Q2 2021 US Foods Holding Corp Earnings Call

Yeah.

Good day, and thank you for standing by and welcome to the Q2 earnings call. 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 the collection during the session you will need to press star 1 on your telephone please be advised that today's conference.

All required and further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, He's movies and meet you. Please go ahead.

Thank you Angelica and good morning, everyone. Thank you for joining us today for our U S Foods second quarter earnings call.

And trust that triano, our CEO and Dirk Locascio, our CFO will provide an overview of our results for the second quarter and first 6 months of fiscal 'twenty 'twenty 1.

We'll take your questions. After our prepared remarks conclude please provide your name your firm and limit yourself to 1 question during.

During today's call and unless otherwise stated, we're comparing our second quarter and first half results to the same period in fiscal year 2020.

References to organic financial results during today's call exclude the contributions from smart foodservice through April 'twenty, 3.2021 as the acquisition closed on April 24th.

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 and our 2020 form 10-K for those potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements.

And lastly, during today's call, we will refer to certain non-GAAP financial measures all reconciliations to the most comparable GAAP financial measures are included and the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website.

And I'll now turn the call over to Pietro.

Thank you Melissa good morning, everyone and welcome.

On todays so during today's call we are going to cover 3 main themes just like last time.

And the industry recovery that we spoke on on our last call continues to progress.

Restaurants are welcoming customers back into their establishment as restrictions have been lifted across the country and you.

And as foods continues to participate in this recovery and the meaningful fashion.

And our great food made easy differentiated platform is helping to drive market share gains with both small and large customers.

And third our financial results are continuing to recover to pre pandemic levels are improved results are being driven by a recovery and case volumes and improved margins and the performance of our recent acquisitions.

So let's begin on slide 3.

Restaurants are recovering at a rapid pace as evidenced by the foot traffic and food away from home establishment shown on the chart on the left.

Foot traffic for the industry has continued to increase over the last several months and it's very close to returning to pre pandemic levels.

And this is nearly full recovery and foot traffic has occurred despite the fact that some markets across the us are still ramping up which is shown by the chart on the right.

This shows our own restaurant volume from markets that have opened less than 3 months ago versus markets that have been open 6 months or longer rests.

Restaurants and markets have been open the longest are showing growth rates and the high single digit range compared to 2019, while restaurants and markets have recently reopened and are still down compared to 2019, we.

We believe our view to be representative of what is happening and the country, which indicates that even with volume above 2019 levels. There is still some headroom for growth for restaurants.

Moving to slide 4.

The benefit of markets reopening can be seen in the improvement and total case volume that we are experienced and we experienced during the second quarter.

And the chart you can see that restaurants continue to trend ahead of 2019 levels.

With both independents and chains ahead of plan and 19 by roughly comparable margins, we expect us to continue support and part by the growth from the recently reopened market share we reopened markets and I just spoke about.

Most of July was also on line with May and June, but we did see and the last 2 weeks of tick down of about 100 basis points and it's too early to say, whether that's small change is due to the impact of the delta variant.

Moving to other customer types.

Reopening and the related increase and travel is also benefiting our hospitality business, which is now running about at more than 70% of 2019 case volumes and a large improvement from the first quarter.

Leisure travel has returned and a very meaningful way this summer and that's driving a large part of the improvement.

We expect this improvement and that customer type to continue as other customer types within hospitality ketchup and leisure travel.

First even within leisure travel and some large parks and they're still operating below maximum capacity.

And large convention, which have been which have been part return typically require a considerable lead time of up to a year.

And third as we've discussed before we raised a little bit of uncertainty about the future level of business travel.

When we consider the impact of these trends, we expect hospitality to recover later in 2020, 2 and when combined with our market share gains, we do expect our us hospitality volume to return to pre pandemic levels.

Our health care business has remained steady throughout the pandemic different factors are impacting different customer types within health care.

With senior living for example, occupancy rates are still down and the mid to low single digits.

But with aging demographics, and we do expect demand from senior living facilities to recover over time.

With acute care some employees are still working from home and it isn't yet unclear whether this will settle over time.

Similar to the hospitality when we consider the above trends combined with our market share gains, we do expect health care and returned to pre pandemic levels as well sometime later in 2022.

So in summary, based on what we know today about trends within each customer type.

And with a week and recent market share gains and our strong pipeline of new customers. Our best estimate is that we will return to pro forma 2019 total case volume later in 2022.

I am now on slide 5.

Our great food made easy strategy is the primary reason that we win new customers.

The great foods piece of our differentiation strategy is anchored by Scoop, our product innovation platform.

Given the labor challenges restaurant operators are facing the latest edition of Scoop features a number of labor saving products.

But are very much on trend as well as a number of fresh Robyn go items.

We've also begun rolling out the food group's tender by design beef products to the legacy U S foods markets.

Tender by design as a specialized process that produces high quality cut steaks with customers.

The rollout has been met with rave reviews by customers.

Our leading technology solutions and expert support on them.

Backbone of the made easy part of our differentiation strategy and.

In past calls we've talked about are those kitchen playbook, which have played a big part and helping operators generate additional revenue.

Following us a quote from and owner of an Italian restaurant outside Chicago. He was the ghost kitchen concept and diversifying the chicken legs.

We survived the first 100 day of the shutdown and I don't think we would have survived. This 1 if we didn't have our ghost kitchen.

Make wingstop com and has literally been a lifestyle, but from us and quote.

Most recently our.

Walks and restaurant operations consultants have been focused on a series of Webinars to help customers navigate the challenging labor environment, including topics, such as payroll management and doing more with less staff.

Thanks to the benefits of virtual technology, we're able to leverage our best rocks and food fanatic chefs across a number of geographies and customers can easily schedule..1 on 1 called cells by simply scan a QR code.

Finally on the topic of technology I would like to welcome John Thompson to the U S Foods team John was recently announced as our new Chief information and digital officer. He brings extensive experience, leading IC organizations and the distribution space.

Notably the last 10 years, our CIO and 1 of the largest tech distribution companies globally.

John's mandate is to continue to enhance our leading e-commerce platform, while working with Bill Hancock, our chief supply chain officer to make our supply chain and the most effective and efficient and our industry.

Moving to slide 6.

Last quarter, we spoke about the challenging operating environment for our customers distributors and manufacturers and whites and.

While labor and product supply challenges continue to push that persist our actions have helped mitigate these challenges.

On the labor side, we have made good progress and hiring warehouse and transportation associates, we filled over a third of the open positions that we discussed last quarter and we expect to continue to close this gap.

On hiring and retention incentives of contributor to improving the pipeline and to reduce and churn.

In addition, we do expect the labor market to continue to improve and.

And those states that have ended supplemental unemployment benefits, we have seen a dramatic increase and applicant rates low.

And lastly, and so and some select markets. We have made some hourly wage rate increases, especially for entry level wages.

Taken together these incentives and wage adjustments, where having a modest impact on the P&L, which Darcy will discuss shortly.

On the product supply side.

Service levels from vendors are still well below 20, and 19 as a result of manufacturers are experiencing the same labor and freight challenges that we are.

We are utilizing our scale, our relationships and alternative sourcing arrangements to help secure the product we need to effectively serve our customers.

Our net promoter survey confirmed that we are faring as well as or better than our competitors on this front.

Lastly, moving to slide 7 both the smart foodservice and SGA food group acquisitions are performing at or above expectations.

Beginning with cash and carry.

Same store sales that are nearly 80 chefs stores open at least 1 year, our head of 2019 levels.

We call that part of the rationale for the Smart Foodservice acquisition was that the cash and carry market was growing at roughly twice the delivered market with higher margins.

And as the reopening continues we're seeing these pre pandemic trends take shape again, we.

We are bullish on the outlook for chef store and expect that 2021 EBITDA levels will exceed those of 2019.

The other rationale for the smart Foodservice acquisition was the long runway of growth that we see for chefs store.

We expect to have 3 new stores opened in 2021, all in existing markets 2020 to us when we should begin to expand our footprint ultimately doubling our store count, making chefs or a meaningful part of our growth story.

Turning to food group with Donny restrictions recently lifted and food group markets and the Pacific Northwest, we are starting to see volume returned to those markets combined with the introduction of our differentiator and Scoop E Commerce and team based selling and we expect these markets to be posed poised for growth and the future.

By way of a recall, we have completed 4 warehouse systems conversion and now expect to have the remaining systems conversions completed by early 2022.

Synergy capture remains on track and we expect to fully achieve the previously announced 65 million $65 million of synergies and 2023.

As I mentioned, a few minutes ago, we are extending food group's tendered by design process to legacy U S Foods locations. In addition, we're also extending food and fresh produce capabilities through the rest of our customer base.

Both of these initiatives will bring synergies to the legacy Us foods network by providing customers with 1 of the highest quality product offerings and the industry and 2 very important categories center of the plate and parties.

I will now turn the call over to Jeremy to discuss our second quarter results and full year financial outlook.

Thank you Pietro and good morning, everyone.

I'll begin on slide 9.

Our second quarter financial results improved significantly compared to recent quarters, driven by continued volume recovery and strong gross profit results.

During the quarter.

<unk> on restaurants were lifted and leisure travel increased as Pietro noted.

This resulted in improved case volume with both our restaurant and hospitality customers and contributed to the significant increase and our adjusted EBITDA.

During the second quarter, we also experienced record food and cost inflation across a number of different categories.

Our teams did an excellent job of managing that inflation and passing it through to customers.

This resulted in very strong gross profit dollar and per case performance.

Which also was a significant contributor to our increased second quarter EBITDA.

As Pietro mentioned, the operating environment remains difficult, but manageable.

Had success filling many of our open warehouse and driver roles per we like many other companies still have work left to do in order to get to full staffing levels, especially as demand increases further.

And bond product supply from vendors also remains a challenge.

And have the processes and the tools in place to manage through these challenges and focused on minimizing the impact on our customers. However, we do expect these headwinds to persist at least 3 and a 2021.

Moving to slide 10.

Net sales for the quarter were $7.7 billion.

Up 68% from the second quarter of 2020.

Food cost inflation for the quarter was 8.2%.

Driven by product shortages and disruptions and the supply chain.

We experienced inflation and almost every major product category with the largest increases and poultry.

Pork and disposables.

Adjusted gross profit for the quarter was $1.3 billion.

Up 73% from prior year.

And our gross and gross adjusted gross margin improved by 50 basis points.

Adjusted gross profit dollars increased faster than net sales despite the high food cost inflation.

Highlighting our very strong gross profit per case performance and the quarter.

As a recall inflation benefits our gross profit dollars, while it is typically a headwind to gross margin rate.

As I just mentioned, we had over 8% food cost inflation and the second quarter with much of it and commodity categories.

This means our gross margin as a percent of sales as compressed yet our gross profit per case is by far the best we've had since Covid began and in fact, we are ahead of 2019 second quarter on our legacy U S foods business.

This high level of inflation and our ability to effectively manage it increased our second quarter gross profit by approximately $25 million.

And as inflation Moderates Corp, we see deflation, we don't expect us gain to continue in Q3 or Q4.

We're very pleased with our gross profit performance and second quarter, especially given the freight headwinds, which we expect to continue at least through 2021.

Adjusted operating expenses and the second quarter.

$940 million.

Up 46% versus the prior year.

As a percent of sales adjusted operating expense was 12, 3%.

Down from 14 point point 14, 2% and the prior year.

While food cost inflation is a headwind to our gross margin rate is a benefit to our operating expense as a percent of sales.

Just as a point of reference our opex as a percent of sales for our legacy U S. Foods business is about 60 basis points lower or better than it was and the second quarter of 2019, largely due to the significant food cost inflation I just spoke of.

Pietro mentioned earlier and so we are seeing additional supply chain labor inflation, this year, primarily related to signing and retention bonuses.

The additional inflation this year is about $20 million to $30 million and us above and beyond the approximately $50 million of normal annual supply chain labor inflation, we experienced.

As the labor market normalizes, we anticipate not needing to use these bonuses to the same expense and therefore expect most of these costs to be transitory.

We increased the use of these bonuses during the second quarter and as a result, didnt have the full run rate and our second quarter numbers.

We have made a lot of good progress hiring warehouse and driver associates. However are still on the process of filling open positions as our business continues to recover.

On slide 11, adjusted EBITDA was $332 million for the quarter, a very strong rebound from the second quarter of 2020.

Adjusted EBITDA as a percent of sales was 4.3%.

Earlier as Pietro mentioned, our current best estimate is to return to pro forma 2019 case volume levels later in 2022.

We also expect to return to 2019 pro forma adjusted EBITDA and expect that to be later than the return of case volume.

During 2022, we expect the recovery and restaurant volume plus market share gains will make up for the slower recovery on hospitality and health care volume.

While our category gross profit rates are well on their way to recovery, we expect logistics headwinds to continue into 2022.

For distribution costs, we have 2 years of wage inflation, plus the temporary incentives and potentially some higher wage inflation that will require additional productivity and customer margin improvements to offset.

For fixed costs, we still expect from $130 million of permanent cost reductions completed in 2020 to flow through to the bottom line.

As Pietro said, the integration of food group and smarter on track, including expected synergies.

Overall, we are very confident about achieving pro forma 2019, EBITDA levels, but the continued uncertainty with respect to freight and labor markets makes us specific timing less certain.

We know the actions we have and continue to take will result in us being a stronger company going forward than we were pre pandemic.

Finally on this page adjusted net income and the second quarter was $146 million and adjusted diluted EPS was <unk> 58.

Baird to a loss and the prior year.

We are now reflecting the additional shares from the preferred equity transaction and our adjusted diluted earnings per share calculation.

With these shares reflected our outstanding adjusted diluted share count is approximately 250 million shares.

And now on slide 12 operating cash flow for the first 6 months of the year was $250 million.

And the first half from 2020, we had a significant benefit to operating cash flow from working capital.

This was a result of reduced inventory levels and extended accounts payables days during the early stages of the pandemic.

And the first half of 2021 working capital has been largely neutral to our operating cash flow.

Our business generates a significant amount of operating cash flow each year as evidenced by the $250 million, we generated and the first half of this year, despite our business being on a recovery phase.

We will use this cash to reinvent reinvest in our business and.

And reduce our total outstanding debt.

And the second quarter, we proactively pay down $200 million and total debt and addition to our standard debt repayments.

Our leverage ratio dropped by more than 2 turns due to the paydown and significant adjusted EBITDA improvement.

Our target leverage ratio remains between 2 and a half and 3 times and.

We expect to continue to make progress against this target over the balance of this year, the additional debt reduction and increased EBITDA.

We had a very strong second quarter and are focused on the continued recovery of our business.

Looking ahead, we expect both Q3 and Q4 EBITDA dollar EBITDA dollars to be below Q2, as a result of not repeating the approximately $25 million of.

Of inflation benefit from Q2 as well as the increased opex related to the full run rate of supply chain sign on and retention bonuses put in place during the second quarter and the impact of our continued reinvestment and sales resources as we've discussed previously.

Our industry is rapidly rapidly recovering and we are participating in that recovery and a meaningful way.

Our volume is recovering well.

Our gross profit is strong.

And we are focused on effectively managing the supply chain challenges, we and the industry are facing and our acquisition performance is on track.

Resulting in improved results and were you.

Using the cash flow generated to invest and our business and reduce debt.

Finally, the actions we took during the pandemic have positioned us to continue to gain share with both large and small customers.

Operator at this time, we can now open the call for questions.

Yes, Sir just a reminder, you asked a question and you will need to price Taiwan on your telephone to withdraw your question press the pound key.

Our first question from Us from the line of Alex Slagle from Jefferies. Your line is now open.

Thanks, Good morning.

Just a question and thinking about some of the incremental headwinds from the accelerated hiring and retention efforts and.

Sounds like you're expecting headwinds continue for a few more quarters and at what point do you think the acceleration and these costs sort of peaks and and.

Move toward a more moderated pace of the cost increases.

Good morning. This is Dirk I'll take that it's hard to know exactly but to your point I would expect just based on some of the early evidence that we've seen and states that have ended unemployment and as we continue to make good progress on hiring.

That's as you get towards the end of the year, we should be quite a ways. There. So it's hard to know exactly there but at.

At this point best estimate would be as we get towards the end of the year into 2022, you'll begin to see that moderates and so begin to return to a more normal environment. What I will tell you though is in this environment with some of the labor challenges and supply challenges from vendor. It's also been a really good opportunity for us to engage in discussions with a number of our customers about.

Margin and just other operational factors to improve our ability to serve them.

So overall really partnering with our customers well to try to manage through this as best we can.

Sounds good thank you.

Thanks.

Our next question comes from the line of Peter Kelly. Your line is now open.

Great. Thank you very much I believe last quarter, you guys were talking about the labor shortage and I think you had mentioned you were about a thousand drivers and selectors sure of where you'd like to be can you guys give us an update on where you are today and in terms of you know.

Getting up against that goal.

Yeah, Hi, Tito this is Pietro so we as I mentioned and my comments, we've covered over a third of that GAAP and that GAAP to.

Just to clarify us relative to what we anticipate on peak needs and future not necessarily GAAP today. So we're making really good progress what I would say is.

Really ramped up the hiring machine for selectors and drivers.

More on exactly the right number that we are looking for the challenge right. Now is just reducing the churn rate and I'm sure you've seen and the process quit rates on an all time high and so part of the measures. We're putting in place are really aimed at reducing the churn so and we can continue and close the GAAP and talked about.

Alright, Thank you very much.

Our next question comes from the line of Nicole Miller from Piper Sandler Your line is now open.

Thank you. Good morning also on labor inflation and my question is.

Y J.

Yourself, specifically at the industry at large do you feel like it's transitory.

The total cost might not come and form a bonus.

Why does someone want to net net net glass and just curious of what circumstance would you see where it's just a total benefit conversation and you try to make it hall going forward and that way and then at what level would you pass it on.

The answer to the first question on the call, having and engaging the customer would lead me to believe that perhaps that's happening now thank you.

Yeah, So I'll start and I'll start with the second part of your question. So as you mentioned and as Derek mentioned, we have been passing on some of the.

Inflation that we've seen.

And we'll certainly on the product side, but also where possible on the on.

And the labor side.

In terms of the your question as to why it's transitory.

I think look there's there's a school of thought that is shared by many of that the labor supply and and.

And balance is and it sounds transitory like with the speed of the recovery.

And the faster than many expected.

We've seen the demand for labor go up fast and supply.

Partial evidence for that is what I noted in those markets where.

Supplemental unemployment benefits have ended.

And the hiring pipeline is several times better what it is in those markets, where supplemental benefits are still in effect.

And so those are some other reasons why we believe these are transitory in nature.

Yes.

Thank you.

Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open.

Yeah, Hi, guys good morning.

Hey, Doug I wanted to get back to what you. The color that you gave around EBITDA for Q3, and Q4 and what I was hoping that you could do is maybe just.

A little bit more color to sort of bridge. The 332 of this quarter to the expectation you gave some numbers.

I think were annualized but I'm not sure maybe some of them are quarterly.

And I don't think you talked about a number around sales resources. So maybe just help US bridge, how we think about the.

On the back half and I also I'm not sure what you're assuming for volume within that what youre, assuming for inflation and so just any color there would be helpful.

Sure happy to so it's.

The reason we wanted to provide the additional insight that I did is really because the.

And the second quarter, we really benefited from the strong inflation and as you see our ability to pass that through with really good gross profit per case being above 2019, and I think important takeaway on that 1 is our second quarter results were strong with or without this additional inflation benefit and so the thing we wanted to call out with the 25 million.

Is that is the piece that for the quarter alone.

It helped that we sought.

Given that there's not an expectation from many of the and the industry and outlooks for continued inflation and even some modest deflation. So I think that 25 billion, which day sort of more.

Modest story and I'll kind of flattish on inflation is the piece that we would not expect to repeat in Q3 or Q4.

I think that if you look at the.

US sales resources.

We haven't talked about specific amounts we've continued to hire and kind of second quarter third quarter fourth quarter. So I think you probably can get close on up there with an estimate there on the impacts per quarter as we continued to ramp up we're well on our way there from us from and adding resources, and then and supply chain.

20 to 30 billion is largely what we expect in year. This year with a portion of it and the second quarter and other rest of it through the balance of this year and most of that being in a form of these retention and sign on bonuses that I've talked about from a volume perspective, we do expect volume.

And so putting aside any impacted us.

And they have been looking at the trajectory that the business was on we expect volume recovery to continue there. So there theres nothing that I was attending or that we are calling out that's what I would say derailing the strong recovery as opposed to US just some things to keep in mind.

And that earn out is recurring so hopefully that helps.

Okay.

And then I wanted to ask you about <unk>.

Sales growth versus case growth there was a 14, 5% GAAP and 5% and that was inflation, but the rest was mix.

And what's driving that mix.

And is there incremental on the within that mix, it's actually positive gross profit dollars. So maybe we should be thinking about share the case growth plus that and.

And how does that look going forward as well.

Sure. So the mix to your point that can be sort of category or types of products people are buying as well as customer types. So on.

I used the example, with restaurants recovering faster than say healthcare and hospitality that's been on.

And net positive when you look at sales so.

And as direct of a math correlation that you can do from sort of the sales percentage of that mix versus gross profit. However, the thing to takeaway is with the strong performance is especially as you look at the independents and such there is some benefit and our gross profit and so that's that's part of the reason that way, even with our strategy and <unk>.

Years of growing these more attractive customer types, so us independents grow faster than the broader business. They are more accretive and so that helps the overall business. So on that 1 I think that the mix has been positive it's going to be more influenced by some other external factors as health care hospitality and such continued.

And to recovery and depending on the pace of that but overall gross profit dollars and rate good trajectory and we feel good about the pace of that recovery.

Okay. Thank you.

Thanks.

Our next question comes from the line of John Glass from Morgan Stanley. Your line is now open.

Thanks, Good morning, and you mentioned that freight and labor and it's going to stick around and so you may need some additional productivity I think that's what I heard do you have line of sight and Theyre actually work going on now to increase the productivity that you've already experienced 130 net million million net.

And if so where does that come from can you just talk about if youre looking for new areas to save it and share them specifically just on the cost inflation just as a quick follow up are you actually seeing the rate of inflation beginning to come down and.

Just your expectation it will but it hasn't yet just so we understand kind of where you are exiting the quarter and July on inflation.

Sure <unk>.

A lot of that question, Yeah, we're kind of on it.

So I'll start with the second 1 because thats the quicker. So we have seen the rate of inflation slow we're still seeing some modest inflation and some categories, but then seeing some meaningful deflation and other categories that are sitting and netting out closer to zero. So it's these last kind.

Kind of 4 to 6 weeks. So that is sort of the assumption is sort of how that and what we've been seeing more more recently there.

As far as your question on productivity so yes.

Remind us I put out there the number that we sort of occur on a normal year on inflation and the supply chain and we typically and it given year, we'll focus on mitigating as much of that as we can through productivity.

And as you can expect so we do have some things that are underway and supply chain and.

And in particular, however, not near at the pace that we would have and a normal year and as you can probably appreciate we and others and the industry are directing a lot more energy to running the business and really providing us good experience for the customers. We can during this challenging time and so therefore, it leaves a little bit less.

And to focus on productivity. So you do end up with the slowing of sorts there, but we do still have some things going and feel confident on our ability to.

Ramp that up faster under arguably still Hancock's leadership as we move ahead.

And that helps.

Okay. Thank you.

And just to add dirt the John the 1 theory, you were referring to was in terms of fixed cost no change to that as Doug said.

The productivity initiatives that Doug was just referring to and his answer on the variable side of things, whereas he said that the focus on customers and the onboarding of a large number of new associates and slowed down and the productivity that we typically see on the variable side.

That's helpful. Thank you.

Our next question comes from the line with Jim I've I'm, calling from Jpmorgan. Your line is now open.

Hi, Thank you. The question is and the context of your gross profit dollar per case ahead of the second quarter of 19.

Obviously, the dollar profit is what matters to this business, but I'm curious if there are any market share battles that are going out there that give us some distributors given obviously.

Profitability recovery across the space.

Or perhaps you are using these gross profit dollars to gain share whether to existing customers or new customers and.

And whether you think that's actually an opportunity over time for you to us GP dollars per case to drive case volume. Thanks.

Yes.

And maybe I'll start.

And because we're really talking about market share and volume so.

And so we've continued to make.

Market share gains John.

But I think.

We and others and you've probably read about this.

Those market share gains and probably been held back a little bit by the.

On the challenging labor staffing environment.

And our desire to make sure that we serve customers and the way that is what they expect.

And has probably held us back a little bit in terms of making even more aggressive market share gains.

Over the last couple of months.

And when I say I think I mean.

Day, everyone.

Right.

I was just going to add Jon that I think and up from a pricing so.

We as part of the way we run our business.

The team is always looking at balancing volume and margin and so driving those share gains smartly and and there are categories that from time to time.

We will choose to invest and that we think are accretive to the overall basket. So as you summarized well it's about.

<unk> more gross profit dollars ultimately.

And to the bottom line and Thats, what were really trying to balance and and this period big progress and gaining market share with small and large customers and very good gross profit results at the same time.

Thank you.

Our next question comes from the line of Mr. John Hynes on cost from Guggenheim. Your line is now open.

Hey, I wanted to start with.

And where do you guys think your capacity is now.

With volume recovering is this a good time to.

To think about accelerating the culling of less profitable accounts and are you doing that.

So it depends how you measure capacity, John I think what.

And capacity that's been talked a lot about us again as I mentioned and the prior question.

Past the as a result and staffing so if you're a short drivers there's only so many.

Trucks, you can get out.

So on and they said that Dennis hampered our ability to grow even more than we have.

While we still we still see us, making you still seem we've made market share gains and so as that.

Is that kind of stabilize and as we continue to close the gap. We believe we have the opportunity to.

To continue to gain market share.

And we've had and a very small number of instances.

<unk> done some optimization in terms of resetting terms with customers.

Or on a handful of cases part of ways. There has been a little bit of price on that you can see that the impact on us and our results have been de Minimis and when you look at the volume growth versus 2019.

And then maybe secondly, I know you were investing and sales I thought the number was $50 million but.

And where do you sort of in the.

You filled the third of the open positions where are you on the sales investment.

And then the 2 thirds left to go right, you said thats kind of out and the future.

So it doesn't sound like that's a frontloaded investment right that may stretch out into next year is that fair.

John I'll take that it's on the on.

And on the sales so we're.

As I mentioned, what and where we haven't talked about a specific number. We're we're a good way through that journey, as well and making progress and expect to get to that full investment run rate. This year, yet later in the year.

From a supply chain perspective, we would expect to get to that kind of a full staffing level. Yet in 2021, obviously you know the market will dictate but the thing to remember probably all the way even back to us.

Quarter, Paul as I was talking about that our third quarter call last year is just the thing that we want to make sure as we're continuing to press hard on staffing, especially given the challenging market that's out there and knowing that our business is recovering and we continue to have good customer wins and share gains. So do you expect to get to that level of staffing at some point.

Later in 2021.

Thank you.

Our next question comes from the line of Kelly Dania from BMO Capital. Your line is now open.

Hi, good morning, Thanks for taking our questions.

Just had a quick 1 on on the current inflation environment and on the comment that it sounds like it's maybe moderating a little bit.

Just curious if there is an opportunity to kind of pass those.

Smaller costs on add on.

And we're a slower rate and maybe capture some margin as us.

Cost moderate or if that's happening across the industry and if you.

Have any opportunity to do that just given where some of the elevated supply chain costs are.

Hi, Kelly Stark, yes, so and so there is there is some moderate opportunity to do that but that ends up being relatively short and timeframe.

Cause of us.

And do you remember us talking about a large portion of our business is based on contracts and so it sort of automatically happens when those contract resets, which can be from weekly monthly generally speaking so a little bit of opportunity. The reason and I wanted to call out and second quarter. It was just the combination of the inflation plus product shortages et cetera.

Really.

Combined with our processes and tools enabled us to have really outsized gross profit gains and very pleased with that and just highlighting that although that was really strong and a quarter of strong with or without that we wouldn't expect that level of gain to continue going forward.

Got it that's helpful.

And just another 1 and.

Terms of gross margin.

And kind of estimating gross margins about maybe 100 basis points low pro forma levels.

With the acquisitions is that accurate and can you help us maybe think about just the factors that get.

Back to that kind of full gross margin.

Kelly would you might clarify when you're saying I estimate at 100 for the current quarter or.

Yeah just.

13, and a half.

We were thinking that's kind of about 100 basis points below the kind of full.

Pro forma estimate.

For the total company just curious what are the factors how far below us gross margin today relative to kind of the full potential and what are the factors that get that back over time.

Thank you for clarifying so that the thing that makes it a little harder to talk about specific just with the outsized inflation, we've had and the amount of commodity is it actually it makes gross margin look worse than it really is because with a lot of this inflation being in these categories that have fixed cost markups or and where you are passing it along and they look like there is compression.

And even though you're making more per per case, what I would tell you is if you look at.

So we would expect gross margin to largely returned to 2019 levels over time kind of as you see inflation moderating but.

It's when you think about it from a per case, which is sort of more than what we really make COVID-19 case, we ship is.

Even though the level of inflation gain doesn't continue inflation as I think you know does benefit us over time. So that's helpful.

The customer and product mix headwinds, we've talked about continue to improve as case volume returns. So we'd expect that to return and then logistics or freight is the other big piece debt.

As we look at it and we've made some progress there but would expect to also just as we return to a more normalized environment for that to reverse at or close to 2019. So at this point theres not anything that gets and the way of us getting back to you and a growing from the 2019 gross profit per case I think the thing on gross gross margin.

And just to put us further into context, and I'll say it if you stripped out.

The impact of inflation on sales this outsized actually given gross margin would be above for the second quarter above 2019. So.

It's a harder question to answer right now given the inflation, we're seeing but feel very good about gross profit dollar and per case growth over time, and I think the inflation and that sorts out will help us to be able to provide more visibility on what that does to gross margin, but I think the last thing to remember is.

Any impact and it has negative on gross margin hasn't equal positive impact on opex. So it isn't really a net impact on adjusted EBITDA and as you saw we improve that and the quarter as well.

Thank you.

Yes.

Our next question comes from the line of flow into their minds from credit Suisse. Your line is now open.

So industry supply challenges and shortages well documented he spoke to them are you seeing customer stockpiling inventory just given us concerned on the supply chain and a related question to that I think you noted on a 100 basis points ticked down and restaurant case volume over the last 2 weeks of July do you think that stockpiling.

Has anything to do with it or do you see it more related to under underlying deceleration of it.

So this is pietro so I don't believe their stockpiles and happening there as well.

And there's not enough inventory to be stockpiled.

I think 100 basis over the last 2 weeks and talked about.

It's premature to call 1 way or the other in terms of what's driving that I don't think it's stockpiling and I think there's there's a chance and maybe related to delta and but it's very hard to say at this point, we haven't seen restrictions go up and maybe a small percent of consumers who.

Or are affected but.

But I think here's here's what we do know whenever we've had a wave of COVID-19 and so they think of fourth 1 tend to think sent to bounce back even better than they were before and that wave and more quickly.

Great. Thanks, and if I could just do a follow up on the inflationary commentary.

Pretty big LIFO reserve adjustment in the quarter can you just talk about how we should be thinking about the impact to adjusted gross profit dollars alright.

Or I guess gross margin and future quarters, if at all.

So you're right I think the.

And you saw I think and my 12 years here I don't recall, a LIFO charge and a quarter being anywhere near where it was and it really is directly related to the same thing with the sheer amount of inflation that we had and the period.

Just because of the way life works, because youre still valuing that inventory at the sort of firsthand and type of cost and just our results and a charge and so what.

What I think he would I.

I don't think I would correlate that any more to set up from an adjusted gross margin and gross profit et cetera. It is because it sort of different inventory methods. So when you think about that focus on that the inflation is a positive to our gross profits and gross profit dollars and.

Her case and LIFO.

Happen is if we see inflation moderates it stayed pretty neutral if you start to see some deflation it's.

Likely you would start to see some form of us offsetting credit for that and the second quarter.

Thanks, sorry second half of the year.

Thanks.

Our next question comes from the line of Mr. Mike Huang from UBS. Your line is now open.

Good morning, Thanks, so much for taking the questions how is the Confederate and competitive environment shaking out isn't recovery and has ramped up have you seen any smaller distributors and finally start to go out of business, giving us much flexibility on inventory and fluctuations and food away from on demand.

And have you seen any meaningful wallet share increases and your independent customers. Thanks.

So the competitive environment has I would say.

And then.

Pretty stable in terms of the number of competitors.

And again the recovery happening as quickly as it did over the course of the last year, which has helped a lot of smaller.

All other competitors.

And we look at on a net promoter score is there's clearly some competitors are more challenged and others with respect to <unk>.

Being on time or.

Fulfilling the orders that customers have.

In terms of can.

Can you remind me of the other part of your question on mind.

Just in terms of any meaningful wallet share increases and and the best long and so yeah. Thank you. Yeah. So we are seeing so our cases per line or up about 7% on.

On prior year, which is which was quite good.

I think that's probably a combination of things, it's a combination of and probably some wallet share gains as well as the recovery. We've also seen lines per customer go up a little bit with independents, which is.

Probably up a bit.

A good proxy for wallet share gains otherwise restaurants, continuing to expand their menu, there's a little bit of that going on it. So.

Same overall story as it is I would tell us or as a results driven.

Driven by a combination and the recovery and our and our market share gains.

Got it that's really helpful and just 1 quick follow up there's been some news that unemployment benefits are less likely to get renewed past September 6th could you see us having a meaningful impact on food away from home demand.

I mean, it's.

And that 1 is hard to question and I think we've really focused on on the end of unemployment benefits and obviously, there's some associated savings with that.

Having an impact on the labor market I think what we've seen is that.

That the vs habits that are decades, and and making them.

Consumers eating out and are now taking out are really well and that it and entrenched and and the combination of digital ordering the vaccine has allowed these.

Habits to establish themselves.

So I think there may be some from some potential and the long term for food away from home to to continue to increase share at the expense of food at home just as we've seen over the course of time.

Got it thanks, so much.

Our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.

Great. Thank you very much.

1 follow up clarification, and then a question.

I wanted to clarify Derek I know you mentioned the.

Third quarter quarter to date that it was strong to start July but slipped 100 basis points to last couple of weeks, but I think he mentioned.

Yes, the second half of the year the volume recovery is going to continue.

And so it implies a 100 basis point pullback as you'd maybe it's a blip I'm just trying to understand.

What the common themes or maybe that you've seen out of those recent pullback, whether it's by market or.

What would give you the confidence that it's not something more sustainable I guess and then 1 follow up.

Sure So you're right.

And Pietro noted is seeing that little bit of decline and I think the.

The way to bridge those 2 comments as you know if there is an impact from delta or such that's 1 that's harder to know so I think you kind of put that aside and I think on that 1 the impact from Delta that you come back to us with Pietro said as we've seen us and multiple waves.

Even though we could have us shorter term impact the demand is there and we would expect the recovery to be right back on track, even if there's a bit of a delay I think overall just the demand externally seems to continue to be there we have seen consistently and the markets that chart that we included here that as REO.

<unk> occurs.

We're seeing continued demand increases and improvements and so you still have a number of markets that have only reopened and the last 3 months or so.

Closer to full capacity and we would expect those and the demand in those markets and continue to increase so I think from our perspective overall expense.

And.

And you think of independents as an example expect that to continue to.

Strengthen as that demand gets there more and more markets and.

Overall again no matter if there's a short term impact from Delta are not expected.

It's really just timing and not.

Whether the demand is there and the return is there is that the strong demand we expect to be there and the growth to continue.

Understood and then the.

Primary question was I guess Pietro if I look back a year and it seemed like there was excitement among the distributors.

On a couple of fronts, 1 just further penetrating existing accounts coming out of this crisis and.

It seems like you've achieved that with I think you said your cases per line up 7%.

Otherwise there was it was hoped for.

And in new accounts, who might shift to a larger distributor just for comfort and using 1 of the bigger players.

<unk> and maybe Ed and growth play M&A. So I'm just wondering on those latter 2 fronts.

Your thoughts relative to the start of the Covid in terms of your ability to contain and add new accounts and maybe add growth by M&A or whether you've shied away from the latter on the short term right.

Sometimes and new accounts, I think where we have really demonstrated that us with the large accounts.

You talked to in the prior call about a $1 billion of new business over the course of since the pandemic started and we expect to continue to add to that level.

Given the pipeline, we have and that.

With respect to large customers and on the smaller customer side.

And we're seeing on new accounts and that accounts ramp up nicely again as I mentioned the.

Temporary staffing challenges, we've seen have held us back a little bit in terms of BMO and grow market share a little bit more.

The way, we would have liked or as aggressively as we would've liked.

In terms of third part of your question and M&A, you're right that's been 1 of the.

Things that perhaps didn't pan out exactly as we would've expected in terms of.

Further consolidation and further distress I think I owe that to where it should be back to the speed and the recovery, which has been good for the industry, but there have been some select markets, where we've seen.

And some some distress competitors and we've really taken advantage of that in terms of hiring our sales force and we're going after they're pushing on their customers. So we've kind of from a different way to take advantage of perhaps slightly less distressed situations and you didn't.

And visits from the beginning.

Understood. Thank you.

As a reminder to ask a question you will need to France, Taiwan on your colleagues on our.

Our next question comes from the line of Edward Kelly. Your line is now open from the us find them.

Hey, guys. Thanks for letting me back on here.

A couple of things for you I guess first I just wanted to go back to commodity inflation and the expectation of I guess no.

Inflation and the back half of the year and just kind of curious I mean, it's really the question and sort of how is that possible because it does seem like everywhere else you'd CPG vendors et cetera, and everyone's talking about inflation I'm just kind of curious what we're missing here.

So and the way that I would think about it as continued inflation because it's that continued inflation that that drove the incremental gains and I think that when you. If you look at if we don't have additional inflation, you're still on a year over year basis, you will see inflation show up but it is that incremental.

Until that sort of drives the kind of outside drove the outsized gains and the second quarter I think that what we've seen so far and the last few months is I'm sorry last few weeks as you see some of your commodity category. So.

And are the plates are good examples where that had a lot of inflation and the second quarter begin to show some deflation and the more recent.

Weeks, and then you have sort of some modest inflation, continuing and a few other grocery and other categories. So I think that's that's the piece that we'll kind of wait and see but maybe that's.

How to bridge the difference between what maybe some of their comments are and how how I've talked about it and the context of how it increased our Q2 earnings.

I gotcha, so year over year still some inflation, which share by the way benefit gross profit dollars, but to the extent and then we saw that in Q2, that's not likely to continue at that rate.

Correct and that's why we wanted to call out the $25 million just to highlight that it's not that the business is worsening in the third and fourth quarter as opposed to that.

Outsized gain in the quarter and like I said with or without that game. We're very pleased with the strong improvement we saw on the quarter versus Q1.

Okay excellent that makes sense and then just 1 last 1 for you because you did sort of.

I mentioned on the call post Covid.

Profitability and you know my question here is is that I kind of calculate pre COVID-19 pro forma EBITDA and around 1.34 billion or so.

You've got your cost saves.

The synergies from the 2 deals, which combined is probably a little bit more than.

A couple of hundred million dollars.

So we're kind of at like 1516.

And I know, there's underlying inflation here right now and by my math every 1% increase and and and labor inflation and like drivers and warehouse workers and.

And is in the neighborhood of like $17 million to $20 million.

But there is no share gain there is market growth.

Is there just any reason to think that and when sort of like all of us set and done and I'm not trying to nail you down on a day or a year, but when all of us sort of set and done and the businesses is back to normal that you would be and that level from an EBITDA standpoint.

So and I think youre thinking about all the right elements and all the right things that the bill to a number to your point that gets to that 1.3 ish billion and grows from there.

The.

And then I think that the piece that you called out that sometimes people don't focus on is just that cost inflation that we incur in a given year. So I think when you factor that in and then it's really just.

The other piece that I talked about just the.

With all of the.

Onboarding of new associates, and the current market just a little slower productivity than we would normally have and supply chain for this call. It Europe period, but we don't think there's a reason that we don't continue to get back to that and a 1.

1.3 ish number and and grow from there to the higher numbers that you were talking about but I think you have a lot of the right numbers and pieces that you are thinking about how you've been captured and inflation as well.

Okay and just the last thing for you. So you know when we go back to like US, 1% increase and driver pay and warehouse worker pay which you know again I think is probably 17, maybe $20 million.

And to offset that and you know your EBIT margin pre COVID-19 forget about incrementally the margin, but just try and get our EBIT margin.

That's only about a per cent per cent and a half of case growth over 19 levels.

So there are offsets even 2 underlying wage inflation, if we are optimistic that the business well.

I'll be higher from a case growth volume standpoint am I thinking about like those incremental numbers right.

You're you're definitely on the right neighborhood and I think that I mean, the way youre thinking about it is sort of it's good logic and I think the other thing and I'll come back to you on that is just when you think about the incremental inflation I think the key message to take away is and I think it was Oh, Laura on the day of asked earlier as well.

But it's the debt it's hard to know if all the pieces that we think on labor inflation are transitory. If you do get to some portion of it that remains permanent.

As I said earlier in my comments that we've had really good conversations with a lot of customers and so it's an environment that customers are understanding they want we're trying to be very good partners with them. They want to be good partners with us and and some of those cases.

It's really if they were <unk>.

Discussing with them about either changes and the way operational and we serve them and.

And a number of cases, some level of economics improvement in order to.

Mitigate or offset portions of this so it's not that we don't have any levers. We actually think there are some good opportunities for us to offset at least a meaningful portion of that incremental inflation over time.

Great. Thank you.

Thanks.

He and the Q&A session and we'll now turn the call back to them and keep the answers that triano critical thinking and Mike.

Hi, Thank you maybe a couple of takeaways since we spent a lot of time talking about the P&L look a very good quarter volume was strong and we see us the path to full recovery on the volume side.

Margins and the kind of inflation as Dirk said on a really nice spot there are challenges to to a variable distribution costs, but we believe we have a handle on them.

And acquisitions are performing well and you're paying down debt. So I think overall, a very good new story on a close by thanking our 26000 associates, whose outstanding affluent is responsible for the very promising results. We cover today, thanks to all for tuning in.

This concludes today's conference call. Thank you for participating you may now disconnect.

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And.

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Okay.