improvement over the second quarter.
Derek will cover this forcepoint and this review and financial results and I will cover the first three starting with our perspective on the industry.
Moving to slide four the chart on the left compares consumer visits at food away from home establishment like restaurants to visit at food at home establishment like grocery stores.
As you can see pre called bad food away from home visits were roughly 50% of total consumer visits.
After stepping down in late March and April consumer visits I food away from home establishment have consistently increased and are trending back towards the 50% level that the industry experienced pretty cold.
This recovery illustrates the desire of the consumer to purchase from food away from home establishment habitat has been shaped over decades and helps reaffirm our belief that our industry will ultimately recover to pre called levels.
One of the drivers of this recovery has been off premise dining which continues to grow in importance as we said in our last call full service restaurants, 55% of traffic in DRAM was off premise compared to 19% pre corporate.
More recent survey eat at 68% of consumers in this country or take out at least once a month post cobot compared to 45% pre cope with an increase of 51%.
Continued growth in off premise dining also gives us the confidence that restaurants in the colder climates.
We'll be able to navigate the winter months.
The past several months, we have seen restaurants embraced goes kitchens also known as virtual kitchens away by which operators can use their kitchen space to create new brand focused solely on takeout and delivery and.
In addition, some operators are experimenting with Kent, England isn't heaters as a way to prolong outdoor dining and.
Another you're promoting air purification mechanism, such as you'd be lighting as a way to build consumer trust for indoor Dougherty.
The ingenuity of restaurant operators, that's kept the permanent closure rate at a low level.
Weve, even begun to hear about some wild ride and well capitalized operators looking for opportunities to open new restaurants as the external environment improves.
Let's now go to slide five and take a look at our own volume performance across different customer types.
Throughout the third quarter and into the early part of the fourth quarter, we have seen a steady improvement in case volume across most of our customer types.
The Green line on the chart shows total restaurant case volume, including both independent and chain restaurants the.
The uptick you see in the month of August and September as both a result of an improvement in the industry as well as us foods gaining share.
Organic restaurant case volume for the weekend. The October 24th was down just under 10% compared to prior year, which is remarkable given that we were down almost 60% at the beginning of the pandemic.
When we compare independents to change over the last few weeks organic independent case volume has been down approximately 11% to 12% year on year, while organic change.
Chain case volume has been down approximately 78% year on year.
Moving to other customer types or case volume with both health care Hospitality has also improved health care designated by the Blue line. That's picked up that's possible just started allowing visitors to return in a limited fashion hospital.
Hospitality designated by the Yellow line has also picked up that's hotel occupancy rates have improved, especially in some geographies and format.
Leisure travelers of substitute one kind of travel for another.
Last quarter I commented on the $500 million of new business, we had one in the first half of this year.
This business is now fully onboarded and I'm happy to report that on that on an annual run rate basis, we're on pace to onboard a total of over $800 million of new business by the end of this calendar year.
Several of the new wins since we last spoke or in the healthcare arena.
Constraining the strength of our new business pipeline across the multiple different customer types.
The pipeline remains strong and as we look ahead to next year, we expect to continue to gain market share.
And as we have previously discussed the new business wins across these multiple customer types quite good contribution margins, helping us grow overall profitability.
Let's move to slide six and a discussion of the factors that have led to these market share gains.
As we see it U.S. foods has four distinct advantages over many competitors.
The first is our scale and our scope.
Our national footprint and consistent approach to servicing multi geography customers or particular appeal to large customers who are looking for a stable distribution partner like U.S. foods.
Second is our digital leadership.
Our ecommerce offering has been particularly important during these times as customers are able to shop, our extensive product offering and place orders online.
Third is our suite of value added services or check business tools.
Of our more popular value added services has been show now.
Platform that allows customers to do takeout and delivery with much more favorable economics have been competing services.
Since the pandemic again, the number of customers using China has increased 50%.
No not only does this drive more loyalty to us foods, but we have seen that customers who use child now are buying more profitably approximately 80% more than customers are now using that platform, which also confirms how much off premise dining has grown in importance.
A new addition to our portfolio of value added services as our goes kitchen playbook supported by proprietary analytics and this has helped customers mitigate impact it's called <unk> by extending their off premise reach both geographically and it's a new menu concepts that are particularly suited well delivery.
And the fourth advantage is our growing portfolio of innovative products.
In September we launched our fall squarely focused on off premise dining.
The launch feature new items, such as tamper evident containers cleaning sanitizing products and individually packaging, we didn't sell our restaurants to create whole meal kits.
Responses Scoop launch was just terrific.
Customer penetration was comparable to the rates that we used to see pre cobot.
Last week, we launched our holiday season.
Which features more new items, many in keeping with current customer needs, including the only EPA registered two in one sanitizer that is effective against the virus that causes COVID-19, thereby helping operators keep their environments safe and building trust with diners.
Holiday Scoop also features items for off premise dining with solutions that are perfect for family meals, including several sustainable items to add to an already strong line of portfolio of products, you know sort of a good platform.
These differentiated products and solutions are a great example of how we continue to be the leading and most relevant distributor to operators.
Lastly on page seven I want to provide an update on our two recent acquisitions.
As we discussed last quarter, the food groups National chain business continues to perform well benefiting from some of the recent favorable QSR trends, we have seen play out in the industry.
On the integration front systems conversions required to enable some of the expected synergies are also progressing well in August we completed the first systems conversion in the Seattle market not went without a hitch over.
Over this past weekend, we completed our second systems conversion and early signs point to another successful conversion.
As a result, we have made up most of the temporary pause due to cold, but and we are on pace to achieve the previously communicated $65 million of annual run rate synergies on the original timeline of which we expect to realize $10 million of those synergies this year in 2020.
Moving to smart Foodservice case volumes continue to outperform our delivered business with comps down in the low to mid single digits over prior year.
The cash and carry business typically performs well and economic downturn as customers look to the value offering it provides.
Smart foodservice stores also but open to the public and this has allowed us to capture some of the shift to food at home over the last several months without changing our business model.
Adjusted EBITDA remains on pace with our expectations and we expect to achieve synergy targets that we had previously discussed.
Lastly, I'm pleased to announce the opening of two new smart foodservice stores in the fourth quarter of this year. This is just the beginning of our store expansion plans with the ultimate goal to double the existing stores.
I'll now turn it over to Dirk for a discussion of our third quarter financial results.
Thank you Pedro.
I'd like to begin I'm on slide nine well cover the highlights for the quarter before taking a deeper dive into our financial results.
Our third quarter results showed significant improvement from the prior quarter.
I like the work we've done to position the business for success post Cogan.
As Katherine mentioned, we saw consistent improvement in case volume as the quarter progressed.
This improvement is attributable to our ability to gain market share as well as improvement in the underlying fundamentals of the industry.
Our adjusted gross profit margin improved 70 basis points from the second quarter.
Stable throughout the quarter.
We expect our adjusted gross profit margin will continue to improve as our case volume recovers and our customer product mix returns to pre corporate levels.
On the cost side, we enacted a series of permanent cost reductions in the second and third quarters, there will position the business for higher EBITDA margins post kobin.
On an annualized basis, we eliminated approximately $180 million a fixed cost from the business and we'll continue to manage our variable cost in line with case volumes.
These fixed cost reductions are mostly in the corporate and back office areas of the business.
And I'm pleased to report that we continue to see strong collection efforts on our outstanding accounts receivable and as a result, we further reduced the uncollectible accounts receivable reserves.
$30 million again this quarter our.
Incremental covered related uncollectible account reserves now sits at $65 million and.
We have not seen a degradation in the quality of our receivables since cobot began.
Moving to slide Chad Arthur.
Our third quarter financial results improved significantly from the trough, we experienced in the second quarter.
Net sales compared to the prior year were down 10.5% for the quarter driven by a combination of lower case volume and negative customer mix, which is a significant improvement from the 29% year over year net sales decline we saw in the second quarter.
Inflation for the quarter was 220 basis points, primarily driven by inflation in the beef and cheese categories.
Our adjusted gross profit margin was down 100 basis points compared to the prior year, but improved 70 basis points from the second quarter.
Changes in our customer product mix and lower inbound logistics income were the drivers of the year over year decline.
Lower inbound case volume resulted in us needing to re optimize our afraid not work to compensate for the loss of scale that we benefit from at higher inbound case volume levels.
This work is in process and we expect our inbound logistics income to improve as the Reoptimization works take effect and inbound case volumes improved.
As I previously mentioned, we expect our adjusted gross margin to increase as our case volume recovers in customer and product mix returns to more normal cobot prequalified levels.
Gross margin at the customer level remained similar to pre corporate rates and we continue to see a rational competitive environment.
Adjusted operating expense increased 20 basis points compared to the prior year. However.
However, this was a 100 basis point improvement compared to the second quarter.
We experienced a 20 basis point year over year increase despite experiencing fixed cost deleverage from lower case volume.
During the quarter, we successfully managed our variable costs to be in line with case volume, while enacting the permanent cost reductions I discussed earlier.
In the third quarter, there were a couple of items that had a net benefit to adjusted operating expense of approximately 20 basis points. The largest of which was a 17 million dollar gain on the piece of excess land in southern California, we.
We don't expect these items to repeat in the upcoming quarters.
Even with the benefit factored in we're extremely pleased with the work we've done on the cost side.
Our cost structure remains flexible.
Allowing us to quickly adapt to changes in our case volume.
On slide 11, I thought it would be helpful to spend a few minutes discussing our operating leverage and adjusted EBITDA margin.
Article good our adjusted EBITDA margin, which is the difference between adjusted gross profit and adjusted operating expense was running in the mid 4% range and increasing annually.
At the trough in the second quarter. This delta shrunk to 190 basis points, but as quickly expand that began to 3.6% in the third quarter.
This is a direct result of improvement in our customer mix and the cost actions we've taken.
If you notice our adjusted operating expense as a percent of sales in the quarter is largely in line with where it was pre tobin.
This is despite the fixed cost deleverage from lower case volume.
As our case volume improves we expect the organization to operate at a lower adjusted operating expense level that we did pre call but.
And on the opera adjusted gross profit margin side of equation the recovery in our independent Res restaurant case volume is helping us to drive improvements and as I. Just mentioned, we continue to work to re optimize our inbound freight network.
This work and an increase in our independent case volume help adjusted gross profit recover to be in line with pre kogan levels. The net effect, we believe will be an expansion of our adjusted EBITDA margin post kobin.
Moving to slide 12, our adjusted EBITDA results for the third quarter improved meaningfully from the second quarter in both dollars and EBITDA margin up.
Adjusted EBITDA was $209 million for the quarter, which means based on this run rate the businesses generating approximately $800 million of adjusted EBITDA on an annualized basis, Despite case volume being down in the high teens.
This is another indication of the flexible cost structure and operating model that exists within the business.
In the third quarter, we returned to positive earnings generating $32 million of adjusted net income and 15 cents of adjusted diluted earnings per share.
Since we had a GAAP net loss for the quarter. The additional preferred equity shares are not included in the share count for the third quarter.
When we do return to positive GAAP net income those shares will be factored into the earnings per share calculations. If these were included in the Q3 earnings calculation, our adjusted diluted EPS for the quarter would have been 13 times.
Turning to slide 13, the business remains in a strong liquidity and cash flow position.
We ended the third quarter with $1 billion of cash on hand, and $2.7 billion a total liquidity.
In the second quarter, we had a large working capital benefit, which we expected to reverse in the third quarter.
As of the end of the third quarter. This reversal is largely complete.
During the quarter, we reinvested in inventory to support current case volume levels and return vendors for normal payment schedule.
Going forward, we will manage working capital on line with a recovery in case volume.
And a current case volume levels. The business is cash flow positive and we expect to return to the strong cash flow levels, we experienced pre coded as case volume continues to recover.
We remain focused on reducing our net debt balance and lowering our net debt leverage ratio, which stands at 5.9 times at the end of the third quarter overtime, we expect to reduce our leverage ratio through both an improvement in EBITDA dollars and a reduction in our outstanding debt.
As we've consistently demonstrated the ability to do it in the past.
Overall I'm extremely pleased with the progress we've made during the third quarter.
And the benefits, we expect the business to experience from a continued recovery in case volume.
With that operator, we can now open the call up for questions. Thank you.
As a reminder to ask a question you may need to press star one on your telephone.
Question press the pound key please.
Please standby, we can tout accuen a roster.
Your first question comes from the line of John Heinbockel Guggenheim Partners.
Yeah for two things I wanted to dig into the 180 million how much of that did you see in the third quarter and is that now that that as a run rate beginning in the fourth quarter.
And.
How did you go about sort of safeguarding it sounds like it didnt impact the field at all safeguarding that that would not impact your your topline.
We talked about the 180 and cost reductions John.
Yeah.
So you know the primarily andr can add more on this the focus has been primarily on the back office.
We did make some small reductions in the Salesforce as as you know John back in April aligning what size the salesforce with the expected customer count over the long term.
And so.
We and as a result, as you can see by the market share gains and by the the success. We've had in terms of bringing on large customers you.
The reductions we've made have have not impacted us we've we've learned to operate in a kind of more lean more agile fashion as a result of Kogut and as Derek said, we think that you know over the long mid to long term that also present will result in higher EBITDA margin.
Derek anything you want to add.
George I would just add Petro is just to again remind her on the sales reduction to Tetra mentioned were the ones that happened earlier in the year and the more recent reductions were mostly back office types of roles and John to your point, we do expect to be at a full run rate here in the fourth quarter.
Alright, then it will.
Follow up right.
The ideas and it makes sense for the business would be more profitable on a margin rate basis, given the what 80 plus synergy.
When you think about returning to pro.
Pro forma right sales and profitability.
How quickly do you think.
Which it would seem like profit would come back maybe faster than topline is.
That's fair and would you think could it be a year or sooner.
Profitability again, given the 180 and leave the synergy that profitability would come back before you got to a pro forma revenue number or no.
So with that John I think it is a reasonable assumption that it would come back quicker, it's hard to predict exactly how much quicker, but to your point as volume recovers that does help profitability, but given the actions we've taken on costs that go into effect essentially now it is reasonable to expect the profitability dose would come back quicker.
Okay. Thank you.
Your next question comes from the line of Kelly Bania with capital.
Hi, good morning, Thanks for taking our questions.
There's a couple of questions first on on the.
Mark Foodservice and Sta wondering if you could just talk a little bit more about how those are performing and the contributions there.
Sounds like smart.
Sued performing quite strong and then just another question on the efficiency as Youre.
Bringing on some cost back as trends.
Trends improve and how you see that trend continuing.
Sure. Good morning, Kelly I can start and then up to Turkey and cut out as appropriate I think from a job as Pietro indicated earlier for the acquisitions, they're performing you know.
Well relative to the environment, we're in which to your point smart holding up quite well as a business so starting with with food group there.
Their sales were up slightly better than us foods organic for the quarter are really driven by a higher mix of chain business and the overall EBITDA EBITDA decline was a little bit better than the organic business in large part because of some of the synergy benefits that have begun to flow through.
And also just from a food group.
<unk> noted with the second successful system conversion, we continue to make good progress on the integration of that business and are pleased to the pace now in which we have reaccelerated to move ahead with that.
From a smart foodservice exactly right. So that that business has held up quite well for some of the reasons Petro talked about with Kate case volume is being really down in the low to mid single digit range and EBITDA not not much off from prior year levels. So we continue to be excited by what that presents from an existing flipped.
Brent as well as expansion opportunities from.
From this highly profitable business so.
The day with both of them and continuing to work to strengthen our footprints and our penetration in both of them and continue to build on that.
The only minor point I would add Kelly is that you know the.
The performance, we've seen with smart foodservice in terms of the low to mid single digit comps negative comps is very much in line with our successful CES six stores in a different part of the country. So it just goes to reaffirm the resilience of this channel and the appeal in this channel, especially in these kind of.
Challenging economic times.
Perfect and then just just the efficiency just as you've kind of brought back some costs as sales have improved and just if you can tie that in maybe with the size of the sales force.
It is now and how much of that contributes to the 180 and cost savings.
Sure. So the reason that we tried to separate out the 180 from variable cost because one of the things that are so I just.
Maybe start with distribution is that a distribution labor pool is flexing up and down depending on what the results and the case volumes are in different markets and so we've been pretty active in managing that well continue to do in order to match volumes. So that's that's the main area, where you see labor moving around a lot.
From the the other selling and admin.
We have brought back some sellers from the original reductions, but I think in that case, we're we're pretty pleased with the size, where we are in the one thing that we've talked a lot about in the past demonstrated that in.
In that case as volume improves in certain markets as needed we will bring sellers back in order to to profitably grow sales, but the bulk of the 180 that we've talked about is sub more admin and back office type roles, which we would expect to largely.
Largely stay in place of business continues to recover.
Thank you.
Your next question comes from the line of at what Kelly with Wells Fargo.
Hi, Good morning, guys. Thanks for all the color so far.
I wanted to start with just current case growth trends and maybe if you could provide a bit more color around.
So what you're seeing currently I know you have through it looks like I guess the week of October 24, it looks like total organic cases, maybe down somewhere in high teens. Just curious is if you've seen any change in that more recently.
Just given the rising covert cases, and the cooler weather and now we are seeing globally restrictions.
Kinda rising here, which you know maybe we start to see some of that in the U.S. do you think that we could see some step back in.
In their recovery you know as we get deeper into fall and winter.
Good morning, Ed It's Cacharel.
So in terms of the pattern I mean, you could see the you know from ASCO, which pages that you know, it's been a slow and steady increase throughout.
The fall the increase has slowed a little bit from where it was in summer not surprisingly, but.
But it's a slow and steady increase kind of versus versus.
Where we were the week before the week before that.
In terms of you know the possible headwinds we might had into that you mentioned I mean.
The thing I would also ask.
You know you're think about is you know the.
Offsetting positive tailwind so let's walk through I think the things you mentioned, so that the number of increasing cobot cases.
So one of things we did we did do is you know there was a.
You know what was characterized as the second wave in the Sunbelt This summer and.
What we did as we looked at the sales in those those states you know.
Merrily, Georgia, Florida, Arizona, Texas, and what we found was there was a.
It was a bit of a step back for a little bit of time, but then what we found is sales bounce back and they they recovered at a higher level than they were before that second wave. So the long term trend or mid term trend continues to go up and just kind of.
You know overcome that.
A couple of cases, so so yes, some people might consumers might sit on the sidelines.
For some period of time, but then they come back and they come back in even greater numbers that they were pre pre that spike. So I think that's that's encouraging.
I think in terms of the colder climate I talked about about that a little bit in my in my comments.
Some parts of the country, obviously, you know there's not as much outdoor dining that can happen.
But I think the wildcard is the continued growing importance of.
Of off premise dining, whether it's take out or delivery.
And there's a number of things restaurants are doing to both make diners feel you know more more comfortable about indoor dining.
And.
And Thats, while you know trying to prolong the outdoor season in terms of restrictions you're right. There is a couple of places in the last week that put restrictions in place you know Theres still also add places in the country that have restrictions in place that haven't come off like California, So I think those might offset.
Across the portfolio of geography. So you were I would say is you know short term. There's there may be as many positive tailwinds as some of the headwinds that you described and I think medium to long term the trajectory continues to to remain positive.
Okay.
And then I was curious.
I guess, if you could provide some color on the cadence of sort of EBITDA by month and.
Asking this question because just taking a step back into the queue for consensus estimate it looks to be around $270 million or so which to me seems a little high.
And just kind of curious as to how we should be thinking about thinking about Q4.
Sure. So the the overall just in broad terms the cadence wasn't all that difference you end up with a little stronger EBITDA as volumes recover throughout the quarter, but beyond that there's not a whole lot I have two to add I think the other increment.
So pieces will go we would expect a little more of the cost savings to show up in Q4, but.
Otherwise Sars that the timing the cadence in the quarter nothing specific to call out beyond that as far as specific timing.
So where you were sort of running you know end of Q3, maybe a sprinkle in a little bit more cost saves and that's kind of how we think about EBITDA by month Q4 is that fair.
There's always some things on.
You know some things on seasonality and timing of things, but I think when you think about the core business. That's a good way to think about it and I think that.
I know, there's a there's interest in the coming few months I think so we're trying to balance that as you would want us to but at the same time trying to make these decisions to balance for that at this time frame that.
Post co but in order to make sure that we're doing the things are really setting ourselves up for success on the other side you have talked about this a gain share on loss small large customers and we've had very strong success in the last few months on that and in our can it continue to to push ahead to really help.
Help prepare the business further for the near term as well as the mid term.
Okay. If I could just squeeze one more in just bigger picture I guess, you know you're optimistic that profitability can exceed pre <unk> levels.
Some of this depends I guess, probably on making the right decisions on the business that you've taken today can you just talk a bit about how you're balancing the desire to drive near term EBITDA growth, which is the focus on post covered margins.
A million dollars that you brought in those.
Those margins kind of look similar to what the company would earn pretty cold, but just.
I'm curious, how you're thinking about all that.
Yeah.
So if I try to allude to in my comments the margins for the new business that we have brought in a very healthy.
You know for large customers are obviously lower than independents are small customers, but there.
If you look at that spectrum of of.
A large customers that come in and you know the upper Cortiles on the margin profile of the.
The large customers that we've historically had in our portfolio. So weve been very judicious in terms of.
Though the rate at which we bring on those countries I think the factors that are driving.
The the interesting customers too.
To make a different decision about who to partner with that's probably more to do with some of the advantage that I talked about the scale. The stability. We provide some of that some of the value added, especially you know some of those smaller multi unit local customers.
Those value added still still make a big difference.
And I think that that's really what is driving the most profitable market share market share gains.
Great. Thank you.
Your next question comes from the line of John Alan Cole with JP Morgan.
Hi, Thank you I wanted to revisit the $180 million of cost savings would.
But you said the majority of which are in the back office and corporate that's not a small number as I mean, obviously I know that you know are there any future investments or functionality that you know you've kind of taken off the front burner that maybe you're losing its as some of those cost cuts and were there any major department consolidations other type of.
Structural work you know that kind of happened to hit that $180 million and then the final question just in case I get cut off.
You know there's some companies have come talk tell regionalization other business changing the way their salesforce is compensated just kind of taking the opportunity of you're doing a broader restructuring not just on the corporate and back office, but also the you know what's facing the customer.
Is that.
On the table is that off the table where are you in that process. Thank you.
Thanks, maybe petrol I'll start with some of the initial cost and if you can comment on some of the.
Business model things, so I think on that John with a 180, so most of it being up people related costs, but.
What I would say is we took an approach to really try to some balance so that we weren't making decisions that so we felt negatively impacted the customer our ability to service the customer in fact, our focus on customer and service levels to customers is more a relentless I would say in the last.
Three to six months then than it was prior to call that really have in fact in some cases investing more in inventory as we really strive for that I think as we've gone through there's there's there's a lens we've applied across these different areas some of it because in somebody's admins, if you do have.
Volume lower you can take some of the south we have found some ways through using some of our continuous improvement process to streamline some process. So but as you think about big investments in the way our priorities are structured.
We have applied a prioritization and are not sacrificing the future and our top priorities at the expense of this cost and still feel very good about our ability to maintain and expand our leadership in many areas come out the other side of it.
Yeah.
Mr. And then and then in terms of some of the other things you you said are they on or off the table.
John I presume you're referring to.
Couple of things, one is and move to a multi site area.
And you'll remember we moved to that management model in 2000.
15.
We're very happy with it we think it served us well.
Most most areas of the present that overlooks to two markets. We think that's the right number and we aligned our region structure at that time to be consistent with that span. So we think we you know we put we did not work in number of years ago, and we're happy with the results of that work in terms of our operating model.
And and anything you know on the <unk> on the sales on the sales facing part of the business in terms of how the customers being served whether it's.
The rig rethinking the way that they are being compensated or what we what the coverage or how do you know the territory managers are integrated just see within the selling organization I mean, if there are any changes that you know that that the customer could see that could also make you more efficient.
Right so.
Thanks for that reminder.
No the team based selling approach as again, we put in place many years ago. As you know we modified our approach to compensation slightly a couple of years ago. So again those are those are changes that we made a I've already made and you know we want we want to make sure that they settle the no.
No the only thing that has.
Been pretty different in this environment.
Compared to where we were before is the ability of imported.
And particularly our restaurant operations consultants rights, we have we have specialists who are focused on product and then we are we have.
Experts are specialist we call him rocks restaurant, we should consult who are who are focused on.
[music].
On the back office.
The restaurant and they you know we've been able to really increase their reach to the webinars and through virtual technology. So what we've been able to do is as opposed to have.
No.
One raw square a couple of blocks the market try to learn everything about especially with respect to the reopening blueprint are with respect to back in March or April you know how to best apply for the government support and we were able to specialize and give people a much broader reach which results in a better customer experience.
With with customers.
I suspect some of that will persist John you know you're able to kind of expand the reach and provide a better experience for the customers. So when it comes to more of the product specialists, which is more hands on I don't I don't expect a lot of change on that front.
Thank you and I'm sure everyone is looking forward to getting the food shows back on the schedule that the yes. Nice reminder, that covance is over thanks, so much good right [laughter]. Thanks Don.
Your next question comes from the line of Laura see Berman with <unk>.
Sweet.
Thank you can you go dimensionalize organic independent case growth with the impact of restaurants cancer sales decline versus net new restaurant customer acquisition versus larger game. So to what extent has cancer sales decrease amongst existing customers and closures.
That's my while share gains and onboarding of new customers.
So.
What I would say Laura is.
Some of the gains as I said have come from from market share gains and market shares is.
Recently been able to to try to triangulate around that there's not great data on that we're starting to get better data.
Of course.
Some customers, especially those where there's remain to be indoor restrictions.
Same store sales fall puts on us compensated as I've said threw off premise.
Dining and through outdoor dining of course this summer in the colder climates or would you know so.
So it's really there's a number.
A number of different factors and I think it would be hard to.
ER to generalize I don't know that we have all the data and I think it'd be hard to generalize spin.
Specifically with risk with respect to your question.
Okay understood just a follow up in the near term organic case growth looks like restaurant.
Down 10% the last few weeks. So I know you spoke to some of the near term headwinds, but as we think about further sales gains in here are they largely predicated on increasing capacity restrictions or do you really see the most meaningful opportunities for continued recovery near term you know.
Assuming the current environment status quo.
I think so I think overtime. So the next two to four months.
I don't know that anyone is as I said was implying you know that the current environment.
May may improve may very well deteriorate depends on different parts of the country.
And as I said, there are just as many potential positive forces as headwinds with respect to the near term, but I.
I think what I would focus on is more the medium to long term environment. Laura. We're we think that consumers. You know there are some consumers who are obviously, perhaps sitting on the sidelines, who perhaps have been replaced older.
Dining out locations with with with off premise that overtime, especially one there's a vaccine in place I think that those those consumer habits go back to where they were and what we're really encouraged by is just the steady, but slow and steady increase in organic performance. Despite.
The second wave despite some of the other things you know, we're just seeing what's what's really encouraging over the medium to long term is the slow and steady increase in organic performance amongst.
Got it.
Okay. This is just a quick one we've seen a pretty significant disparity performance in urban and suburban market. So what's your relative exposure concentration in urban versus suburban areas.
I don't know that we're able to quantify that all right, but I think you do raise a point. That's another example of where you know some of the more urban markets have been have been hit hard, but we've seen the offsetting shift to some areas and again when when you cover the country like we do.
Like a very well diversified portfolio stocks, a bunch of puts and takes in and we're making sure our local.
Leaders do is make sure they shift appropriately whether it's two different menu types that are more resilient or different sub geographies that are experiencing experiencing growth.
Thank you very much.
Your next question comes from the line of and it cycle with Jefferies.
Thank you good morning, I wanted to follow up on the margin commentary and gross margin improved 70 basis points quarter over quarter. This quarter. Just wondering how we should think about the dynamics heading into the for Q, which historically is a pretty high margin corridor. Obviously this year faces some unusual.
Circumstances, if there's any.
Many factors mission, considering our export you view.
Sure Good morning, I think that.
You know when I start with the core customer margins as I mentioned earlier, they've been quite stable and we continue to see a pretty rational competitive environment. So I you know at this point it doesn't indicate that as something to consider changing I think that the main thing is really if you know the mix.
Again plays out any differently than than historically or recent run rates, but as far as the core underlying health.
You know that there's nothing specific that I would that I would call out there and we would expect the gross margins as volume.
And mixed recovers to continue to improve as it has and what recent months like I said from the the.
Second quarter call I called out the last two months, so that quarter versus this than we have seen improvements as volume and mix has recovered and as volatile.
Covers over time, but expect that to happen and thats kind of how.
Hard to predict exactly when that happens in Q4 versus you.
But for the coming quarters, but we are seeing.
That positivity happened as volume recovers.
Thanks, and then a follow up on the smart foodservice business sounds like you opened a couple of stores. So far in the Fourq you do you have a rough idea on what you think the pace of development will look like in the 21.
So on those Weve opened one we have one more there will be open and you know the.
The.
We've talked about a specific near term pace one of the things that we do have more in the pipeline for opening next year and its Petro commented earlier, our plans continue to be to double the footprint over the long term, we're working to integrate that in the business and really.
Allow us to have a strong omnichannel presence that that would be difficult to match and as you may remember weve talked about in the past is positive we see with our own smaller footprint of shop stores is that not only do we get the incremental business from those stores delivered customers who shop. There also by more so it's not it's accretive on.
That front and so we look forward to as we continue to expand.
To like to see though.
So on that as well so exciting future for smart food service as part of the U.S. Foods family.
Great. Thanks for the color appreciate thanks.
Your next question comes from the line of Carla Casella with JP Morgan.
Hi, I'm wondering given the changes that you've made the new new contracts that you've gotten the acquisitions. If you give us a sense for the breakdown of your business what percentage of your sales overall are two key categories like either the restaurants, the independence versus hospitality and.
Health care.
Tim underpinning that one more time please.
I'm looking for the business mix, where it stands today, given the acquisitions and the new business. You've added if you could break it out if it's changed dramatically between restaurants, hospitality and health care or you can tell us how much of the businesses to independence.
Sure. So at this point, we haven't quantified specifically, what I would say though is.
Because it's there's also some ships.
Are well aware.
Current changes in volume. So for example in hospitality being lower but what we expect is when you look at the the core business and the customers overtime, we wouldn't expect that to shift meaningfully off from where we had been historically you end up with a hospitality being a little bit less than its been historically just because of the it is recovering.
But taking a little bit longer.
To recover that done otherwise, but as we think about the business recovering over the long term I would think about the mix similar to where it's been.
As he said in the past what percentage of your sales RQ independents are to restaurants.
So we've talked about is we've said.
I'm trying to remember that roughly Melissa you have to keep me keep me honest here is it roughly.
Sure about it in fairness third about a third schuh independence about a third to health care hospitality.
About a third to what we would call all other.
And then Carlyle, we've also said about 50%.
Sales are two restaurants, so that would be independent as well as change.
Okay, Great that's helpful now.
<unk>.
Your next question comes from the line of Jeffrey Bernstein with Barclays.
Hey, guys. This is actually Jeff Freestor on for Jeff Bernstein.
Two questions for you.
Can you just give us a sense of how are your inventory levels and inventory management is trending kind of as you rebuild your inventory following the second quarter, maybe kind of positioning out relative to your pre building level.
And then second do you have a sense of whether or not your customers on average are still running simplified menus are back to running their full menus, maybe through SKU count per customer or any other metrics you want to try it.
Sure. So we're as I mentioned earlier, we are actively managing inventory just because of.
You know the the pace of with certain.
Inventory number skews are moving we're running.
A couple of days higher on a T.O.H., but a pretty I'd say not not that far different and our replenishment sales teams are actively monitoring and what we're really striking a balance between the cost cuts are these goods to having the inventory levels and the service levels and because we have some very.
Your challenges of getting the product in on time getting up the product that we order.
Here, it's a matter of what we've chosen to invest a little bit extra inventory in order to serve our customers. So can little more not all that different monitoring closely. Thanks for your question about the menus. It does indicate that so customers are still running a more simplified menus and I think that's the.
A way for them, but I think you know.
Though for them to manage their own inventory Rescope I'm.
At a loss or spoilage in this environment and I would expect that that will continue for a while until we return to a more stable environment.
Got you and then is there any update on the number of customer up your customers, but are not taking deliveries right now whether it's temporary or permanent closures.
So it's what we've talked about is that we expect that the level of closures sort of in the single digits and we do have that we will work with are sellers on sort of some of them being temporary and some permanent add but expect at this point the.
The level of of closures to still remain in the single digits. I think the thing that gets harder to tell overtime is how that how that trends, but at this 0.1 of the things that we've seen as operators do continue to be very resilient and as we've talked about before I think it through and different talked about a few different ways today.
Right.
Operators really expand the offerings they have through takeout and delivery.
They are much better positioned now the general group appears then when we first entered co but as far as dealing with some of the uncertainty in some of the restrictions are in place.
Got you I appreciate it.
Thank you.
Your next question comes from the line of John Glass with Morgan Stanley.
Thanks. Good morning, So first if I could just go back to gross margin you had last quarter provided some helpful detail around the year over year change related to volume declines acquisition puts and takes cause customer mix et cetera give those details for this quarter, what the what the pressures where by those sort of various buckets.
For gross profit specifically.
Correct.
Sure. So you know what I would say so out of the roughly 100 basis points. It's it's entirely driven by the combination of mix and the impact of sales inflation sort of the the acquisitions were a pretty benign this quarter as far as an impact and so it really is the combination of those mix and inflation.
Actually as I comment earlier across our us cut cost or margins. The balance it really is quite stable of a backdrop of an environment. So that's what gives us the but the positivity question optimism about the continued return as volume continues to improve it even across the mix we've seen an improvement in the third quarter as.
We've seen those volumes recover.
Thank you and then just as a follow up you know the do you have a sense or can you sort of quantify what you think your wallet share has changed among independent customers. Some talk about gaining wallet share among existing customers are holding aside perhaps new customer acquisition EBITDA.
Tencent, how much improvement you've seen them wallet share it such that maybe some of its switching you being a secondary distributed the primary distributor.
However, you measure that wallet share among independent customers.
Sure. So we haven't talked about a specific number but but we do believe we are gaining share among the independent and there is that there isn't the kestrel comment earlier that great industry data other some industry data through NPD that we use that does on up.
For blind basis, our share in each of the markets compared to others and that data indicates in recent months that we are gaining share versus the rest of the industry pretty broad based across our regions Indian patent space and then with the larger customers national sales with the wind up yet or talked about also.
I also believe we are gaining share on that as customers continue to engage with our team about conversions.
Okay. Thank you.
Thank you.
Your next question comes from the line of William Runner with Bank of America.
Good morning, I just have to your prepared remarks, you talked about how permanent restaurant closures seem to be relatively benign at this point, but I guess, if you could talk about sequentially between.
The second and third quarter. If you did see an acceleration of some of those closures and then Youve discussed hundred gross store openings that you've achieved this year are there any offsetting customer losses that were meaningful that's that's all from me. Thanks.
Sure so.
In that case from a closure is the.
Nothing that I would call out as far as any meaningful change from Q2 to Q3 and I think in fact in many cases the operators that were closed in Q2. So we started to see some opening those they adapted.
Through the the environment that we're operating in so it's nothing meaningful to call out specifically there.
And then two underpinning your second question again please.
Yeah. The second question was just you I'm getting to 800 gross new doors thats around the 500 or change them.
And then if there's any losses to offset those thanks.
Sure. So there's a there's the number I think it's roughly 100 million or so that offsets that on a net basis. In fact this is one of the strongest year as our national sales team has had a number of years and again as a picture just to reiterate what you said earlier for us when we talk about profitably growing sales.
Well that is we're taking that seriously and what these when does not coming because we're we're just bringing in cases, it's about no attractive economics on these in our our sales team, bringing forth. Some of the differences we have from scale consistency of operations tools et cetera, and are very very pleased.
He's with the gross and the net levels of wins in the pipeline on that business remains very strong.
Thank you.
Thank you.
And your final question comes from the line of Carla Casella with JP Morgan.
So with that I had a follow up on.
On the cash flow side.
And to follow you.
You're currently paying your preferred in kind are picking it do you expect to continue to do that and then you also sold some assets that in the quarter and I'm wondering if you have much more that's slated for sale and what actually you sold.
Sure. So we expect to to play through pick the first year. That's the way the agreement was structured and that I would expect that we would pay in cash post then and that that is just one of the instruments were focusing on one of the things over time that we have consistently demonstrated his focus when we talk.
Delevering of really following through in executing on that and getting back to our two and a half to three times, which in fact, we have achieved right before the two recent acquisitions and I would expect us to continue to use strong cash flow post covert to in order to do that as we move ahead.
The to your point on that the sale. So the piece of property, we sold with an excess piece of property in California that we had that we bought a number of years ago. We from time to time, we'll buy pieces of property for potential future.
Distribution centers and in this particular case as Time's gone on and we looked at our footprint, we determined that we would not need it and thankfully.
The market has improved since we bought it. So that's why we had the $17 billion gain and ultimately left that in our operation because we do buy and sell our itself.
Excess properties from time to time with the kind of gains or losses, but we wanted to make sure we called it out in our.
Scripted earnings release et cetera in order to be clear about what was it in the results as far as your question about how do we have many others.
I wouldn't expect I mean, typically you know in a given year, we may have one or two others.
There's just nothing you know.
If there's a couple of smaller ones that.
You know potentially we have on the market now and if we have progress on those we would give updates as we move forward.
Okay, great. Thank so much.
Thank you.
And then no further questions at this time.
Okay. Thank you I think that unfortunately right toward the end there Pietro was swift kick off the call. So I just in closing just I hope as you leave todays call. It really get three takeaways first just the industry is resilient expected to return to pre cobot volume levels second that our scale.
Alan differentiation as a company are leading to market share gains and third that our financial results for the improved from the trough in the second quarter and for this I just want to reiterate and thank all of our associates, who have really worked tirelessly since since the beginning of this pandemic to serve our customers. So with that thank you all for joining our call today and that ends our.
Or comments. Thank you have a good day.
This concludes today's conference call.
Thank you for your purposes participation you may now disconnect.
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