Q1 2021 US Foods Holding Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to net quarterly 2021 performance for us.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
And so that's a question during the session you will need the price are wanting and telephone keypad.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today Ms. Melissa Napier.
Ma'am the floor is yours.
Thank you Lauren good morning, everyone and welcome to our first quarter earnings call.
Today, we have pictures set channel, our CEO and Dirk Locascio, our CFO on the call Pietro and Dirk will provide an overview of our results for the first quarter of fiscal 2021, well 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 first quarter results to the same period in fiscal year 2020.
References to organic financial results during today's call exclude contributions from smart foodservice, which we acquired in April of 2020.
Our earnings release issued earlier this morning, and today's presentation slides can be accessed on the Investor Relations page of our website.
In addition to historical information certain statements made during today's call are considered forward looking statements. Please review the risk factors in our 2020 form 10-K for those potential factors, which could cause our actual results to differ materially from those expressed or implied and those statements.
Lastly, during today's call, we will refer to certain non-GAAP financial measures all.
All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website.
I'll now turn the call over to Peter to get Us started.
Thank you Melissa and good morning, everyone.
Today, we're going to focus on their recovery and recovery, which has been extremely good news for our industry and are we.
And then I was also called and our associates to work harder than they have before.
Do you want to take this opportunity to recognize our 26000 associates, whose tireless commitment to serving our customers over the last several months.
Truly been second to none.
And this call I'd like to cover three themes, which are outlined on page two.
First our industry continues to recover and we are participating in that recovery and a meaningful way.
During the last few months, we've seen a steady increase in volume and restaurant traffic as in person dining restrictions continue to be lifted.
The recovery that we've seen over the last few months and a rebound and sales from markets that are more fully open and gives us the confidence that the industry will fully recover to if not exceed 2019 case volume levels.
Second.
Our scale and differentiated strategy is driving market share gains across most customer types as our technology and innovative products and team of industry specialist, that's providing customers with the necessary resources and tools to drive and the current environment.
And for US case volumes and have begun to recover.
<unk> seen us financial results strength.
We expect our financial results to continue to improve as the recovery continues.
At the same recovery that is driving volume gains and there's also driving tightness in labor from customers distributors and manufacturers alike.
We believe however that this tightness from transitory and to ease and the latter part of the year.
Moving to slide three.
The foodservice industry is experiencing a recovery as in person dining restrictions are eased around the country, let's call. It 19 vaccine distribution becomes more widespread.
The chart on the last show us that traffic at restaurants recently exceeded traffic on grocery and convenience stores and is very close to returning to pre pandemic levels.
The recovery is being driven not only by easing restrictions.
And as importantly by consumer sentiment.
As shown by the chart on the right consumers are becoming increasingly more comfortable eating out.
And we expect to continue as vaccination rates increase and COVID-19 cases continues to decline.
And why even us dining out continues to recover we expect some of the increases and off premise dining to become permanent which augurs well for food away from home to continue to gain share from food at home.
On slide for you can see and other recovery trends and I just spoke about have impacted our case volumes for each of our main customer types compared to fiscal year 2019.
Since the beginning of 2021, we've seen a steady increase and monthly case volume with our restaurant and hospitality customers.
This is highlighted by restaurant case volume exiting the quarter with volume levels that were above for 2019.
While the recovery while the industry, we probably are certainly part of the story behind on recovering volumes. We are also gaining market share.
First let's talk about restaurants.
<unk> volume for March and April was ahead of 2019 and for independence volume for March was flat to 2019 and above 2019 for April and.
On a positive trend has continued the mother's day week that we just concluded on Saturday had the highest shipments to independent restaurants for our legacy business of any mother's day week and five years with a 6% jump over 2019 Mothers' day week.
Yes, we know that considerable upside still exists.
And markets, where local jurisdictions allow more than 50% CD volume is well ahead of 2019. This.
This includes much of the south and southeast and a few other geographies.
And markets, where either less and 50% for less than 25% seating is allowed.
North West volume is well below 2019 so.
So as restrictions get lifted everywhere as vaccination rates continue to increase and as consumer sentiment continues to improve we expect that all markets to move into positive territory.
Hospitality.
The hotel portion of our hospitality business as we've talked.
As leisure travel returns and occupancy rates, we come up.
With occupancy rates now being on the 500 basis points below a year ago.
We expect this trend to continue consumer surveys highlight the travel next the dining restaurants is one of the top things that consumers are looking forward to doing.
Our portfolio hotel customers leans more towards leisure side of the industry positioning us to take advantage of the increase and leisure travel that is expected as the economy reopens.
On health care case loans continue to remain steady and the negative 10% range, which is where that's trended for the better part of the last year.
Restrictions on visitors as hospitals are just starting to be lifted and hospital cafeterias are just beginning to reopen.
We also expect that occupancy rates and senior living facilities, which have declined over and over the past year, we will start to normalize as vaccination rates increase.
Both of these factors plus recent wins and the health care and yet will indicate that health care case volume.
<unk> returned to pre COVID-19 levels, if not higher.
For nationally managed customers, which remember includes national chains healthcare and hospitality you will remember that in 2020, we added on $800 million of new customer wins.
Which is driving some of the increases we are seeing.
And the first quarter of 2021, we added $200 million of new customer wins, and our pipeline for the balance of the year is very healthy.
Lastly, and for National chains, and specifically the contribution margin at which we are signing new customers as well above the average for that portfolio and above the margins associated with recent wins.
Turning to page five.
As I've discussed and important factor behind one case volume has been the recovery of our industry for.
For and equally if not more important factor has been on market share gains across most customer types.
The driver of our market share gains continues to be our great food made easy strategy, which aims to help customers succeed by taking advantage of our leading technology, our innovative products and our team of experts that support our sellers let.
Let me give a few examples of how our core programs and our strategy has evolved to meet changing customer needs and contribute to recent market share gains.
First on the technology front recent.
Recent research and comments from new customers indicate that our technology is still performs our technology platform still leads the industry.
For example for larger customer wins like the $1 billion of wins and the last five quarters. We track. The main reason why customers. So that's just U S foods and many cases the determining factor is a combination of our technology and our service model, we see that especially with healthcare and large chains.
Acknowledged and makes it easier to manage menus and control costs across multiple locations.
Similarly for independent restaurants, we continue to enhance the functionality to make our technology even easier to use. Some recent enhancements include mobile pay functionality and the ability for customers to see our inventory and real time.
Visibility provides real value to customers, especially at a time when the industry is experiencing some volatility on the part of our manufacturers.
Second on the product innovation side I.
I mentioned on our last call how COVID-19 has resulted in the shift and the products that customers rely on the most the free.
Three big trends that we observed our off premise dining and the need to mitigate labor challenges and products that promote wellbeing, which includes plant based products, our spring Scoop, which launched in February featured products exclusive to us foods.
US all three of these operator needs.
As a result, we saw trial of these innovative products in line with historical norms, which we know contributes to increase retention and market share gains.
Upcoming summer Scoop, well similarly feature products that take labor out of the kitchen, especially ingredients or components that require intense preparation.
These labor saving products enable restaurants, you maintained interesting options on their menu and continue to add innovation to the next we're also expanding.
Spanning a range of products that support the continued growth and off premise dining such as tamper evident packaging and grab and go products.
Note that our 2020 corporate social responsibility report was published two weeks ago. This is a comprehensive review of our progress on our three pillars of people product and point of which our line of 900 and serve good sustainable product is an important component.
The reported is available on our website, which I encourage you to visit to learn more about <unk>.
The third and final part of our Great food made easy strategy is our dedicated team of industry experts that are available to help customers run their business more effectively.
At the beginning of the pandemic, we have had a dedicated team of restaurant operations consultants, helping customers access chairs and restaurant and revitalization Act funding.
And with our first webinar and April 2020. The team is held weekly Webinars and conducted over 7501 on one consultations to help customers understand and navigate available funding options.
We estimate that our team has assisted customers and accessing over $1 $5 billion and funding since COVID-19 began.
And as early as mid February this team was conducting webinars on helping customers be prepared to access the restaurant revitalization fund even before the legislation was signed into law. These.
These efforts are truly making a difference to customers as illustrated by this E mail, we receive from our restaurant owners and St. Louis, which I'd like to read to you know quote and.
Information you supply is a game changer, Mike payroll company said they found $300000 between both my businesses I'm not sure. How to think you you are literally changing people's lives and Corp.
This is what we mean by we help you make it.
Now moving to slide six another key part of our strategy has been the acquisitions of food group and smart foodservice and <unk>.
Group acquisition allowed us to dramatically improve our distribution footprint and the northwest giving.
Giving us a presence and this growing part of the country and making us more attractive to regional and national customers.
The acquisition of smart foodservice enable us to scale, our entry into the cash and carry channel and more profitable and faster growing channel in the foodservice industry.
Not only does this channel provided more attractive growth and margin profile and enables growth and share of wallet with our existing delivered customers, while extending our reach to target customers. We werent previously serving.
Let's spend a few minutes talking about the progress we have made on the integration and food group.
And the future growth opportunities cash and carry presents.
Starting with Citigroup.
Our house systems conversions are progressing well since we last spoke we have completed two additional conversion for.
For a total of four and we were on pace to have all of the food group warehouses converted to U S foods operating system and the second half of this year and line with our original plan.
If you recall completing the warehouse system conversion as a key enabler to unlocking the $65 million of annual run rate synergies and 2020, we made good progress on synergy capture especially on the products for them.
And we remain on track to capture the full 65 million synergies by 2023 with 80% captured by the end of 2022.
We've also begun to extend foods, new capabilities around meat and produce through the rest of the US Foods network and we are excited about the enhanced product offering this will bring to customers around the country.
The smart foodservice business continues to outperform our delivered business as it has throughout the pandemic.
Same store sales for April are ahead of 2019 as restaurant demand continues to recover.
And we continue to benefit from some direct to consumer sales.
And that we are getting without modifying our business model.
On our last call I mentioned that we would be rebranding all smooth for all smart foodservice locations to the U S food foods chef store brand and.
Pleased to report that the rebranding effort is now complete and customers have responded well.
With the rebranding complete we have begun to fully leverage the power of combining these two channels by.
I also and both sellers and customers and incentives to shop for two channels.
And as a result, we are seeing delivered customers increased their purchases from chef store with minimal impact on the delivered business.
This multichannel offering is an advantage that no other competitor has access to.
Lastly, the conversion to the chef store brand will help facilitate our expansion into new geographic markets and with U S Foods has an established presence.
Having covered the first two themes of our presentation first the continued and expected recovery of our industry and second how our scale and differentiation strategies contributing to driving market share gains and want to spend just a couple of minutes talking about the current operating environment that are referred to in my opening comments after which I will turn.
The call over to Dirk.
And I'm sure you're all too familiar all elements of the value chain are facing labor shortages.
We hear of restaurants, having to close one day, a week to give their staff for break and some markets hiring drivers and selectors is taking longer than expected.
And lastly for manufacturers are having trouble meeting the growth and demand.
We believe that there are a number of factors contributing to us environment, including Workers' West temporary less labor force extended unemployment and the remarkable but as yet and complete progress on the vaccine front.
We believe that all of these factors will sort themselves out over the next two to three quarters in the meantime, we are working hard to mitigate these factors so as to meet increasing demand on the part of our customers for.
First we have added significant inventory for 25% increase and days on hand, and on order as well as working very closely with manufacturers.
And second we are making use of one time sign on referral and retention bonuses to avoid embedding these weak wage pressures and to our cost structure.
Lastly, we are pleased with how the recent changes to our operating model and help mitigate some of the supplier and labor pressures the industry is experiencing.
You will remember that by reducing the number of regions before we freed up some resources, which then shifted to centers of excellence, whose aim is to quickly develop and deploy best practices across the country, and which has helped us and this environment.
I will now turn the call over to Jeff for a discussion of our first quarter financial results and how we have positioned the business for earnings growth.
Thank you Pietro and good morning.
I'll begin on slide nine where I'll cover a few highlights for the quarter.
And as Pietro referenced earlier case volume improved as the first quarter progressed, especially with our restaurant and hospitality customers.
This resulted in a corresponding improvement and adjusted EBITDA as we moved through the quarter.
These volume trends have continued and the early part of the second quarter as the recovery continues to take shape.
When comparing last month's restaurant volume and trends compared to April 2019, independent cases trended modestly ahead, while chain cases were well into positive territory.
Gross.
<unk> per case for the first quarter of 2021 was below Q1 of 2020. However, the recent improvement and case volume has driven and an improvement and gross profit per case.
Our customer and product mix has started to return to pre COVID-19 levels.
Our gross profit per case improved over the course of the first quarter as volume and mix improved.
We saw higher product cost inflation, and Q1 2021, and we did in prior quarters, which is negatively impacting our gross margin as a percent of sales.
And the two 7% product cost inflation, we saw and the first quarter was and center of the plate categories and may persist in coming quarters.
If you recall center of the plate items, such as beef and poultry.
And some customer contracts are typically priced with a fixed fee per case markup.
So when we have higher inflation gross margin as a percent of sales and compress for the profit these product categories and customers. Even if we are making the same amount of gross profit dollars on each case, we sell.
Comparing to Q1 of 2019 for a moment.
Our gross profit per case was negatively impacted by higher freight costs as well as the continued albeit improved negative mixed impact already noted.
As our case volume of corresponding mix continued to improve we expect the gross profit per case will also continue to improve and when we compare our gross profit per case for 2019, the GAAP for the first quarter was the smallest it has been since COVID-19 began.
Looking ahead.
We expect to see continued headwinds and gross profit per case from the tight freight market and expect mix to improve as case volume improves.
Although we expect the higher freight cost to be transitory. We do think they will remain a challenge for the next two to three quarters.
On Opex over the last few quarters I've spoken about the $180 million of fixed cost savings that we enacted in 2020.
These cost savings are contributing to our results and we are beginning to see the fixed cost leverage return as case volume recovers.
We've begun thoughtfully reinvesting some of the 2020 savings back into the business to further enable sales growth and earnings improvement.
We're reinvesting approximately $50 million, primarily to support growth and both our local and national selling organizations as well as within some key areas such as supply chain to further improve our results and customer experience.
This equates to roughly two thirds of the $180 million ultimately flowing through as permanent cost savings.
Slide 10 shows our net sales for <unk>.
Adjusted gross profit and our adjusted operating expense results for Q1 of 2021 and 2020.
Net sales dollars for the quarter were down slightly compared to the first quarter of 2020.
And Youll recall that only the last three weeks of the first quarter of 2020 were heavily impacted by the rapid onset of COVID-19 on the business closures across the country.
Our gross adjusted gross profit dollars for the first quarter declined two 7%.
And our adjusted gross margin was down 30 basis points compared to prior year.
Freight costs customer and product mix and higher product cost Inflations were had been headwinds to adjusted gross margin and the quarter compared to Q1 from 2020.
We do.
<unk> case volume improvements with independent restaurants health care and hospitality to have a positive impact on our adjusted gross margin going forward.
Adjusted operating expenses and the first quarter decreased two 6% and dollars and improved 30 basis points as a percent of sales.
The improvement and adjusted operating expense as a percent of sales is largely due to the cost savings initiatives, we put in place over the past year and the sales inflation impact.
On a dollar basis for reduction and cost was primarily due to lower volume and the cost savings initiatives, partially offset by approximately $25 million higher bonus expense in Q1, 2021 and then Q1 2020.
The first quarter of 2020 had a negligible negligible amount of bonus expense.
The lower fixed cost base that we operate from today, we'll continue to benefit us as case volume returns with a larger percentage of gross profit dollars flowing through to the bottom line.
We do expect that supply chain cost inflation will be transitory opex will be a headwind through 2021.
We expect the cost increases to be transitory until the work force increases and the hiring demand from the recovery subsides likely later in the year.
On slide 11, adjusted EBITDA was $172 million.
Adjusted net income was $27 million and adjusted diluted EPS was <unk> 12 for the first quarter.
As I mentioned earlier.
Adjusted EBITDA improved as we move for the quarter and the second quarter has started out very similar to how the first quarter finished.
We remained and a GAAP net loss position for the first quarter and as a result are not reflecting the additional shares from the preferred equity transaction and our adjusted diluted EPS number for the quarter.
We do expect to return to positive GAAP net income and the near future and will reflect the additional shares at that time and.
And as Melissa noted at the beginning reconciliations of our adjusted numbers are included in the press release and the appendix of the presentation.
Just to wrap up moving to slide 12.
Share gains.
Cost savings initiatives.
And the operating model changes have and will continue to improve our effectiveness and our results.
These combined with the leverage from volume returning have positioned us to take advantage of the recovery and drive earnings growth well into the future.
Share gains with both large and small customers since the recovery began last summer have strengthened and the top line.
And we continue to pursue profitable new business and believe that our differentiated strategy and scale gives us an advantage over many of the distributors and our industry.
As I mentioned earlier, we do expect some transitory headwinds related to freight and supply chain labor over the next two to three quarters.
Our business has.
Has historically produced strong operating and free cash flow.
As the recovery continues we expect to return to continue to generating a healthy level of free cash flow and this cash will be used to reinvest and the business and reduce our outstanding debt balance.
And April we used cash on hand to pay down $150 million of outstanding debt.
And we will continue to make debt pay downs as the recovery unfolds further through 2021.
We still expect to operate the business at a two five to three times leverage ratio through a combination of improved EBITDA and debt paydown.
Jetro set at the beginning of the recovery is underway and.
And our second quarter case volume was off to a good start.
At this time, it's hard to forecast the precise timing of the recovery.
Not necessarily progressed on a linear manner, but we do see restaurant demand improving as more markets from a restrictions and as warm warmer weather allows for more outdoor dining and.
Additional parts of the country.
As a result, we expect continued improvement in Q2, adjusted EBITDA compared to Q1.
Over the last 30 years customers have shown a consistent preference for eating away from home and we expect this trend to continue where confidence about the future U S foods and the industry.
Operator at this time, we can now open the call for questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
Again that a star one on your telephone keypad.
Your first question comes from the line of Kelly Bania from BMO Capital. Your line is open.
Hi, good morning, Thanks for taking our questions.
And I'm wondering first just on the comments on freight.
And just help us understand the magnitude of the headwinds.
Much you're using third.
And third party freight on the spot market versus contract and just how we should think about modeling that over the next couple of quarters.
Sure Kelly good morning Stuart.
I'll take that and so although we haven't talked about the specific breakouts, we do manage.
A large portion of our freight is kind of relatively split split between where our vendor delivers it using their carrier and where we arrange for delivery either with one of our trucks or contracting directly with third parties.
You use spot rates and a normal environment, it's relatively small when we use third parties, we do try to contract with them.
And then it can be using a little more as you have more volatile environments like we're in now.
I'd say as us so our teams are not standing still and we're working closely with vendors on opportunities, where we can continue to work with them to try to increase.
They're afraid allowances to look at are within our own four walls on optimizing our freight network and it is it remains a challenge.
Not to a little different but on a same idea as 2018.
But what we have seen and cycle over cycles over the years is that when you have this tightness that additional capacity does tend to come into the market over time, and so we're working and the short term to try to mitigate it at the same time.
If we see capacity coming back later and the year, we think that will help as well so.
And as a challenge, but not something we expect to be sort of a permanent impact within the industry or our business for the longer term.
Okay, that's very helpful.
And just a follow up maybe just a little bit more color on the decision to reinvest some of the cost savings I think it was $50 million.
And back into the business, just a little more color on that thought process.
And what you're expecting to get out of that reinvestment.
Sure.
So from the very beginning we've said that we expect to reinvest and meaningful portion of that and we've talked about how we expect the majority of the savings too.
Remain permanent and so today, it's providing a little more specificity and so.
The reason that we've progressed in recent months and moving ahead on those things is really a few things. One is we see more opportunity in recent months for market share gains and we did pre COVID-19 and we really want to take advantage of that especially in some markets. So have begun that reinvestments on the local side and on on the national side.
Well as we see the demand the pipeline and we've also on boarded a fair amount of business in order to support that effectively and then to a lesser extent, but does remain an opportunity.
To continue to upgrade some talent and some cases, the new hires are typically not the same individuals', but really us too.
We continue to support growth and accelerates.
Share gains as we move ahead.
Thank you.
Thanks Kelly.
Your next question comes from the line of <unk> <unk>.
John Glass from Morgan Stanley You May ask your question.
Hi, Thanks, very much Doug maybe you could just go maybe broader and talk about the cost you've incurred that what you would view as unusual this quarter, so you'd mentioned freight on.
Undoubtedly there is some hiring cost you talked about some onetime bonuses, what what are the unusuals or what you would view as kind of one time and as you exited the quarter or are those costs still accelerating that as the sales should we expect greater cost pressures and the next couple of quarters or is the first quarter kind of representative of where you are running now and you would expect to until this sort of unwind later in the year.
Sure good questions I think that a couple of things I would highlight so right.
You pointed out and that's really been embedded for the last quarter or so and I think we will continue and similar magnitudes for at least the next few quarters.
On the gross margin sort of mix continues to be a bit of a headwind. Although as I mentioned continues to improve as volume comes back on that.
From an opex perspective, so the main unusual things sort of there's not anything necessarily large that I would call out as unusual that theres always some incremental costs from small amounts from the some of the storms in February and such but the things around labor that youre getting at when we and others talk.
It's about hiring in advance because the recovery happened so fast that was less of an impact in the quarter and so therefore, some of the retention and hiring we're seeing a little bit a bit in the quarter. We will see some continued ramp up over the next couple of quarters as we continue to hire additional individuals to support the recovery so little bit.
Higher costs, but again expect most of those to be transitory through.
For the balance of 2021.
And if I could just follow up you talked about some favorable contract rates and categories versus prior.
Pricing power in this industry and I understand independents, you might since things are running hot and the economy and restaurants raising prices are you able to pass on maybe.
Price increases greater than inflation and when you know contract are you getting a bit more wiggle room on pricing or is that not just not the case.
Sure so.
And maybe break it into local and larger national contract customers and so on the local side so with the inflation to your point the combination normally and in an inflationary environment you can see some compression when that inflation happens for the immediately and then it gets pass through and this environment you have the combination of the inflation.
Some supply challenges and different categories across the industry and not just us. So our teams. Our commercial teams are price and teams have worked very very closely and have done a really nice job through here of really taking sort of managing that very well to be able to pass through that inflation and gain a little bit of.
Pricing as we've gone through there, but again tried to price very fairly to our customers on.
On the national side.
We continue this journey over the last few years, where our national sales team has done a really nice job of really all.
All the new business that we're bringing in us higher margin than typical and those and continue to take advantage of the tighter pricing environment that we remain and so it definitely is on those customers are much stronger pricing environment and it was a few years ago and depending on how certain things play out and the environment today that may continue.
And even to a greater extent, but I think that's where pure Pietro made the comment earlier us so.
And we try to be priced fairly to our customers, but at the same time there are things that are <unk>.
Difference and we work with our customers on things like our service model, our technology et cetera that.
We don't necessarily have to be the cheapest, it's adding the most value to them and the environment, we're in and the.
And that balance that really helps us both of us one.
Thank you.
Your next question comes from the line of John Hind muscle from Guggenheim You May ask your question.
And let me start with can you give us a sense of if you think if you look at drop size average drop size now that we're starting to cycle COVID-19.
Lines per per customer.
Volume per line per.
The activity of the business. So what are you seeing with regard to those and us drop size up nicely from maybe where it was certainly a year ago, but pre COVID-19.
Yes, I'll take that so.
And so drop size is up.
Above where it was a year ago, John that's probably a combination of.
Recovery on the part of demand and also.
And our market share gains and consolidate and it's hard to tell how much is from each but we are definitely.
And March we saw higher drop sizes compared to a year ago.
Okay, and then and then maybe take a longer term view right. So if you look back.
So pro forma for the acquisitions right I think EBITDA was $1 billion for give or take between synergies and proactive cost reduction thats $200 million or so when you look at where the business can be and.
Three to five years.
It is.
Do you think it is substantially greater than where you were pro forma and then from a margin perspective, right and this business be 50 to 100 basis points more profitable and it was.
Pro forma and part drop size going up as well.
And I know, it's a long time out there, but conceptually where you think this business ends up.
So maybe I'll start with Patrick do you want to add and anything I think yes. So Johnson to your point I think youre thinking about it and the right way. So we do think that.
The business is on a good trajectory now getting back to that pro forma and then we think that's to your point some of the Trinity that the synergy realization and the other cost saves as well as the new business wins really positions the business to grow EBITDA dollars from that base to get to that stronger and <unk>.
Higher number over time.
And it's kind of continued EBITDA dollar growth as we've done in recent years. So from a margin perspective, as you've seen us pretty consistently do over the last four or five years, we really try to balance its focusing on growing EBITDA dollars because thats ultimately, we take to the bank, but really taking advantage of those opportunities where you can.
Create higher margins overall from whether its drop sizes continued logistics.
Our logistics optimization private brands customer mix all of those kinds of things and so we do think that continues to give us the opportunity for margin improvement on rate as we move ahead, so really both dollars and rate opportunities remain out there.
Okay. Thank you.
Thanks.
Your next question comes from the line of Alex Slagle from Jefferies. Your line is open.
Thanks. Good morning, just following up on that last question and maybe tightening the timeframe a little bit just want to get a feel for the sales volumes needed and the current environment versus 2019 levels to get back to a sales, 4% plus adjusted EBITDA margin level, just knowing you add and staffing.
But investing ahead of the curve and we're dealing with the tight labor market and freight.
Any color here on a commentary on <unk>.
Recent EBITDA and margin run rate exiting the quarter that would be helpful.
Sure.
So I think that.
We're going to stay away from a specific number because some of our peers have talked about just.
The exact recovery and mix of business as it comes back can have some some impacts on there, but what I will tell you is us just to kind of build on my last answer is as we get sales volumes truly back to where they were in 2019, we expect that R.
Our.
Business should be bigger because of the wins, we've had and we think that that should drive incremental dollars I think the other thing that's a little harder to tell on the short term with some of the freight challenges that again and more transitory. So as you assume some of those normalize as we get into say 2022, and such we think that as that business and that the.
Core truly recovers that we get back to that.
So form a number of growth from there. So I know, it's not as specific as you wanted but it is really again because of that.
Not noise and industry exactly how things recover but we do firmly believe that the business is stronger and can generate more EBITDA on.
And similar sales because of the different actions, we've taken and the strong and then grow from there with a strong customer wins that we've had over this past year or so.
And that makes sense on.
And the independent case growth.
Deeper behind the drivers behind the strong rebound if there's anything specific that stands out and and I guess, just some thoughts on the potential for further acceleration ahead, I mean, as I guess, the broader supply chain issues likely create an even wider gap between the haves and have nots and foodservice distribution.
And yes some of the.
Our stronger inventory positions.
And able to make deliveries might might fare better than those that are a little bit more constrained.
Yes, so we.
Look I think the best the best sign is the fact that.
April volumes were above 2019, and that's despite the fact that there is still a considerable number of markets probably around a third.
Around the country.
Still at 50% occupancy or maybe even below that so as those markets.
Recover.
We see more upside in terms of then our ability to gain market share you've hit on some other things that.
And our scale, which allows us a balance sheet, which allows us to provide better service we look at our net.
Promoter scores in terms of us versus us.
Competitors were doing well on that front so.
We do see and opportunity in terms of independents to come from both.
And the recovery and some parts of the country as well as continuing to gain share.
Thank you.
Your next question comes from the line of Lauren Silverman from Credit Suisse. Your line is open.
Thank you and another question on the independent side really nice recovery with the case growth trend positive in April can you.
Better understand the dynamics between new customer acquisition and expansion of wallet share.
Tom.
Declines in the case volume and.
And then perhaps are you willing to share and what percentage of independent customer and youre, serving today relative to pre COVID-19.
Sure sure quite catch the whole question, one and maybe Charl and I'll start and maybe perhaps you can add on so I think from.
Overall for us so our customer accounts on the restaurants are still down.
A little bit compared to 2019, but each month, that's going by it continues to get better and us.
The combination of us more markets and more of our existing customers reopen as well as the net new customers that our sellers are continuing to bring on board. So we're feeling good about the trajectory and Thats going and then Petra mentioned, we've seen some nice basket size increases from customers and really looking to continue to build on that and.
And holds some of those gains so.
Raul both from the right direction and Theres always things you can do to continue to improve and so those are the things that.
We're we're focusing on as well and the Lord you might just repeating your last part of the question about something versus 2019.
Yeah.
And to kind.
Parts for understanding the dynamics between what's driving the independent case growth on that.
Second to that what percent of your independent customers, you're serving today versus pre COVID-19.
Okay.
I think Ed and Paul and Jeff.
And we think about that.
Business in 2022, 2023, how do you envision the business mix to evolve if at all given some of your national wins and.
And on customer wins as well.
Okay.
It's harder to tell exactly in 2022 for some of the same reasons that I talked about earlier and not knowing exactly at what pace.
Hospitality or other recovers, but I think that.
Over the longer term kind of to us.
That view, we would expect us to business to be similar and for the shorter term some of the wins you've had and change that's probably a little bit higher but as you can see our independents are recovering and growing pretty.
Pretty quickly and so it and that case.
At the high end of the margin spectrum, so that that helps over time, so over the longer term our focus on the target customers is really unchanged with growing at two extra market.
Independents growing up Mark on and healthcare and hospitality and then being very opportunistic on chain and other and in this case with chain over this past year or two and opportunistic and as I've said, a few different times its not been about just free and cases through the door for us to have to be profitable cases and.
And national sales team has done a really nice job of optimizing for that.
Thank you very much appreciate the time.
Your next question comes from the line of Edward Kelly from Wells Fargo for your line is open.
Hey, guys. Good morning, Thanks for all the color on kind of curious on on <unk>.
<unk> can you just talk about where you currently stand from a capacity standpoint, given the challenges that you mentioned on the labor side and the inventory side.
And if you've had the best quarter over quarter improvement.
Case growth wise relative to your peers here, so, but I'm just kind of curious as to how you are positioned for the coming months and do you think that there is some constraint around capacity or whether youll be able to navigate that.
Okay.
So the capacity really us is on two funds.
And I think that.
Referred to one is drivers and selectors and they're looking to <unk>.
<unk>.
Capacity.
Were short about.
Take care and taking those out.
1000 drivers and selected us across the network from where we'd like to be.
Recovery continues.
And as I mentioned, we're working really hard to.
And every week, we cut that number down to a number of factors not just on the monetary side I referred to what other things we're doing to attract.
And to attract.
Select goes and drivers I think one of our peer set and now these are good jobs and they pay while they pay good benefits, we're just having to ramp up.
The hiring machine.
No more quickly and more than we have and the past us as we've said and recovery has happened.
And really quickly.
On the inventory side.
I think we are working with our vendors to to make sure. We have the right inventory reserve committed to us.
Where we have excess capacity on our network were taking advantage of that and so.
From an inventory perspective, we're doing all the right things.
<unk> really.
Serve our existing customers and continue to add customers.
Very profitable and accretive to our P&L.
Okay, and then just a follow up for for maybe for Derek I guess.
How are you guys going to be presenting.
The convertible preferred so it looks like the dividend came out of the 12 cents. This quarter I'm just kind of curious because on one hopefully we're all going to model. This correctly now going forward.
But how are you going to be presenting adjusted EPS as it relates to the convert thank you sure. Yes. So as you noted we did make a change this quarter to show it adjusted diluted for net income not net income available to common.
Sort of to be a little bit clearer on that and also so that would be sort of.
Hopefully, we're not in a position of a GAAP net loss and much longer but while we have that this would be the way we would we would show it and what will happen as soon as we returned to GAAP net income so likely in the coming quarters. As you would not include the dividend and instead would show the roughly 25 billion shares and your diluted share count.
In order to get to.
On a diluted share base.
And if you guys have further questions you can ask Scott and Melissa, but hopefully that helps great.
Great. Thank you.
Your next question comes from the line of Peter <unk> from <unk>. Your line is Hilton.
Great and thanks for taking the question.
Wanted to come back to your comment on the increases and off premise dining, which you guys believe it will be.
Some more permanent.
Can you just give us a sense on what gives you that confidence.
And to see that those sales will remain permanent and is there any difference between chains able to retain those versus independents or is it kind of broad based across the segment.
Sure.
So look there was a real spike in and off premise dining during the early part of us.
COVID-19.
I think what I was trying to say was.
Some good portion of that of that incremental business will stick I don't know that all of it because it's hard to it's hard to tell.
Tell at this stage, but.
And your assertion is based on talking to customers and.
And also talking to our partners as you know we have a good relationship with channel now which helps and.
Enable off premise dining and.
And based on what they've shared with US It does look like.
Some of that.
And they stick.
Yeah.
Great and if I could just ask on your.
On your customers using your technology and you said, there's one on the top reasons why customers will switch on.
Use your mobile pay and real time inventory, which I think can be a real benefit to them and can you give us a sense on how much of your customer base. Today is utilizing this technology and what the opportunity is still ahead and how does that compare to 2019 levels.
Sure so the <unk>.
To clarify the.
The point I was making in terms of where are we track reason for switching that was with a large customer wins and that was a combination of the technology and the.
Service model, which is one point of contact consistent.
Consistent offering across all of our network, we don't have to negotiate with a different opco for promotions.
So I was referring to that part of it.
And we have historically talked about our.
E Commerce penetration.
As being indicative of our technology.
Advantage with respect to.
Smaller local customers and that I.
And believe that the penetration is at or above where it was 2019 with local customers.
Thank you very much.
Your next question comes from the line of Jeffrey Bernstein from Barclays. You May ask your question.
Great. Thank you very much.
Two questions one just on the.
The margins I think you mentioned that the new business you are acquiring and I guess now.
And $1 billion over the past five quarters.
As with margins well above the portfolio and maybe prior wins and I'm. Just wondering if you can look for more context on that.
And maybe what the margin upside is versus the historical or.
Whether or not you think youre able to sustain those those higher margin levels with further wins going forward and then I had one follow up.
Sure. So just to clarify the so the $1 billion is large customer wins, which includes change healthcare and hospitality I think I specified the more attractive margin profile is coming on the chain side.
And.
That is that is really a function of the more favorable demand supply environment.
And then a few years ago that Derek referred to and we don't anticipate.
That changing.
And the foreseeable future.
Okay, and then just us.
The follow up as you think about the distribution category and consolidation.
I'm, just wondering whether you see yourselves or others pursuing more aggressive M&A or were there specific to yourself you might be constrained near term obviously your leverage levels are well above your target.
And I know on the past you've talked about outsized valuations, perhaps desired by potential acquirers for.
Or whether or not youre seeing you have your own on drilling integration of your most recent acquisitions that might slow down.
Are there any of those reasons would lead you to maybe just prefer to win accounts rather than actually acquiring smaller peers, whether you want to answer that for us foods, specifically or whether you think there would be consolidation through M&A for the broader category.
For what would be great. Thank you.
Thanks.
Yeah.
Sure. So I think I'll take that one I think for us our top priority for the near term on the M&A perspective as I commented before is really about successfully integrating the two very strategic acquisitions that we have done.
For one for the channel and one for the geography, and really getting food group and and smart, both really well embedded and growing within our core business.
After those for us the.
Near term focus us after integrating knows us really about Delevering I would expect over time.
And we would continue to see some tuck in acquisitions, but thats really more where I would expect it to be.
Just like we've done in the past with much much smaller.
Here and there, but again I think right now it's a tougher time for the whole industry because of valuations and valuation disconnects and.
The few smaller transactions that have gotten don or more kind of private equity type of transactions. There. So over time again, and I would expect us and others to probably continue to do some acquisitions, but.
You probably may.
You may not see us much at large scale for across the industry as you would have in the past.
Thank you.
Your next question comes from the line of Nicole Miller.
From Piper Sandler.
Ask your question.
Thank you good morning, and thank you.
And about the industry more or less being at 2019 levels. If you could speak very broadly about the industry getting back to that 50 50 split it was that between grocery eating at home and on restaurants eating out if we keep pace here.
Is this like a six to 12 month catch up for 12 to 24 month catch up and is there any reason.
For the industry that you sell into can't get back I think let's go for like $100 billion in sales for even that out.
So Nicole thanks for the question good morning.
And I think as Derek has mentioned we.
We feel very confident timing about where things net out the timing is a little harder, but and again, we've seen just how quickly the recovery.
As.
Has.
Happened and the last month or two for a number of reasons. So I think the charts. We showed on the traffic which is the best day, we can get at this point between food at home and food away from home show that.
The trend is back to where we were.
I think the.
However, much of the.
Off premise.
Premise dining stacks will help add to the level of food away from home that we saw in the past.
And we're at <unk>.
Thousand 19 level, despite some markets like the northwest being still fairly handicapped in terms of restrictions. So I think we can be confident about getting back to or above those levels, the timing and trajectory of that is really hard to say.
Yes.
Could you talk a little bit on last question could you talk a little bit about the crazy and categories that are improving and which ones are improving the most and is there anything thats not keeping pace.
So everything is on is improving and on the early days of the pandemic we saw the more.
And more resilient customer menu types were around.
Mexican and Italian and CSR for I think of late we've seen we've seen pretty much everything.
Come back were and those markets that have few restrictions and I think that's why we feel good about the health of the industry right its independent chains different venue types.
And all kind of coming back.
What we're seeing at this point.
Thank you.
Your next question comes from the line of.
John I haven't Combe from J P. Morgan you May ask your question Hi, Thank you.
Youre not the only large company that at least on paper has basically finance the increase in receivables and inventories with us with payables again, I know thats, not what youre doing directly but thats what the balance sheet shows can you comment as to whether that is unique to the largest food service distributors or whether that.
It's also being.
And a realized for the benefit to the regional and smaller operators. If there's a way for you to know that because obviously working capital buildup was one of the things that we had talked about before and maybe an advantage that the larger distributors would have and the <unk>.
Smaller ones and I have a follow up as well.
Sure. Good morning, John So as you pointed out so I think.
Of the three of US saw payables increases and at least and our case, it's not because of anything we're doing different.
As opposed to just the natural timing of purchases and there. So I would expect the inventory builds to normalize a little more as we get a little these next couple of quarters.
And then.
Similar to what the AAP.
And to normalize as well I think from us So theres not anything I guess from a terms that I would.
Call out that I would think it would be different from a larger and smaller on what I would say, though is I mean you'd have to pay for that inventory and while you are carrying and it will have an impact and the nearer term still on cash and so I think that's where it does advantage someone like us with the scale on the balance sheet strength, we have Av for.
Nancy and net incremental inventory and then at the same time as the industry is growing your your receivables are growing so just the natural build that happens to your point around that but I think that is where as we continue to see where other smaller distributors will be challenged as we grow through there because it is a cash and working capital investment because.
As we worked through bulk and recovery plus the supply side challenges that they are happening and.
Sure.
Potentially less likely to make be able to make some of those investments to mitigate some of the supply challenges and those are opportunities for us to.
Target those customers and really achieve additional growth from there as well.
Thank you and then secondly, I would think one of the quick quote unquote easier ways for you to win customers from.
And from distributors would be to get salespeople and drivers from those distributors. I mean is that is that practical I mean is that something that youre seeing or other non competes or other things that may make it basically.
And you go out and get other peoples best employees and more.
We're sticky proposition.
We definitely see that now that we have.
As Dirk said reinvest a portion of the cost saves in terms of.
Expanding our sales force I speak to a new class of sales force every months and.
And there's definitely a portion of that come from.
From other competitors and.
They are attracted to us foods buy things that have made us attractive and the past as well our culture, our technology our products our team based selling all of which kind of give them the ability to earn more income than they might and other places and so.
And that definitely is.
And opportunity that we've we've taken advantage us.
Thank you.
Your next question comes from the line of Jana and GNL Li from Goldman Sachs. Your line is open.
Hi, there thanks for getting me in and I just had a question you spoke about technology and being appointed differentiation and helping us gain market share and <unk>.
Should we expect any incremental investment here, that's kind of needed or required to keep that industry, leading position basically is there anything else that you'd like to do or need to do and then just any color on the allocation of capex balance as we think about 2021 and any investment. Thanks. So much.
Sure good morning so.
Out of the $50 million a small portion of that is some incremental.
Investment for for digital and what I'd say us on that one I mean, that's an area where year on year out we've continued to invest and there to be able to add more capability and serve our customers better. So there's not a step change so to speak.
We need over time, but again, we are investing a little bit extra there because we think through and that would be more on the call at the opex for P&L side, as we think through capital.
Not anything big or different that I would call out on our capital for this year and one other things that I've talked about prior is you will see more cash capex and the current year because were.
Spending less on fleet this year than in past and more on facilities and that ebbs and flows from year to year sort of our all in number when you're close together isn't all that.
Isn't all that different again, because we other than the pause last year. One other things we try to do us consistently make sure we're investing and the business to be able to support the growth across built.
Buildings.
Tac and fleet.
Thank you for helpful. And then just one bigger picture question. If I can just on the on the market share gains can you give us a center for where you think youre gaining.
Gaining that share from us it from other large players or some other smaller and more fragmented players and then when you think about the go forward and your mind that potential size. The portion of the pie that that could be up for grabs and really how meaningful credit out further and market share gains and net.
For me thank you.
Okay.
To be honest, it's hard to tell where the gains are coming from we don't have access to to that sort of data.
And we talk to the field and really it comes from.
This is small and large competitors it really depends on the local environment.
And how various players are doing in terms of service and and who the makeup of the players us in terms of the longer term outlook that you asked about.
Overall, we're on.
10 ish share player.
On a touch below that so we see lots of opportunity to grow share over time given.
Our position we're the number two.
Player but.
Still essentially and it's still a very fragmented industry. So we see lots of opportunity.
Gained share over time.
Thanks, so much.
Okay.
Your next question comes from the line of <unk> Martinson from Jefferies. Your line is open.
Good morning, just wanted to touch on the.
The rise of the ghost kitchens and.
How you guys are penetrated and that and talk is that that will continue as we recover folks 10.
And to like the economics on that just wanted to see where where your position, there and where and what the focus is on that side of the market.
Sure.
So those kitchens, we benefit as a distributor we benefit from.
And as of Ghost kitchen, and the same way, we do commissaries and caterers, because theres still have to purchase there for bulk foods from somewhere and I believe in past calls we've talked about our gross kitchen playbook and I think we were one of the first ones to come out west and that's definitely helped.
Existing customers.
<unk> operates on.
And get better leverage out of their existing real estate or acquire lower cost real estate to access new customers and our ghost kitchen playbook has some analytics built in.
And menus built in for different different menu types and we've had we've had a lot of interest and participation on the part of customers.
In terms of ghost kitchens.
Thank you very much guys I appreciate it.
And there are no more phone questions I'll turn back the call over to Mr. Pietro <unk>.
<unk> for closing comments.
Thanks, operator.
Keep it brief with comments.
I hope that just to go back to US we takeaways that you can see after this call.
And if we keep the three takeaways and I talked about at the outset. The industry recovery is well underway and we are participating in this recovery and a very meaningful way.
And our scale and differentiation is driving the market share gains that we have talked about and third the continued strengthening of our financial results.
Industry continues to recover.
And again I want to take the opportunity to thank all our associates really continued to go above and beyond and to serve our customers and this and this environment.
We look forward to speaking with everyone on our next earnings call on August Thanks for tuning in today and have a great day.
This concludes today's conference call you may now disconnect.
And on.
And is there.
Moving on.
And then.
Ladies and gentlemen.
And yes.
And.
And it happened.
And.
[music].