Q3 2021 US Foods Holding Corp Earnings Call

November 8, 2021

Yeah.

Good day and thank you for standing by. Welcome to the quarterly earnings call Conference 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. To ask a question during the session you will need to press star one on your telephone.

If you require any further assistance, please press star zero. I would now like to hand conference over to your speaker for today Ms. Melissa Napier. Please go ahead.

Yeah.

Thank you good morning, and happy Monday. I'm joined for our call today by Pietro Satriano, our CEO and Dirk Locascio our CFO. On today's call, we will provide an overview of our results for the third quarter and first nine months of fiscal 2021.

I'm joined for our call today by Pietro said, Toronto, our CEO and Dirk Locascio our CFO.

On today's call, we will provide an overview of our results for the third quarter and first nine months of fiscal 2021.

We'll take your questions after our prepared remarks conclude. Please provide your name your firm and limit yourself to one question. During today's call and unless otherwise stated, we're comparing our third quarter and nine month results to the same period in fiscal year 2020.

During today's call and unless otherwise stated, we're comparing our third quarter and nine month results to the same period in fiscal year 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 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 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 Pietro.

I'll now turn the call over to Pietro.

Thank you, Melissa, good morning, everyone. Third quarter results were in line with expectations. Volume for the quarter was up 18% over prior year and 6% below 2019 as the industry continues to recover. EBITDA margins were up slightly as we continue to successfully manage through both higher than normal product and labor inflation.

Third quarter results were in line with expectations.

For the quarter was up 18% over prior year and 6% below 2019 as the industry continues to recover.

EBITDA margins were up slightly as we continue to successfully manage through both higher than normal product.

And labor inflation.

This performance resulted in strong cash generation, which contributed to further deleverage from the prior quarter.

Since the industry is demonstrating that it is well on its way to recovery, we are shifting our discussion and our goals to be more in line with our pre-pandemic strategy.

First, to profitably grow market share with our great food made easy differentiation. Second, to optimize gross profit margins. And third, to execute with an intense focus on operational efficiency. But first let me start as I, usually do with a brief update on the industry on slide three.

To optimize gross profit margins and third to execute with an intense focus on operational efficiency.

But first let me start as I, usually do with a brief update on the industry on slide three.

Industry foot traffic at restaurants in the third quarter was largely in line with the prior quarter. Despite the surge in COVID cases due to Delta.

This underscores our view that industry demand is resilient and that demand for eating out or taking out at restaurants is largely past COVID-19.

In fact as seen by the chart on the right Technomic is now calling for the entire industry to recover to pre pandemic levels across restaurants, and other customer types alike by 2024.

Based on our own current trends, we are confident that US Foods will recover ahead of the industry with our volume returning to 2019 levels sometime in 2022. This reaffirms our continued ability to gain market share. Now, let me turn to our volumes on slide four.

This reaffirms our continued ability to gain market share. Now, let me turn to our volumes on slide four.

Now, let me turn to our volumes on slide four.

Restaurant volume for the third quarter was generally in line with the second quarter and a slight dip in growth rate that you see in the third quarter is attributable to COVID-19 related staffing challenges and a handful of markets. If not for these challenges, we believe we would've achieved higher volume and market share gains.

Gains that are fuelled by our differentiated great food made easy platform. October volumes to restaurants are trending slightly higher than the third quarter.

October volumes to restaurants are trending slightly higher than the third quarter.

Hospitality volume continues to recover. While volume to healthcare was flat for the reasons that I mentioned on our last call. Some lingering restrictions on visitors that's heard food consumption and hospitals, while senior living has yet to recover to pre pandemic occupancy rates. We think recovery in senior living is simply a matter of time, given the favorable demographics of an aging population.

simply a matter of time, given the favorable demographics of an aging population.

Lastly, we continue to have great success, signing larger multi geography customers across healthcare, hospitality and chains.

So the two years combined, 2020 and 2021, we are on track to add $1 billion in net incremental business across these three customer types, some of whom will onboard in 2022.

This 1 billion is net of any accidents over the last two years, including strategic exits as we continue to optimize our portfolio.

The single most important reason cited by these large customers for switching to US Foods continues to be our service model, which makes it easier and simpler for customers to do business with us.

I will now update you on the elements of our strategy starting on page four. Sorry page five. With how great food made easy will continue to drive market share gains with target customers. Recall that great food made easy consists of three elements, innovative products, industry-leading technology, and our selling and service model based on a team of experts that support our sellers, what we call team based selling.

Sorry page five.

With how great food made easy will continue to drive market share gains with target customers.

Recall that great food made easy consists of three elements innovative products industry, leading technology, and our selling and service model based on a team of experts that support our sellers, what we call team based selling.

So let's start with innovative products. We had yet another successful scoop launch featuring labor saving products that are highly relevant to customers in this tight labor market. This was the 10th anniversary of SCOOP and since then we have launched 540 exclusive innovative products of which 80% are still sold somewhere in our network, a remarkable stick rate.

still sold somewhere in our network, a remarkable stick rate.

Also of note on the product side, during the quarter, we rolled out tender by design and innovative and proprietary beef program that we inherited with the acquisition of food group.

In the subcategories that we launched we saw a 300 basis point increase in market share and we expect further market share gains as we expand the line-up.

Turning to technology or the second element of great food made easy platform. We continued to expand our leadership position with frequent releases of enhancements, including a recent update that provides customers with real time inventory visibility during the ordering process, which is critical in this environment of supply volatility.

Recent third-party research with customers reaffirmed our lead in technology in our industry, with customers waiting the US Foods mobile app significantly better with the net promoter score several times higher than the competition.

A representative quotes from the survey include easier to navigate, most logical setup and able to show all breadth of products and ways to save money.

And able to show all breadth of products and ways to save money.

Lastly, on the third element of our differentiation platform our team of experts fast company named US Foods, one of the 95 brands that matter in recognition of the seminars, playbooks and expertise that we deliver to customers to help them navigate the pandemic.

So having now just covered how great food made easy is driving EBITDA growth from market share gains, I'm turning to page six to cover the second and third elements of our strategy. That is optimizing gross profit margins and driving operational efficiency. So let's start with our efforts to optimize gross profit.

So let's start with our efforts to optimize gross profit.

As Dirk will cover shortly gross profit per case for the quarter was the highest it has been in recent years, despite some headwinds from unfavorable customer and product mix.

Contributing to this expansion in gross profit has been first, our ability to manage and pass through inflation. Second, continued growth in private label brands and third, the continued optimization of terms and customers in our portfolio.

For the quarter private label as a percent of total sales in our legacy US Foods Broadline business was 36.6%, which represents almost 140 basis point increase compared to Q3 of 2019.

And we still see plenty of opportunity for further growth in private label penetration, which will further expand gross profit margins. We also continue to optimize our portfolio of customers negotiating better terms, bringing on new more profitable business or warranted exiting customers at the low end of the profitability range.

We also continue to optimize our portfolio of customers negotiating better terms, bringing on new more profitable business, where warranted exiting customers at the low end of the profitability range the.

The new business in healthcare, hospitality and national chains that I referred to and that we brought on this year is coming in at margins that are three times higher than the existing base.

Still on page six, I want to update you on the third and last element of our strategy and intense focus on operational efficiency.

And supply chain, while the challenging labor environment persists, we have made significant progress in our hiring and our headcount for drivers and selectors is now above 2019 and close to our staffing targets.

The resulting high penetration of new warehouse and driver associates, not surprisingly, was the headwind to productivity in the quarter, but we do expect to return to 2019 productivity levels by mid 2022 as the tenure of the workforce returns to more normal levels.

In addition, we continue to make progress on our supply chain efficiency roadmap. Since the beginning of the year, we have reduced assortment by 15%, which not only contributes to higher service levels for customers, but also to higher productivity in the warehouse. With staffing now in a better position, we have resumed the deployment of our new picking technology, which we started in 2019 and we now expect to complete that by the middle of 2022.

At the beginning of the year, we have reduced assortment by 15%, which not only contributes to higher service levels for customers, but also to higher productivity in the warehouse.

Staffing now in a better position, we have resumed the deployment of our new picking technology, which we started in 2019 and we now expect to complete that by the middle of 2022.

This technology is demonstrated to improve productivity, especially of new associates as well as service to customers.

Lastly, we have resumed the rollout of more efficient receiving methods, which we had also paused. On the delivery side with greater stability on the customer ordering front, we cannot put greater focus on continuing to optimize routing.

On the delivery side with greater stability on the customer ordering front, we cannot put greater focus on continuing to optimize routing.

Taken together these efficiency initiatives will help bring distribution expense closer to historical levels.

Lastly, on the sales and administrative side, we still expect to retain two thirds of the $180 million and fixed cost savings that we announced last year. With most of the investment of the reinvestment showing up as an expansion in our sales force, which will drive market share. We are very pleased with the level of sales talent we are attracting, our tools, our unique products and our culture make us a very attractive choice for sellers.

unique products and our culture make us a very attractive choice for sellers.

I will now move to slide seven for a quick update on the smart foodservice and SGA food group acquisition, which are both performing at or above expectations.

Recall that the rationale for the smart Foodservice acquisition was twofold. First, the opportunity to expand our presence in the cash and carry market, which is growing at roughly twice the delivered market with higher margins.

On that front, we continue to secure real estate for expansion into new geographies. And second, the revenue synergies that come from existing customers and existing markets.

The revenue the revenue synergies that come from existing customers and existing markets.

The fact that same store sales at our nearly 80 chefs stores open at least one year, our head of 2019 levels provide some support for that thesis. And on the synergy front, we are beginning to see reductions in cost of goods and improvements in private label penetration.

And on the synergy front, we are beginning to see reductions in cost of goods and improvements in private label penetration.

Lastly, we expect 2021 EBITDA for our cash and carry business to exceed 2019. Turning now to food group. Recall that the rationale for that acquisition was to complete our footprint in the important and growing Pacific Northwest region. Of note, we recently won a significant national customer due to our strong presence in the Pacific Northwest, which was a result of this acquisition.

For our cash and carry business to exceed 2019.

Turning now to food group.

Call. It the rationale for that acquisition was to complete our footprint in the important and growing Pacific Northwest region of note. We recently won a significant national customer due to our strong presence in the Pacific Northwest, which was a result of this acquisition we.

We have now completed six warehouse system conversions and all have gone fairly smoothly. We expect to have seven warehouses completed by year end and all complete by early 2022.

With the continued progress on integration, synergy capture remains on track and by the end of 2021 we would have captured approximately $40 million of the projected $65 million in synergies.

And as I mentioned earlier, we are now starting to see some of the revenue benefits across the entire US Foods network from the center plate capabilities that came with this acquisition. I would now like to turn the call over to Dirk to discuss our third quarter results and our outlook.

Center of plate capabilities that came with this acquisition.

I would now like to turn the call over to Darcy to discuss our third quarter results and our outlook.

Thank you, Pietro, and good morning, everyone. I'll start on slide nine. Our third quarter financial results were in line with our expectations and demonstrate the strength of our business.

I'll start on slide nine.

Our third quarter financial results were in line with our expectations and demonstrate the strength of our business.

Sales increased compared to Q2, while volume was in line with the prior quarter. As Pietro mentioned, the slight decrease in the third quarter restaurant volume growth versus 2019 is attributable to COVID-19 related staffing challenges that impacted our industry and also impacted our business.

As Katherine mentioned, a slight decrease in the third quarter restaurant volume growth versus 2019 is attributable to COVID-19 related staffing challenges that impacted our industry and also impacted our business.

Our Q3 trends was similar to traffic trends for the various industry data sources and commentary from several restaurant chains. During the third quarter, we also experienced additional food cost inflation, namely in protein categories, such as beef and pork.

During the third quarter, we also experienced additional food cost inflation, namely and protein categories, such as beef and pork.

In addition, after seeing food cost inflation moderate in July, these costs accelerated again in August and September.

Costs accelerated again in August and September.

Our team continued to do an excellent job of managing that inflation and effectively passing it through to customers. This resulted in continued strong gross profit per case performance.

This resulted in continued strong gross profit per case performance.

In fact, even stronger than Q2 and as Pietro noted was the highest gross profit per case in recent years.

During the quarter, we successfully filled most of our open warehouse and transportation roles and as Pietro said also are close to hire our hiring and staffing targets.

We are focused on increasing the productivity of those higher in recent months. Our supply chain cost is expected to be high in Q4, given the large number of more recent new hires with significant improvement in cost by mid 2022 as productivity improves their training and experience.

Supply chain cost is expected to be high in Q4, given the large number of more recent new hires with significant improvement in cost by mid 2022 as productivity improves their training and experience.

In bond product supply for vendors also remains a challenge. Strong gross profit is offsetting some of the labor cost headwinds that we and others in the industry continue to face.

Strong gross profit is offsetting some of the labor cost headwinds that we and others in the industry continue to face.

Our operating cash flow was strong for the quarter, we use that cash to further reduce our debt and leverage.

We're focused on effectively managing through the challenging COVID-19 environment and related supply chain labor and product availability challenges.

At the same time, we're balancing that as we look to the future by continuing to enhance our digital platform, supply chain technology and processes through our operating model and continuous improvement focus in line with our pre-pandemic strategy.

Supply chain technology and processes through our operating model and continuous improvement focus in line with our pre pandemic strategy.

We saw improved restaurant volumes in October which indicate there is strong underlying customer demand to accelerate our restaurant growth further as we also continue the recovery back to 2019 levels in healthcare and hospitality.

Moving to slide 10, net sales for the quarter were $7.9 billion. Up 35% from the third quarter of 2020. Food cost inflation for the quarter was 11.5%. Driven by further inflation mainly in proteins.

Up 35% from the third quarter of 2020.

Food cost inflation for the quarter was 11, 5% drill.

Driven by further inflation mainly in proteins.

Adjusted gross profit for the quarter was $1.3 billion. Up 30% from the prior year. And our adjusted gross margin decreased by 70 basis points as a result of the inflation. And most of it being in proteins.

Up 30% from the prior year.

And our adjusted gross margin decreased by 70 basis points as a result of the inflation.

And most of it being in proteins.

We generated strong gross profit per case again this quarter. As we continued to experience product cost inflation.

As we continued to experience product cost inflation.

As I mentioned last quarter inflation benefits our gross profit dollars, while it's typically a headwind to gross margin rate.

With over 11% year over year food cost inflation in the third quarter, primarily in commodity categories, our gross margin as a percent of sales was compressed.

Yet our gross profit per case is the best we have seen in recent years. That's ahead of 2019 and even stronger than Q2. We're pleased with our gross profit performance again in Q3, especially given the freight headwinds impacting us and others in the industry.

That's ahead of 2019 and even stronger than Q2.

We're pleased with our gross profit performance again in Q3, especially given the freight headwinds impacting us and others in the industry.

The actions we're taking on pricing growing private label and optimizing your customer mix are showing up in our results.

As long as food cost inflation continues, we expect to manage through it effectively to increase gross profit dollars. Adjusted operating expense in the third quarter was $988 million up 28% versus the prior year. As a percent of sales, adjusted operating expense was 12.5%. Down from 13.2% in the prior year or an improvement of 70 basis points.

We expect to manage through it effectively to increase gross profit dollars.

Adjusted operating expense in the third quarter was $988 million up 28% versus the prior year.

As a percent of sales adjusted operating expense was 12, 5%.

From 13, 2% in the prior year or an improvement of 70 basis points.

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

Just as a point of reference our Opex as a percent of sales is about 50 basis points lower than it was in the third quarter of 2019, largely due to the significant food cost inflation.

We continue to experience additional supply chain labor inflation this year, largely as expected coming into Q3. During our last call, I mentioned that we expected additional labor inflation this year of about $20 million to $30 million, mostly in half two.

During our last call I mentioned that we expected additional labor inflation this year of about $20 million to $30 million, mostly in half two.

Above and beyond the approximately $50 million of normal annual supply chain labor inflation we experience. The $20 million to $30 million in half two. Or $40 million to $60 million annualized for '22, it's still our best estimate of the incremental inflation. We continued to use hiring and retention bonuses and have increased wages and additional markets during the quarter driven by the broader market wage rates increasing in those markets.

The $20 million to $30 million in half two.

We're $40 million to $60 million annualized for 'twenty, two it's still our best estimate of the incremental inflation. We continued to use hiring and retention bonuses and have increased wages and additional markets during the quarter driven by the broader market wage rates increasing in those markets.

We continued to use hiring and retention bonuses and have increased wages and additional markets during the quarter driven by the broader market wage rates increasing in those markets.

We now expect most of this year's incremental labor inflation to be permanent and we expect the impact we are seeing to be comparable to others in and outside of the industry.

We continue to think that inflation in future years, however will revert to more normal levels and thus the higher inflation in the current year to be transitory.

We do expect productivity to offset some of the incremental inflation.

In this environment, we're also having success with margin increases on a number of customers and ultimately, expect the margin increases to offset most of the incremental permanent labor inflation.

We will continue to optimize customer terms to offset the labor inflation. On slide 11, adjusted EBITDA was $291 million for the quarter. A 39% increase from the third quarter of 2020. The P&L outcome was largely in line with our expectations.

On slide 11, adjusted EBITDA was $291 million for the quarter.

39% increase from the third quarter of 2020.

The P&L outcome was largely in line with our expectations.

Gross profit did outperform our expectations since we didn't initially planned for the level of additional food cost inflation in our outlook. And that was offset by higher Opex from increased supply chain costs largely due to the productivity impact from the higher number of new hires and higher insurance costs.

Productivity impact from the higher number of new hires and higher insurance costs.

Adjusted EBITDA as a percent of sales was 3.7%. As I mentioned earlier, we are seeing improvements in case volume growth in October. And expect the 2022 recovery in restaurant volume at select markets plus market shares will make market share gains will make up for the slower recovery in hospitality and healthcare volume.

As I mentioned earlier, we are seeing improvements in case volume growth in October and.

And expect the 2022 recovery in restaurant volume at select markets plus market shares will make market share gains will make up for the slower recovery in hospitality and healthcare volume.

On volume we are optimistic the October reacceleration continues as COVID cases continue to decline.

As we look ahead to Q4, we expect the EBITDA drivers to be similar to Q3 with good gross profit as long as inflation continues and continued high supply chain costs.

That said, we expect total EBITDA dollars at levels below Q3, largely because Q4 is typically a seasonally lower volume quarter and to a much lesser extent, a higher supply chain costs due to the onboarding of many supply chain, new hires and the impact of the signing bonuses and continued onboarding of new sellers that we've talked about previously. Specific to volume. Historically, we've sold roughly 6 to 7 million fewer absolute cases in Q4 than Q3.

Specific to volume hit.

Historically, we've sold roughly six to 7 million fewer absolute cases in Q4 than Q3.

And this year, we also have an incremental negative volume impact of about 100 basis points in the quarter, if you're comparing to 2019 due to the way new year's holiday falls on the calendar, which helps Q1 2022.

The seasonally lower volume and holiday timing impact is significant in terms of EBITDA impact when it comes to comparing Q4 EBITDA expectations to Q3.

Expectations to Q3.

We and others in the industry typically see an improvement in gross profit per case due to the additional holiday business and related product mix. We aren't sure how much volume, we or the industry will see in Q4 from holiday gatherings potentially impacting the significant benefit it can have on volume and gross profit rates. So we're watching that closely.

Likely to be better than 2020, but not back to the levels in 2019. Meaning gross profit not likely to see quite the rate tick up this year that we have historically experienced versus Q3.

Meaning gross profit not likely to see quite the rate tick up this year that we have historically experienced versus Q3.

Just as a reminder, if you are comparing Q4 volume to 2020 also remember that 2020 had an extra week in the fourth quarter.

Earlier Pietro Pietro mentioned that our current best estimate continues to be a return to pro forma 2019 case volume levels sometime in '22.

We also have our sights firmly out of returning to 2019 pro forma adjusted EBITDA and then growing from there based on M&A synergies, topline growth, including the $1 billion of net new customer wins Pietro referenced, GP expansion and cost savings.

G P expansion and cost savings.

Finally, adjusted net income in the third quarter was $119 million and adjusted diluted EPS was 48 cents, compared to 19 cents in the prior year.

Turning to slide 12, operating cash flow for the first nine months of the year was $520 million compared to $533 million in the prior year. The prior year still had the benefit of working capital management actions we took when COVID site in that had not fully unwound by the end of Q3.

The prior year still had the benefit of working capital management actions, we took when Covid site in that had not fully unwound by the end of Q3.

Year to date operating cash flow in 2021 is in line with the pre-pandemic amounts through the first three quarters of 2018 in 2019. Demonstrating we're effectively converting our EBITDA to operating cash.

Demonstrating we're effectively converting our EBITDA to operating cash.

Our business generates a significant amount of operating cash flow each year, and we expect to grow that cash flow with EBITDA. We will use this cash to reinvest in our business and reduce total outstanding debt.

In the third quarter, we proactively pay down an additional $100 million of total debt. Incremental to our standard debt payments and have reduced our net debt approximately $300 million and nearly three turns year to date.

Incremental to our standard debt payments and have reduced our net debt approximately $300 million and nearly three turns year to date.

Our leverage ratio decreased further in Q3 to 4.8 times due to the net debt reduction and the significant improvement in adjusted EBITDA.

Our target leverage ratio remains between two and a half and three times and we're well on our way towards that target.

We expect to continue to make progress against the target via additional debt reduction and increased EBITDA.

To close, we are focused on the continued recovery of our business. However, as Pietro said at the outset, since the industry has demonstrated its well on its way to recovery, we're shifting much more of our focus back to our pre-pandemic strategy.

First, to profitably grow market share with our differentiated and Great Food Made Easy. Second, to smartly optimize our customer margins and mix. Third, to bring an intense focus on operational efficiency.

Smartly optimize our customer margins and mix.

Third to bring an intense focus on operational efficiency.

We expect this focus will lead to our volume recovering well ahead of the Technomic outlook and further improving our gross profit and Opex, resulting in healthy earnings growth and a strong capital structure.

We will continue to use the strong cash flow to invest in our business and reduce debt. As we look to 2022 and beyond, we are optimistic on our ability to profitably grow our business and deliver value for our shareholders. Operator, at this time, we can now open the call for questions.

As we look to 2022 and beyond we are optimistic on our ability to profitably grow our business and deliver value for our shareholders.

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

Thank you. The floor is now opened for questions. I would like to remind everyone in order to ask a question you may press star one on your telephone. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Edward Kelly. Your line is open. Please go ahead.

Your first question comes from the line of Edward Kelly. Your line is open. Please go ahead.

Yeah. Hi, good morning, guys. So profit per case this quarter was obviously very good. Case growth was a little bit lighter than what we and I think probably others expected.

So profit per case this.

This quarter was obviously very good.

Case growth was a little bit lighter than what we and I think probably others expected.

Just hoping you could talk a bit about the cadence of case growth during the quarter sort of vast versus kind of where June was. Maybe give a little bit color by customer type, including independence.

Maybe give a little bit color by customer type, including independence.

And then talk about the staffing challenges and the impact that that had. And is it possible to quantify sort of like what amount of volume as sort of being left on the table by that? To give us a better sense as to where business really should be run rating right now.

Business really should be run rating right now.

Sure Ed. Good morning. This is Dirk. I'll start with that. Ultimately through the quarter. If you look at the way Q2 continued actually are and then into Q3 cadence is not that dissimilar than what you've probably seen from industry traffic data sources and a number of the chains, where June was the strongest and then July similar and then some softening in August into early September. And then really some pick up towards the end of September and that's continued into October.

Ultimately through the quarter. If you look at the way Q2 continued actually are and then into Q3 cadence is not that dissimilar than what you've probably seen from industry traffic data sources and a number of the chains, where June was the strongest and then July similar and then some softening in.

In early September and then really some pick up towards the end of September and that's continued into October.

Ultimately, that's a similar across a number of our sort of especially around the restaurants and hospitality. But really what we're seeing is almost all of our sort of I'll call it slowing of the volume recovery is around staffing challenges in certain of our markets and really the end demand perspective or any impacts on end demand from Delta variant appear to be pretty insignificant. So from that perspective as COVID-19 cases decline our staffing continues to improve.

Really what we're seeing is almost all of our sort of I'll call it slowing of.

The volume recovery is around staffing challenges in certain of our markets and really the end demand perspective or any impacts on end demand from delta variant appear to be pretty insignificant. So from that perspective as COVID-19 cases decline our staffing continues to improve.

We're optimistic that the re acceleration we're seeing in October continues through the balance of the year and then of course into 2022. So that's positive as we look ahead.

And is there any way to quantify the staffing component impact?

So we're not going to comment on a specific impact of foregone volume but I would tell you though is it doesn't. What we're seeing in our markets is that to the customer demand and consumer demand appears to be there. The challenges we've had don't appear to be that dissimilar to others.

What we're seeing in our markets.

Is that to the customer demand and consumer demand appears to be there. The challenges we've had don't appear to be that dissimilar to others.

And we are seeing in markets where our staffing and were lower. COVID staffing challenges that we saw during the quarter, we have a number of our markets growing in double digits. So we're confident that as we get further through this and past this that there's plenty of business out there and that we can meaningfully accelerate our growth rate.

Where our staffing and were lower.

Covid staffing challenges that we saw during the quarter, we have a number of our markets growing in double digits. So we're confident that as we get further through this in past this that there's plenty of business out there and that we can meaningfully accelerate our growth rate.

Great. Thank you. Thanks, Ed. Your next question comes from the line of Rahul [Koothrappali]. Your line is open. Please go ahead.

Thanks, Ed.

Your next question comes from the line of Rahul Paul Your line is open. Please go ahead.

Good morning, guys. Thanks for taking my question. Just going back to slide six. These initiatives sound familiar.

Just going back to slide six these initiatives sound familiar.

What is an evolution of enhancement of an existing project? What's the what are the new projects with their own paybacks and buttered within this initiative? And also wanted to check if this projects require investment before return or can improvement would be expected without incremental near term investment in this initiative?

before return or can improvement would be expected without incremental near term investment in this initiative?

Sure, this is Pietro. So a number of, in distribution the levers you're going to go after in terms of warehouse productivity, delivery productivity are levers that we continue to push on and continue to improve on which is why probably there's a certain amount of familiarity to to what we talked about however, what I would call out as especially on some dimension of the assortment rationalization. Some really good progress compared to historical norms in terms of your question about that investment. The one ow two technology that I talked about in terms of picking technology really are very modest investment and the payback is pretty immediate.

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A number of.

In distribution the levers youre going to go after in terms of warehouse productivity delivery productivity or our.

Levers that we continue to push on and continue to improve on which is why probably theirs.

Certain amount of familiarity to to what.

we talked about however, what I would call out as especially on some dimension of the assortment rationalization. Some really good progress compared to historical norms in terms of your question about that investment.

Historical norms in terms of your question about about investment.

The one ow two technology that I talked about in terms of picking technology really are very modest investment and the payback is pretty immediate.

One or two.

Technology that I talked about in terms of picking technology really are very modest.

Investment and the payback is pretty immediate.

Okay. Understood.

Understood.

Yeah.

Your next question comes from the line of Lauren Silberman. Your line is open. Please go ahead.

Thanks for the question. Just on gross profit per case up year over year and sequentially, you guys called out inflation in private label and optimization of terms and mix. How are you thinking about the sustainability of gross profit per case from here? Just looking into '22 is perhaps you see some inflation has come down or customer mix shift.

Year over year and sequentially, you guys called out inflation in private label and optimization.

How are you thinking about the sustainability of gross profit per case from here.

Looking into 'twenty two is perhaps you see some inflation has come down.

From a mix shift.

And then I understand your commentary on the uncertainty around the tech the holiday performance, would you expect fourth quarter gross profit per case to be at least as high as 3Q?

Thank you.

Yes.

Sure. Hi, Laurent. Thanks for the question. We do believe that the higher gross profits sustainable TBD in the exact same or the exact level to your point based on what happens with inflation, but we think the combination of the things that also just even the environment that we're in with the environment that we're in with labor cost challenges all contribute to a stronger gross profitability to maintain stronger gross profit per case. So we're confident in our ability to maintain a higher level there, even though it may move around a little bit from quarter to quarter. I think you've seen over the years, you've been leading up to the pandemic. We were successful in expanding gross profit and expanding our operating leverage as we improved our EBITDA margins. I think specific to the fourth quarter.

We do believe that the higher gross profits sustainable TBD in the exact same or the exact level to your point based on what happens with inflation, but we think the combination of the things that also just even the environment that we're in with the <unk>.

labor cost challenges all contribute to a stronger gross profitability to maintain stronger gross profit per case.

Stronger gross profitability to maintain stronger gross profit per case, so were were.

So we're confident in our ability to maintain a higher level there, even though it may move around a little bit from quarter to quarter. I think you've seen over the years, you've been leading up to the pandemic. We were successful in expanding gross profit and expanding our operating leverage as we improved our EBITDA margins. I think specific to the

Fourth quarter.

I'm not going to speculate on the exact amount. I think the with the holiday timing I guess the way I would suggest thinking about it is in the holiday product mix et cetera is whatever it shakes out to be.

<unk> mix et cetera is.

Whatever it shakes out to be.

It is really a Q4 2021. It doesn't change how we think about it and probably how the industry thinks about the recovery into 2022 and beyond I think the positive is, it seems like from what we and others are hearing and seeing there probably will be more activity. So that's an encouraging sign for what demand and people getting out more. I think that all bodes well for the continued recovery into 2022.

It seems like from what we and others are hearing and seeing there probably will be more activity. So that's an encouraging sign for what demand and people getting out more.

I think that all bodes well for the continued recovery into 2022.

Great. And then it looks like sales per case was up a bit more that gross profit per case this quarter. Anything you can share about the dynamics, there and what's driving that. That's really more around the categories in which the inflation came in so just because of the third quarter a lot of it came from proteins and as you probably remember from.

Gross profit per case this quarter anything you can share about the dynamics, there and what's driving that.

That's really more around the.

The categories in which the inflation came in so just because of the third quarter a lot of it came from proteins and as you probably remember from.

I talked about in the past as more of those categories tend to be a fixed mark-up per case or per pound. So you don't necessarily get gross profit to go up quite at the same level of sales. So there's nothing that I would call out that's sort of fundamentally different.

Great. Thanks, so much. Thanks.

<unk>.

Your next question comes from the line of Mark Carden. Your line is open. Please go ahead.

Good morning. Thanks a lot for taking my question. So on the inflation front is there a point at which you would typically become concerned that elevated inflation could start leading to demand destruction? You see this being much of a risk in that inflation just hitting a certain point for a certain period of time that customers basically ship more of their sent stood at home.

Point for a certain period of time that customers basically ship more of their sent stood at home.

So we haven't seen that I mean, as we've seen from the industry data and our own data, consumer demand continues to be very healthy.

Humor demand continues to be very healthy.

The increase in digital ordering takeout has has helped demand with food away from home. I think there's a couple of other data points I would point to that lead us to believe that from an outlook perspective, we're confident that the sector is very healthy one, if you look at the growth in food away from home relative to food away food at home continues to close the gap and the expectation by one of the industry analysts is that the lines will cross sometime in 2022 I believe early 2023, in terms of more dollars being spent away from home and at home. And then third thing, if you look at inflation between the food away from home and food away at home, the gap has really narrowed over the last several quarters. So the inflation we're seeing, especially the proteins as Dirk commented on as inflation, that's being seen in both food away from home and food at home and I think. If there's any substitution that happens it will happen within the within the sector perhaps.

Demand with food away from home I think there's a couple of other data points I would point to that lead us to believe that.

From an outlook perspective, we're confident that.

the sector is very healthy one, if you look at the growth in food away from home relative to food away food at home continues

to close the gap and the expectation by one of the industry analysts is that the lines will cross sometime in 2022 I believe early 2023, in terms of more dollars being spent

Uh huh.

Away from home and at home and then third thing if you look at inflation between for the way at home food away from home and food away at home. The gap has really narrowed over the last several quarters. So the inflation, we're seeing especially in the proteins as Duke commented on as inflation, that's being seen in both food away from home and food at home and I think.

If there's any substitution that happens it will happen within the within the sector perhaps.

Lastly, the expensive proteins and more towards some of the less expensive proteins. So we feel pretty good about the outlook.

The outlook.

Great and then from an optimization standpoint, have you guys had to call many incremental independent locations, while optimizing your trucking routes relative to last quarter? Thanks.

Do you mind repeating the question? Was is about all these independent locations? Yes, just in terms of.

What about all these independent locations, yes, just in terms of.

Have you guys, with some of the hiring challenges on the driver front, have you guys had a call many independent locations just to optimize your trucking routes relative to last quarter?

Youre trucking routes relative to last quarter.

I understand okay. So that's what I was referring to in a handful of markets we had to rationalize the amount of demand we were able to serve, that was sometimes due to driver shortage, sometimes due to selectors. And I think as I mentioned it was less about the shortage and we had a number of facilities, unfortunately, disproportionate large facilities where COVID just kind of went through the facility and we got one or two weeks setback in terms of our ability to serve those customers. But by the way we also benefited from that in other markets, where it happened to other other competitors and when you look at those other markets, we had some pretty good increases in the market share.

We had to.

Rationalized.

The amount of demand we were able to serve that was sometimes due to driver shortage, sometimes due to selectors and I think as I mentioned it was less about the shortage and we had a number of facilities.

Facilities, Unfortunately, disproportionate large facilities where.

Covid just kind of went through the facility and we got to it.

One or two weeks setback.

In terms of our ability to serve those customers, but by the way we also benefited from that in other markets, where it happened to other other competitors and when you look at those other markets. We had some pretty good increases in the market share.

Great, that's very helpful clarity and best of luck.

Yeah.

Your next question comes from the line of Nicole Miller. Your line is open. Please go ahead.

Thank you and good morning. I might have understood on the 4Q, I think you said EBITDA commentary about down sequentially. So before I ask the long winded question. The restaurants traditionally have a better 4Q and I don't see that historically in your numbers. So did I misunderstand that? No, you did not. And that's in our business historically back to pre-pandemic, just Q1 and Q4 absolute volume is lower for us than Q2 and Q3.

Understood on the four Q I think you said EBITDA commentary about down sequentially. So before I ask the long winded question. The restaurants traditionally have a better for Q and I don't see that historically in your numbers or did I misunderstand that.

No you did not and that's in our business historically back to pre pandemic, just Q1 and Q4 absolute volume is lower for us in Q2 and Q3.

And I think that's the thing that's some of the outlooks that people have considered them, it's looking a bit more as restaurants as opposed to our industry and our business has historically worked.

Some of the outlooks that people have considered them, it's looking a bit more as restaurants as opposed to our industry and our business has historically worked.

And you talked about like 6% to 7% sequentially seasonally on that absolute volumes and there was one other item. Can you address that one other item I was trying to understand if that was more one time or not?

Does this all translate all the way down to EBITDA than being lower in the fourth quarter than the third quarter?

Yes. So my comment was I'll start with it. So we do expect we expect the drivers to perform very similar to Q3, but we do expect Q4 EBITDA to be below Q3, not because of the change in the core business, but because of the seasonally lower volume.

And if I go to the volume piece of it yes. So in Q4 I gave as a reference typically we sell $6 million to $7 million fewer cases in Q4 than Q3. And then the other thing on top of it this year if you're comparing stayed at 2019 is New year's Eve and Christmas both fall that last week of 2021, so it has an additional negative impact of about 100 basis points in the fourth quarter of this year that will then help in Q1 of next year.

And then the other thing on top of it this year if youre comparing stayed at 2019 is.

New year's Eve and Christmas both fall that last week.

2021, so it has a negative additional negative impact of about 100 basis points in the fourth quarter of this year that will then help in Q1 of next year.

So again. That is timing and even the downturn in volume is really again, it's just, seasonal not a change in the actual business outlook.

That is timing and even the downturn in volume is really again, it's just.

He is in all not a change in the actual business outlook.

And then on the sales leverage or I guess I shouldn't call it that but I guess on the sales or just the business in total returning to normal at some point in mid 2022. To the degree that you talked about that being a function of labor.

The sales leverage or I guess I shouldn't call it that but I guess on the sales or just the business in total returning to normal at some point in mid 2022.

To the degree that you talked about that being a function of labor.

Where are you hiring from? I'm thinking about if it's in industry. Is this a productivity unlock a learning like your new enhanced technology? Or are you hiring outside of the industry and it's just teaching the basics around your process and procedures?

Or are you hiring outside of the industry and it's just teaching the basics around your process and procedures?

So just to clarify Nicole when we talk about 2022, we're talking about the volume outlook. And that's a function of hospitality still being kind of two thirds of what was in 2019, but you can see the continued growth, healthcare being around 10%, but below 2019 and some of the occupancy rates returning back to prior levels in senior living that's what we referred to in terms of 2022. in terms of the part of your question I think. And in terms of where labor is coming from. So as you know selectors and drivers are very different occupations, drivers commercial license.

Volume outlook and that's a function of.

Hospitality still being kind of two thirds of what was between 19, but you can see the continued growth healthcare being around 10%, but below 2019 and some of the.

occupancy rates returning back to prior levels in senior living that's what we referred to in terms of 2022. in terms of the part of your question I think. And in terms of where labor is coming from. So as you know selectors and drivers are very different occupations, drivers commercial license.

The part of your question I think.

And in terms of where labor is coming from so as you know sectors.

Selectors and drivers are very different occupations drivers commercial license.

These are experienced drivers and there's been a headwind in terms of driver supply going back to before the pandemic. So what we're doing there is we're aggressively recruiting and as well we've created programs with buyer selectors can train to become drivers and that that's a great path upwards in retention vehicle. Selectors it's different. Most often come from other warehouse environment not necessarily in food distribution. They come from other warehouse environment in there. Ours is a very fast paced high volume environment, multi tenant and so it's training them on the method in our warehouses in our industry that might be different from where they come from but at least you have a sense of what of what they are, the environment they'll be working in. Hopefully that answers your question.

So what we're doing there is really aggressively recruiting and as well we've created programs with buyer selectors can train to become drivers and that that's a great path upwards.

in retention vehicle. Selectors it's different. Most often come from other warehouse environment not necessarily in food distribution. They come from other warehouse environment in there. Ours is a very fast paced high volume environment, multi tenant and so it's training them on the method in

<unk> it's different.

Most often come from other warehouse environment not necessarily in food distribution.

Come from other warehouse environment in there.

Ours is a very fast paced high volume environment, multi tenant and so it's training them on the method.

our warehouses in our industry that might be different from where they come from but at least you have a sense of what of what they are, the environment they'll be working in. Hopefully that answers your question.

The environment they'll be working in hopefully that answers your question.

It does thank you for that appreciate it.

Sure.

Your next question comes from the line of Jeffrey Bernstein. Your line is open. Please go ahead.

Great. Thank you very much two questions. The first one from a topline perspective, and then second on the inflation side of things, but from a sales perspective, I think you mentioned technomic suggest in the industry would get back to 19 sales levels by 'twenty four.

Which does seem.

Overly conservative I know you mentioned you'd achieve that by 'twenty. Two I'm just wondering as you think about it relative to your forecast relative to Technomic I'm, just wondering whether you would prioritize the biggest benefit being further penetrating existing accounts or.

Is it the net new business, you are adding entirely or.

Maybe is there some expectation for <unk>.

M&A opportunity or I'm not sure if that's even an option for you near term with the elevated leverage we're just trying to prioritize why do you believe yours will recover faster than the broader industry in terms of the different buckets available to you.

I think in part it's because that's what we've seen so far Jeffrey we've seen our restaurant business recovered more more quickly than the broader industry.

So its space.

In large part on the evidence so far and our market share gains and again as I said that too.

Sectors that have still the most often for recovery around healthcare and hospitality.

Very optimistic about that in terms of the type of business or where the growth will come from I think it's it's it's really around the right business.

It's existing customers, where we can.

Grow share of wallet or new business, it's around business and at the right. The good fit with our with our with our footprint a good fit in terms of the Skus we cover.

Part of the.

The work we've done over the last three to six months in terms of optimizing the portfolio that I referred to and that's been a combination of renegotiating terms as Derek referred to we're exiting some customers where we can find the right fit it's really about growing in a healthy fashion in a way that expands margins.

Both in terms of absolute dollars from growth and expand EBITDA margins.

And then the follow up was more on the inflation side of things I know you mentioned that the margin percentages are down but more importantly, the dollars are up I'm just wondering a lot of investors see the foodservice distribution category is a good place to be in a hyperinflationary environment because it does seem like the messages that youre able to pass along pretty much all of the inflation to customers.

I'm just wondering whether your confidence is still high and the ability to continue to pass through or maybe there is some concern as the inflation now approaches or isn't it.

Now in the low double digits. So I'm, just wondering whether you're still confident in being able to pass along or maybe you can share your expectation for inflation in the fourth quarter thoughts going into 'twenty, two relative to that 11% plus that we just saw in the third quarter. Thank you.

Okay.

Sure Hi, Jeff. This is Dirk I'll take that I think that ultimately we are confident of our ability to pass it through as you've seen now for two quarters in a row.

Our processes and our customer base and the way contracts are set up set us up well for that so pleased with the performance across these and I think we expect as long as inflation continues to will continue to operate effectively and passing it through I think to your point. It. So what we did see is we saw inflation.

There are seeing inflation moderates a little bit into October.

Just as I said on the last quarter call. We saw that in July. So at this point, we're going to continue to watch what happens and Pietro made reference earlier, but operators are they're very thoughtful to creative and can can go with different options as to how they think about do you have higher inflation in certain categories to be able to manage their food costs.

That's where our differentiated model also can help with them from a sales and service perspective. As you go into '22 it's harder to know exactly what happens. Our focus is on helping operators manage through it and at the same time making sure that we have our processes running well so that we can pass it through. I think as you've seen with your opening comment and how it's an ability to pass through, I mean that is one of the advantages that our business has a lot of others are telling us on food cost inflation. It is a pretty direct pass through on our case, about 70% of our customer base and that's one of the key enablers of such strong gross profit in Q2, and then again in Q3 with Q3 being kind of among the highest we've seen are the highest we've seen in recent years.

As you go into 'twenty, two it's harder to know exactly what happens our focus is on.

Helping operators manage through it and at the same time.

Making sure that we have our processes running well so that we can pass it through I think as you've seen with.

Your opening comment and how it's an ability to pass through I mean that is one of the advantages that our business has a lot of others are telling us on food cost inflation. It is a pretty direct pass through on our case about 70% of our customer base and that's one of the key enablers of such strong gross profit in Q2, and then again in Q3 with Q3 being kind of.

Among the highest we've seen are the highest we've seen in recent years.

Got it and the idea that you said, you're seeing some moderation in commodity inflation in the fourth quarter.

Thinking about it from a year over year perspective, you would therefore think the third quarter might have been the high point and we would see inflation on a year over year basis subside in the fourth quarter. If trends were to continue like this or is there something unusual in the fourth quarter last year that might still have the inflation percentage actually be higher in the fourth quarter versus that 11% you saw in the third.

I don't know that it subsides.

Using October as a data points. It indicates that we saw in the month is not a lot of incremental growth above above where the third quarter exited so I think.

It's hard to know and like others, we'll continue to watch as we go through the fourth quarter.

Understood. Thank you.

Thanks, Jeff.

Your next question comes from the line of John Glass. Your line is open. Please go ahead. Thanks very much just going back to your comments about going back to sort of business as usual the pre COVID-19 and you talked about optimizing customer mix and then you talked about those two initiatives in the warehouse.

Receiving and picking and packing can you is there a way to quantify what you think those can do from a savings perspective or in the case of like the growth is the customer mix. What have you already started to realize in gross margins as you've shed maybe unprofitable customers is there a way to think about how that could benefit the margin structure of the business.

Sure.

So we haven't specifically don't expect right now just to quantify the specific impacts of these however, a few things that I can share is.

A number of these things are the pieces that are that are helping and driving it ultimately will work trying to balance each year as that top line growth, but also margin expansion, which just and if you go back a reference from 2015 to 2019, so leading up to the pandemic, we expand our EBITDA margins by about 90 basis points, that's really kind of pushing that each of them.

These levers from a customer mix perspective, although we are seeing some negatives.

In certain healthcare and hospitality as still being down some of the improvements in the net new business wins that Pietro talked about in the higher margin there and some of the pricing actions and the types of customers. We're serving on the local customers have had.

A meaningful positive impact on our margins and ultimately on our EBITDA for the last few quarters. So we expect to continue to move on those. I think on the other pieces that Pietro had on the page there. The private label as we continue to focus on growth there that's twice as profitable as manufacturers brands, so that is an opportunity that we've made significant progress in recent years and we would expect to continue to because we have a lot of opportunity still there remains there and then from the supply chain perspective.

Private label as we.

Continue to focus on growth there that's.

Twice as profitable as manufacturers brands so that'll.

is an opportunity that we've made significant progress in recent years and we would expect to continue to because we have a lot of opportunity still there remains there and then from the supply chain perspective.

Kind of midstream on a number of those things rational assortment rationalization is a great one because it helps simplify our operation and in this environment of product availability challenges with vendors, it's actually a better experience for customers as well. So it's a good win win where it continued to strike this balance or to improve our and grow our EBITDA.

Thank you, and just one follow up you cited inefficiency of new workers coming on and so that's going to still take time to work through. Is there a way to quantify like what percentage of your sales force or your drivers are new today versus what the regular percentage of new employees are like pre-pandemic? Just so we understand that opportunity and challenge.

Pre pandemic, just so we understand that that chip that opportunity and challenge.

Sure. So we haven't broken out the specific percentages on our or historically it is meaningfully more because of the sheer amount of hiring we've done in recent months. I tell you as you think about ramp up. So warehouse selectors contend to be right up three to six months until they get closer to that level. Drivers can take a little bit longer but as Pietro said, since we're at the level of staffing and that we were in 2019 and our focus remains on a few select markets. We feel that we're well positioned really to work on reducing our supply chain cost and improving the productivity as we move ahead to mid 2022. But also most importantly, being able to continue to serve more profitable customers and continue to grow EBITDA.

I, usually think about ramp up so.

Warehouse selectors contend to be.

Right up three to six months until they get closer to that level drivers can take a little bit longer but it's pietro.

Pietro said since we're at the level of staffing and that we were in 2019 and our focus remains in a few select markets. We feel that we're well positioned really to work on reducing our supply chain cost and improving their productivity as we move ahead to mid 2022, but also most importantly.

<unk> been able to continue to serve more profitable customers and continue to grow EBITDA.

Thank you.

Thanks.

Sure.

Your next question comes from the line of John Haines Barker. Your line is open. Please go ahead.

I will start with a more strategic question and then I have another. When you think about the supply chain opportunities. So how aggressively can you get at that? I'm thinking also balancing right the top line market share potential. You don't want to go too fast and impact the customer experience. So let me talk about balancing that how quickly you can go at it. And then in sizing it right.

The more strategic question and then I have another when you think about the supply chain opportunity.

So how aggressively can you get at that.

Im thinking also balancing right.

Top line market share potential you don't want to go too fast and impact the customer experience. So let me talk about balancing that how quickly you can go at it.

And then in sizing it right.

May you give us the exact number? But I think about the proactive cost outs a year ago. Is the ultimate supply chain opportunity in that ballpark eventually? Or is it much smaller?

Is the ultimate supply chain opportunity in that ballpark.

Eventually.

Or is it much smaller.

Okay. So I'll start and maybe Don can chime in look we think we've said we think we have.

It's a great opportunity in terms of both operational effectiveness and efficiency and we think the addition of <unk>.

Hancock and John Thompson as CA over the last.

Nine months will will help us get at that opportunity and aggressive fashion.

I don't know that there needs to be tradeoffs, John between the customer experience.

So the example, I talked about in the prepared remarks is the level of assortment and what happens if you.

Build your assortment.

Too broadly.

While on the surface that may look like.

Driving sales that necessitates.

Necessitates greater inventory.

The tail typically is harder to forecast and so you end up with a lower customer service experience. So we believe that the opportunity for better serving our customers and getting at the operational efficiency and effectiveness actually go hand in hand, together and I could give you. Other examples in addition to TV the assortment one.

The work, we did last year and prior to that when we consolidated the sink.

A single site.

<unk> into multi side areas those were all on the administrative side.

Whereas what we're talking about now and on the.

The fixed cost side, while we're talking about now in terms of opportunity is primarily on the variable cost side in terms of.

Populations.

As Dirk mentioned part of it is just the natural ebb.

Should we have a meaningful number of draw.

Drivers and selectors, where new and so there can be some natural productivity benefit and then on top of that when you layer on some of the.

Initiatives that we've that we've that we've talked about historically some of them are new.

We have to pause during during COVID-19, putting putting new technology in place and we're picking perspective, when you're short staffed it could make things worse. So that's why now we feel given all of that to 2019 levels. We feel that we're in a good position to kind of resume some of that work that we were talking pre pandemic.

Okay.

Is there a way to size the ultimate supply chain opportunity.

And.

It doesn't rise to the level of the cost as you did last year are now.

It's significant and material.

We're not prepared at this position at this point too precisely but stay tuned alright.

Okay, and then lastly, what are you seeing with lines per stop and pieces per stop.

Good news on those.

Yes good.

Alright, John Yeah. So good news we're seeing.

Both.

Line per stop increase and we're also seeing cases per line increase.

Historically the lines per stop are a good proxy for our ability to gain share of wallet.

And in cases per line or a good proxy for customer or operator demand and we've seen both of them.

Go up over the last few months, which I think is a function of both us.

The quality of the new customers were bringing on and as well continue to optimize our portfolio of existing customers.

Okay. Thank you.

Yes.

Your next question comes from the line of Alex Slagle. Your line is open. Please go ahead.

Thanks. Good morning, you mentioned some freight pressures just wondering if you could comment on the magnitude of that headwind in the third quarter and how you're seeing this evolve into the fourth quarter and 22, and then within that anything different about how you're managing that.

These headwinds versus what you've done in the past and maybe the portion of our inbound freight where you're using third party on the spot market any color there would be great.

Sure Alex Good morning, So freights.

Continues to be a headwind not that different than recent quarters, and it's really largely driven by just tightness in the overall freight market. So.

When you ask about impact so it's.

It's meaningful but less than the impact of just the overall I'll call it separate supply chain labor and its impact on volume, even though a lot of the logistics is largely its own labor challenge what I would tell you is we.

We learned a lot back in 2018, when the freight market really tightened up we put a number of plays in place there we've executed against those in 2021.

And it's been a challenging especially in this part of the business because those freight costs have continued to increase so it's not a.

Steady target Youre working again, so we've made significant progress.

And they are closing sort of some of the I'll call. It headwind as the year has gone on and we continue to work through those and feel like we'll be very well positioned as we get to a more steady environment through there both from a cost perspective, but also from a service perspective, we're balancing both of them because we want to make sure it's about getting getting that product.

Whether it's some of it we pick up.

With our own trucks some of it we contract with third parties and in this environment, we've really leaned to have a lot of the strength.

For the third parties with the partners that we have out there and we're just trying to make sure we're getting our loads picked up and into our facilities on time so.

It's probably based on what you read out there its not something thats going away imminently, but continues well into 'twenty two.

We can't control the end about the thing we can't control is making sure we're getting our product to continue to make progress on the P&L side of it as we work through this and that will continue to be our focus.

That's helpful and I had a follow up just on the inflation.

No.

In the food products starts to drop I mean, there is some ability to capture incremental margin as you know probably a short lag in when the contracts reprice in Perth.

Perhaps.

Timing of the repricing with the non contracted customers.

Yes, there is there is a little bit when its on the decline I think the the thing over time, our industry and our business, we like kind of a slow and steady inflation could does help grow gross profit dollars, but yes in a period of.

Called volatility or up and down it does create some opportunities to take it take some pricing during this environment, it's really trying to strike that balance again, our pricing fairly to our customers.

It's just managing for the you know against the tight supply backdrop that we're all experiencing.

Got it thank you.

Okay.

Your next question comes from the line of Peter Lee. Your line is open. Please go ahead.

Great. Thanks for taking my question I wanted to come back to the conversation around reduced assortment I think that was mentioned several times on the call.

Are you actively reducing assortment and skus in and if so how early early are you in the process should we expect more reduction in the fourth quarter and into 'twenty, two or as sales come back to 2019 levels do you expect that.

The assortment comes back into the into the warehouses.

I have a follow up.

So assortment is one of those things that.

Customer optimization assortment optimization.

Is ongoing.

And.

We put up particularly push this year and part of that part of it was prompted by the supply volatility we experience pardon was pumped by we saw the opportunity from an operational efficiency perspective.

But that's an ongoing opportunity that never ends.

And I think you said you had a follow up Peter that's all in number.

Yeah no. The other question would be just on the assortment reduction so far have you seen any sort of sales impact.

To date or do you expect anything going forward.

We have not typically what we go after from a storm perspective as either the duplication in the middle of that does that curve or some of the tail and we work we work closely with our salespeople we work closely with our customers in terms of identifying those opportunities.

So we have not seen any impact from that work from a sales perspective.

Thank you.

Your next question comes from the line of Kelly Bania. Your line is open. Please go ahead.

Hi, good morning, Thanks for taking our questions.

So it's good.

I wanted to just ask a little bit about the hospitality.

Segment.

Correct me, if I'm wrong, but it looked like it came in at Q3 pretty similar to where you had exited the second quarter, I think down about maybe 29% or 30%.

Stable to that so just curious how that compared to your internal expectations.

Kind of cadence or pace of recovery, you're expecting from here and how you're benchmarking. The performance of that segment and then just also what kind of seasonality. If any there is expected in that segment and as we look in to Q4.

Okay I'm looking at the chart here.

Helium on page four and it does this show continued progress on the hospitality segment. Prior to 2019 will continue to see that some of the factors that.

Sure.

You know.

Need to work themselves out.

I mentioned on last call. So we have some customers have some very large parks.

Hum.

Staffing challenges just like other customers and manufacturers and some of that is limiting the amount of.

Gas that they can accommodate so that's one.

There's been less travel inbound into the U S. Now theres been more domestic travel, but how those two net out is hard to tell and then I think we've mentioned this as well.

The return to office or the lack of business travel, which seems to be picking up is all also been one of the factors that have kind of how those customers come back, but we see all three over time coming.

Coming back to pre pandemic levels, and we see that that yellow line continuing to get back to pre pandemic levels and as well too. The other thing too I think I mentioned last time is.

We've had now that the hospitality segment is opening up and people are willing to talk about.

Business opportunities and and.

Working with us as opposed to other distributors.

Thank you know any any potential sharp shortfall that exists when industry perspective, even if there is one we will more than make up with our pipeline and our ability to gain share in this segment.

We have a follow up question.

Great. Thank you Brian.

We have a follow up question from Edward Kelly. Your line is open. Please go ahead.

Hey, guys. Thanks for letting me back in.

I wanted to ask about.

Derek.

The added cost associated with that with labor, which you've talked about now I think it's 40 to 60 annually.

That's what you think will be a more.

Permanent cost how's the visibility on that I mean, obviously the anxiety out there on the Investor side is just sort of the labor front end.

The level of inflation, that's out there and the impact that it had but you've got your labor force kind of where you need it to be do you feel visibility on that that number is now good.

Thanks, Ed Good question. So yes, the we do feel like the visibility is quite good and that was really one of the things that we are taking feedback from various others last quarter where <unk>.

We're as you can imagine.

<unk> could this be a 10 million dollar issue could this be a $100 million issue to try to put some context around it and although we don't know exactly where it lands out we think that that is a very good range and I think the other thing that's.

We're continuing to gain confidence is the success, we're having in margin improvements with customers and so again, we don't know.

Of that amount depending on what land is permanent but we do expect that most if not all of that permanent incur higher levels of inflation in the current year that we will be able to offset with customer margins through things. We've already negotiated and are starting and those that will we expect to be able to progress on in 2022, So from an overall earnings power.

The business as we get through.

This next year, we don't think that it's a permanent inhibitor as opposed to something that's more.

Temporary or transitory over this next year.

And just I'm trying to bridge to sort of Opex per case in 'twenty. Two is the best way to do that versus the 19 would be to take sort of $50 million in annual labor inflation at the $40 million to $60 million, but then subtract. Some you have the savings of 130.

Like subtract some of that savings and that gets me to an.

Opex per case number versus versus 19 or are there other things that I would need to do there.

Yes, I think that's so you've got the big pieces, so you're right inflation.

As well as the normal.

Normal equation, plus the incremental inflation youll continue to have some higher cost on top of that next year as we get back to 2019 level of productivity through this first half of the year as Pietro talked about and then you're right. We do expect to drive some incremental productivity through the things that perpetual referenced along with some other initiatives that we have underway I think those are the.

The main thing.

Out of the 130, there is a little bit of that that is in kind of distribution fixed but those cost reductions were 130 was really more about fixed cost not the variable distribution, which would be drivers selectors et cetera. So.

I would attribute very little of the 130 to that as opposed to.

Other pieces that.

I just talked about.

And then just last question for you on the contract side I mean, obviously it takes time to pass through.

Higher things like higher labor costs, but at the same time the industry is in a situation today right, where it's just hard to get product.

Is that helping you at all and sort of like accelerating what would be let's call. It normal pass through.

So maybe at all separated into two so theres the normal pass through that happens automatically for food cost inflation that is pretty quick as you probably remember from prior comments I bad that can happen when contracts reset weekly to monthly ish, So pretty quick and then on the non contract again.

The product supply issues those pass throughs are happening quite quickly on the labor side.

What we are doing and have been doing.

Is actively engaging with a number of our customers to really try to discuss with them the opportunities to improve margins.

And in this labor environment, it's resulting in some very constructive discussions because it's not a different conversation or and in almost all cases not different than what they are experiencing and so we've had good success with.

Close to half of that kind of 40 ish million dollars number that we've already reached agreement on that either is in place or will be going in place over the coming months. So just for context, good progress and expect to continue through there and that's what gives us the confidence that we'll be able to mitigate most if not all of this year's incremental inflation through pricing.

Great. Thank you.

Alright, thank you.

There are no further questions at this time I would like to turn the call back to Mr. Pietro set triano for closing remarks. Please go ahead Sir.

Thank you so I'd like to close by thanking our 26000 associates, who amidst what is still a difficult environment have continued to do a phenomenal job of serving our customers and generate the results that we discuss today.

Our three pronged strategy of.

<unk> profitably growing market share by leveraging great food made easy second optimizing gross margins and third bringing a relentless focus to operational efficiency continues to show progress and that is the result of the great work by our management team and all of our associates. Thank you for joining us today and have a great week.

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

Okay.

[music].

Yes.

Q3 2021 US Foods Holding Corp Earnings Call

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