Q1 2022 US Foods Holding Corp Earnings Call

[music].

Thank you for standing by and welcome to the first quarter 2022 earnings call. At this time all participants lines are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.

Sure.

Senior director of Investor Relations. Thank you. Please go ahead Sir.

Thank you Suzanne and good morning, everyone welcome to our first quarter earnings call.

On the call today, we have Bob Koski, our executive Chair Andrew.

Andrew Yakubu cheat interim Chief Executive Officer, and Dirk Locascio, our Chief Financial Officer.

Additionally, like last quarter, Bill Hancock, our chief supply chain officer will join for Q&A session.

We will take your questions after our prepared remarks conclude.

Please provide your name your firm and limit yourself to one question. Please.

During today's call and unless otherwise stated we're comparing our first quarter results to the same period in fiscal year 2021.

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 2021 Form 10-K for a detailed discussion of these potential factors that could cause our actual results to differ materially.

From those anticipated in those statements.

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, except that we are not providing reconciliations to forward looking non-GAAP financial measures as indicators.

<unk> Darrin.

I'll now turn the call over to Bob.

Thanks, Nate stay halt and good morning to everyone.

Before we dive into the quarter and the progress on our plan I wanted to spend a few minutes on the two announcements we shared earlier this week.

We're pleased to have reached an agreement with say come head and bring it in to the proxy contest.

<unk> welcome Scott Fergusson, David Toy and Jim Barbara as New independent directors and looks forward to their insights and input as we focus on the continued execution over our long range plan.

And as we do our Chief commercial Officer, Andrew Jaco Buchi has agreed to step into the interim CEO role as the board conducts a search for a permanent successor to ph or et cetera, Onno, who left the company.

On behalf of the entire board I want to thank <unk> for his dedication and leadership to U S foods over the last 11 years and for guiding the company through the pandemic.

We will work with urgency on the search for a permanent CEO successor.

But take the time needed to find the right person.

Andrew joined U S food in 2017, and it's been integral to our efforts around driving profitable market share gains and optimizing gross margin, which are two pillars of our long range plan.

He also has worked extensively with bill and Hancock, our support on our supply chain efficiency initiatives in the third optimization pillar.

He is a proven leader and the board and I are confident the business is in great hands with Andrew at the helm.

In my new role as executive Chair I look forward to working alongside Andrew and the rest of the management team to ensure that we build on our momentum and maintain our strong execution of our strategic initiatives.

On today's call Dirk will discuss our first quarter results capital structure and macroeconomic environment before Andrew walks you through the progress, we're making on our long range plans as well as our outlook.

And it's my whole mentioned Bill Hancock will join for Q&A session.

Finally, I want to thank all of our associates for their focus and commitment to serving our customers and driving U S foods performance.

With that I'll turn it over to Dirk.

Thanks, Bob and good morning.

As we outlined a few weeks ago, we delivered strong sales and adjusted EBITDA growth in the first quarter.

Which reflects the early progress we are making on our initiatives to drive profitable growth.

Expand margins.

And improve operational efficiencies.

Both our results and progress underscore our confidence in our ability to deliver 2022, and our balance long range plan.

Our injury industry is resilient and is in the midst of a strong recovery.

The work we've done over the past few years has positioned us well to drive continued growth as we leverage our scale and innovation.

We will also continue to benefit from new talent, we have added to better serve customers and optimize cost specifically to the supply chain team.

By delivering against our plan, we have a clear opportunity to create significant value for shareholders through earnings growth and a disciplined approach to capital allocation.

Which after investing the business is focused on debt reduction return of capital to shareholders and Opportunistically pursuing tuck in M&A.

Okay.

I'll spend a few minutes on our first quarter results and capital structure, Although I won't go into as much detail as normal since we previously released our preliminary results on April 21.

I'll also speak to several macro considerations that remain a focus for this year.

I'm on slide five.

We're very pleased with the strength of our first quarter financial results Q1, adjusted EBITDA was one of our best quarters relative to 2019 since the pandemic began and demonstrates the early progress of our long range plan initiatives and our commitment to return to and then surpassed 2019 results.

Q1, net sales were $7 $8 billion, which was an increase of 24% over the prior year.

Total case volume increased 4%.

And food cost inflation was 17%.

Within volume, we had 9% independent case growth, 64% hospitality growth and 1% health care growth.

Our year over year case growth was negatively impacted roughly 400 basis points by the mid 2021 exit of the grocery retail business, we temporarily added during the pandemic.

As you would expect January volume meaningfully slow due to omicron and then we saw significant improvement in February and March.

So far during the second quarter, we've seen continued improvement in demand.

As a reference our independent case growth in recent weeks has been trending up mid single digits compared to 2019 hospitality case case growth has continued to improve as well and in recent weeks has been mid teens below 2019.

As hospitality and health care improved from a macro recovery perspective, and our expected new business is realized combined with the accelerated restaurant case growth, we expect legacy volume strength into 2019 levels later in this year.

We produced very strong gross profit dollar growth again this quarter.

Our adjusted gross profit dollars increased 24% from the prior year, which was more than the 20% increase in adjusted operating expense dollars.

We progressed in many of our long plane long range plan initiatives that did and will enable share growth increased gross margins and drive opex efficiency, which Andrew will talk more about shortly.

The progress of our initiatives as well as benefit from food cost inflation resulted in a 40% increase in adjusted EBITDA and a 40 basis point increase in adjusted EBITDA margin compared to prior year first quarter.

And finally, our adjusted diluted EPS increased to 36 cents per share.

The macro environment remains a challenge for our industry and our customers Thankfully omicron is largely in the rearview mirror and severe COVID-19 cases have declined significantly.

Omicron played out in Q1, largely as expected from both a volume and cost impacts and with summer approaching we expect demand recovery to continue.

Moving to labor the labor market is better than it was in 2021. However remains challenging we continue to hire across our network to address staffing needs, resulting from expected continued volume growth.

With labor are the primary challenge is retention, which is definitely not unique to us.

Turnover is higher than it's been historically and we've taken several actions to address this such as limiting hours worked for new hires to ease them into the job.

And retraining, our frontline supply chain managers and supervisors on effective employee management engagement practices and processes.

We're also finishing the deployment of our new selection technology in our warehouses and revising processes leveraging our continuous improvement team to make the jobs a little easier.

Retention remains a key focus for us.

Moving to productivity, we are making progress as Q1 was better than Q4, and we remain focused on getting back to 2019 levels along with increasing retention.

Food cost inflation continued in the quarter with year over year inflation of 17, 3% and sequential inflation of just under 3%.

Which is relevant to our entire industry.

Sequential inflation as similar to last quarter and lower than the two quarters before that which is a positive.

Inflation is fairly broad based across most categories and we have been successful in passing it through to customers.

The quote unquote experts don't seem to have consensus on how inflation plays out over the balance of the year hopefully the slower sequential inflation as a signal of stabilization.

Supply challenges that remain for our industry more broadly don't appear as though there'll be resolved in the near term, but rather it is expected more likely later this year or into 2023.

We haven't seen an impact on our demand at this point and are committed to helping our customers manage through this inflationary environment.

Higher fuel cost is another form of inflation facing our industry fuel is not an insignificant cost for us. However is not nearly as significant as some of the other costs we incur.

As a reference we spend approximately $125 million and diesel fuel for outbound deliveries in 2020 one.

We mitigate some of the fuel cost risk through locking in costs on a portion of our fuel which right now is about a quarter of our estimated diesel fuel needs through Q1 of 2023.

We also recover a portion of the increases through fuel surcharges to customers with.

We typically offset approximately 40% of our total fuel cost changes through customer fuel surcharges and those surcharge amounts vary based on diesel fuel costs.

This all means fuel cost is important however, likely isn't going to be the single item that makes or breaks a year and any impact is likely temporary as fuel costs normalize overtime.

The macro environment has its challenges however, our business in our industry have strong recovery tailwind.

We are pleased with the strength of our Q1 results and we expect that our continued progress on our strategic initiatives combined with a macro recovery will lead to further improvement in Q2, EBITDA and a strong fiscal year 2022.

We are reaffirming our fiscal 2022 earnings guidance that we provided in February .

I talked about earnings and macro now I'll spend a minute or two on slide six discussing our capital structure.

We reduced our net debt dollars in leverage compared to both first quarter and fourth quarters of 'twenty 'twenty. One our net leverage was four three times at the end of the first quarter, which was a 3.2 turn reduction from a year ago and a 0.3 turn reduction from the end of 2021.

Leverage reduction as one of the four components, we outlined as part of our capital strategy I noted earlier.

We continue to make progress toward our leverage goal of two and a half to three times net leverage and are committed to achieving it.

In summary, I'm pleased with the progress in Q1 and optimistic about our balanced long range plan, which Andrew will discuss next Andrew over to you. Thanks.

Thanks, Derek and it's great to be here with everyone. This morning, I'm truly honored to step into the interim CEO role and I look forward to working closely with Bob The management team and our associates to continue moving our business forward and to build on the success of our first quarter.

For the past five years I've led the company's merchandising operations and more recently, our broader commercial team, which has allowed me to develop an in depth knowledge of our customers and of our operations.

And as Bob mentioned I focused heavily during that time on driving market share and optimizing gross margins and have worked very closely with bill Hancock and the entire supply chain team throughout.

This is giving me a great perspective on our team on our capabilities and our opportunities going forward I have to say I could not be more excited about our position in the market and our ability to capitalize on what lies ahead.

I focus as interim CEO will be ensuring that we relentlessly focus on executing the plan.

And continuing to build our momentum and not Miss a beat in the process.

With that let me walk you through the progress, we're making to drive profitable growth expand margins and improve our operational efficiencies.

I'm now on page eight which is a recall slide from our February presentation and provides an overview of the long range plan that we presented our.

Our plan, which we expect will generate $1 $7 billion of adjusted EBITDA. In 2024 is balanced across all three pillars first profitably growing market share second optimizing gross profit and third improving operational efficiency.

This plan builds on our solid track record, leading up to COVID-19, especially in market share and gross margins and brings additional focus to improving operational efficiency. Thanks to a number of significant changes we made coming out of Covid.

First we brought in considerable new talent the head of supply chain head of I T and the head of our newly created program office are all new and all three are outstanding additions to our team.

Inside supply chain three quarters of the leadership team is new and brings considerable experience from the outside.

Second we introduced a new operating model in April of 2021 with excellent teams, whose sole mandate is to drive standardization and bring additional focus the underperforming markets.

These excellent teams are staffed with our best talent and have been an integral part of our success.

And third late last year, we introduced customer prioritization or touring as a way to provide.

A differentiated service to our best customers, while simultaneously removing waste and inefficiency in our operation.

This approach to customer hearing has been proven in other industries and we are beginning to see the benefits of it.

Taken together these three changes represent considerable differences compared to the way we operated in 2018 and 2019 and the Undergird our conviction around the long range plan.

I'm now moving to page nine initiatives to grow market share.

Each of pages nine through 11 is set up in the same way with a recall on our long range plan goals for this pillar on the top left.

Q1 progress on the bottom left and the key initiatives over the three years on the right.

Recall that our goal is to grow one five times the market with restaurants and this pillar is expected to generate.

Approximately $290 million of incremental EBITDA over the three year plan progress.

Progress in the first quarter was good as illustrated by market share gains in key customer types and a 9% increase in independent case volume.

I will now highlight a few of the key initiatives that will continue to drive the three year plan for market share.

First we will drive market share gains by creating a more differentiated service and fresh experience, which our research tells us is a meaningful opportunity.

We are using our customer prioritization framework I mentioned earlier to further improve service and to remove waste via our routing initiative.

On fresh and in particular produce we spent all of 2021 enhancing our quality control processes and are now turning our attention to activating this great quality promise with our customers.

Early results in our test markets had been very positive.

On the larger customer side of the house our pipeline. So far is close to the new business. We brought on over the last two years and these gains are being driven in part by our service model and our technology and.

An example of this technology is our recently introduced vitals.

Which helps hospitals manage their menus and their overall cost and has allowed them to gain a 5% improvement in their operating budget in many instances.

In addition, our Omnichannel strategy, we will continue to fuel market share gains in the coming years and we are on track to open four to news.

Four to six new chef stores this year.

Now turning to page 10 for a review of our recent results and future initiatives driving our second pillar optimizing gross margins.

Recall that this pillar is expected to contribute approximately $325 million of EBITDA growth over the long range plan and as you can see on the bottom left we've made good progress on all elements of the plan, including pricing exclusive brand penetration freight and passing on inflation.

We continue to have good success resetting terms with select less profitable large customers, which is in part the result of a more attractive industry structure than historically.

Moreover, new customers are coming in at margins that are much closer to independent restaurants, and lastly, we see continued opportunity to increase private brand penetration.

On the cost of goods, we are optimizing our vendor relationships to ensure our terms are in line with our scale on the freight side. In addition to the progress we've made optimizing vendor allowances and carriers, which is contributing to our first quarter results.

We are taking advantage of the opportunity to use our scale to reap greater benefits from backhaul opportunities.

Freight income per case was above 2019 in Q1, which is a first since COVID-19 began.

Let's move now to page 11 to cover some highlights on improving operational efficiency.

Recall that this pillar is expected to contribute approximately $235 million of EBITDA growth over the long range plan.

In the first quarter, we made progress as we gained operating leverage by increasing opex less than great profit gross profit increased our selective productivity from Q4 levels and implemented our warehouses selection technology at additional facilities and are on track to be complete by early Q3.

We are currently engaged in phase one of our routing optimization initiative customer order patterns and mix have changed significantly throughout the recovery and we are in the process of removing wasted miles from our rents while maintaining on time delivery as indicated by industry, leading net promoter scores.

While we are early in the process, our leading markets are achieving a nearly 10% improvement in cases per mile when compared to the same period in 2019.

And later this year, we will begin re mapping the re mapping component of.

Phase, one which will ensure that our customers are serviced by the distribution center that can serve them most efficiently.

Later this year, we will begin phase two and that work will replace our current routing platform with dynamic routing technology and will further drive out wasted miles and improve the customer experience.

Our continuous improvement work is focused on aggressively standardizing process, including how we plan for our work how we execute our work and how we create the right environment for our associates and leaders to drive safety service and cost improvements.

As we continue to navigate a competitive labor environment, we are making progress on our network plan that includes analyzing brownfield and Greenfield automated solutions.

We expect to begin testing brownfield prototypes later this year and will continue to pursue more comprehensive greenfield solutions in parallel with that work.

In conclusions inclusion our results are promising affirmation of our strong early progress in implementing our long range plan.

And I want to thank all of our associates for their continued focus and commitment to our business.

Despite continuing challenges impacting our industry, we delivered one of our strongest quarters since the pandemic began a testament to strong execution by our entire team I'm excited to lead this great company. During this interim period and I am confident we have a great plan and a great future ahead.

Operator, please open up the line for questions.

As a reminder to ask a question. Please press star one on your telephone keypad, Andrew Jack a question. Please press the pound key.

Our first question comes from the line of Lauren Silberman from Credit Suisse.

Your line is now open.

Thank you so much I appreciate it I wanted to ask about how you see the opportunities narrow the margin gap to your closest competitor so with the initiatives that you've laid out across gross margin and Opex I guess, one how much of that margin gap do you see as the addressable and two what do you see as low hanging fruit are more near term versus longer term.

Sure Lauren this is Dirk good question. So we are we're absolutely focused on understanding our competitors their performance and benchmark were actively working as we've talked about to further expand our margins and I think the key drivers of that are the things that Andrew has talked about and we've talked about our long range plan, whether it's the cost of goods improvement.

The logistics improvement the supply.

Supply chain efficiency items. We've noted it's really the key levers there that we've talked about and we're focused on that balance of expanding the margins and maximizing our EBITDA dollars, we think that especially during this time when the industry is in the state of recovery that that balance of expanding margins and profitably grow share is critically important.

Overall, our plan may or may not look exactly like the competitor's large industry still collective small share for both of us and a lot of room to run and we would expect to significantly grow EBITDA over this period creates significant shareholder value with a lot of it coming from improved margins.

Okay, and I just want to follow up on inflation you guys are it seems like having a lot of success pushing through that inflation. What are you watching in the consumer environment and more broadly to see whether you might decide to delay pushing any of the inflation that you're seeing.

Thanks, Lauren it's Andrew Thanks for the question. Yeah. We are we are paying very close attention to the impact of inflation.

In our world, we're seeing it everywhere not just not just obviously in our industry.

So far we are not seeing any meaningful impact on demand.

We also are I think being buoyed by what continues to be a post COVID-19 sort of recovery and the pent up demand that comes with that but we are expecting it to continue and we are continuing to monitor it very closely. We are also taking pretty aggressive steps to manage and help our customers that is managed through this difficult time our rock.

And our food fanatic chefs have spent a great deal of time with our customers, helping them understand how to rebuild their menus to get away from a heavily inflation impacted categories rejigging their recipes and the process and also looking at opportunities to engineer their menus to pass along that inflation to the customers and those that had a significant positive impact on our.

<unk>.

Great. Thank you so much.

Okay.

Our next question comes from the line of Edward Kelly from Wells Fargo.

Hi, good morning, guys.

Hi, good morning.

Good morning, Bob I wanted to ask you a question.

Just to start.

Okay.

Change looks to be coming right, because you're embarking on a new CEO search just curious what what's the board looking for it.

In an ideal candidate and what's important in that decision and then things look to be in capable hands with Andrew at the moment does anything change in terms of implementation of the strategy and it's out there.

Yeah. Thanks, Dan So I'll answer your questions in reverse order I would say first off.

One of the reasons the board has so much confidence in Andrew taking over as he was integral in the building of the long range plan and so our view right. Now is we just want to execute against the plan that's in place.

The strategy is sound and the plan the plan metrics are sound and the first quarter validates that we're on the right track. So in the short term I wouldn't look for anything other than Andrew focusing on execution of the strategy and the plan that's in place.

The second question about about the the ideal candidate.

I'll tell you that we've already formed a search committee.

Search committee has already engaged and it's a top priority of the board enough mind to find the next the next good leader for this company.

You know you would you you could write down the specs as easily as I could the person needs to have some industry experience they need to have been in the supply chain business.

And the experience of leadership and C. Suite experience is an important element that will look for but at this moment that it's it's a it's an open palette in terms of the person that will step in.

We have some very very experienced directors on the search committee and we're excited to bring in the next great leader of this company.

Great and then just one quick follow up for Dirk.

Book your peers raised guidance this quarter.

Albeit they have one quarter to go.

You know you reiterated despite I think what was.

Probably a little bit better than expected Q1 results.

Any thoughts like has anything changed about your expectation for the remainder of the year.

Thanks, Ed So as I said earlier pleased with Q1 and the progress in our expectation still is to be at the high end of the range assuming another whether we don't have another arm of crown like wave really for US. It is it's what you said it's early in the year. We're one quarter in also it's relative to other quarters.

Relatively lower earning quarter there are still some macro uncertainties and we have three quarters others have for one quarter. So it's a there is nothing to be read into there on our confidence we remain very confident and we will adjust as appropriate going forward, but bullish on the momentum.

Thank you.

Yeah.

Our next question comes from the line of Jake Bartlett from Cowen Securities Your.

Your line is now open.

Great. Thanks for taking the question.

About a little more detail if you could about just the cost buckets within the operating expense I think going back to the 2018 Investor Day, you mentioned that 15% was administrated <unk> 55 per cent with supply chain, 30% selling I Wonder if you can just give us an updated.

Buck.

Buckets now and then also any other detail within the supply chain of how much is labor or any other detail just as we kind of assess your ability to cut some of those costs.

Sure a J good question. So our overall percentage isn't all that different than it was a few years ago. So those are still a good could proxy to use and I think the other piece that I would add within supply chain that we.

We've talked about in the past is we do spend more on deliberating with your warehouse. So the lion's share of those costs are people costs and then it is delivery is bigger I think the only other thing I'd go back to us in supply chain. If you look at historically I've talked earlier about using 2021 as an example of how much we spend on fuel I think that's.

It's just important because that is a piece that is not labor that helps you tease that part out there and that's the part that I think it's important to understand that it's it's meaningful but it's not near as significant as other expense budget buckets, and you know it would likely normalize overtime.

Got it and just a quick follow up.

You gave us the expected savings over the next few years in.

Gross margins and operating efficiencies, which would you say come first just just any any clarity on kind of what's the most low hanging fruit is it on the.

On the gross margin side or on the operating expense.

Efficiencies that you're targeting.

Yeah, Jake Thanks, its Andrew.

Thanks for the question look we've built this plan quite intentionally to be balanced across all three pillars and I and what I think is most encouraging about our first quarter is that we saw really strong improvement across all three and our plan is to continue to drive all three in an equal so I would not say there was a first among equals.

On this on this list and we are working very closely together to ensure that that balance continues.

Great. Thank you very much.

The next question comes from the line of Alex Slagle from Jefferies.

Your line is now open.

Thank you good morning, I just wanted to ask about the resiliency of your business and sort of.

If you could frame the landscape for independent restaurants, and your exposure to this category in the event of a material slowdown in consumer spending just curious how things have changed since past big downturns in terms of capabilities. These operators had leveraging.

You know what what U S foods offers.

Now and then the position of your business, that's an even more important and and demand supplier just given the broader issues getting product and reliable service and yeah to the extent you think that share gain there could could help offset the potential slowdown in spending.

Yeah, I think that to answer the last part of your question first I think that is a big opportunity regardless of the environment that we're in as Derek mentioned, it's a it's a large market we play in and quite fragmented and we continue to see opportunity to grow market share and we'll pursue that as far as the resiliency goes.

We've seen some data from.

From Technomic and others that show that.

Consumer spending even during downturn tends to stay quite consistent what you see instead is a change in the mix of their spending behavior that food out of home.

Those stick stays at a at a relatively.

Consistent level.

The good news about our business is we've got such a diversification across all segments in our in our industry and that diversification I think puts us in a very good position to manage through if there is a change in that those demand behaviors. The only thing I would say is that Covid has taught us a lot about about moving nimbly into where the market is moving and we I think are very very good.

Well positioned to take advantage of that should we see a slowdown.

Got it thank you.

Next question comes from the line of Nicole Miller from Piper Sandler.

Your line is now open.

Thank you so much good morning.

A couple of quick ones.

So theres been some hires that you mentioned and that was helpful to review that and obviously you know our new CEO , Ken can send some tone and tenor but that being said can you just talk about like where everybody sits today, how they interact day today, you know as everybody together under the headquarter facility building how is that coming together.

Yeah.

Yeah. Thanks, Nicole for the question. So so we are in the process of returning to work in a sort of hybrid fashion.

So physically we are together on a regular basis throughout the month.

But the team is in terms of the coherence in the sort.

Sort of.

Our work to keep them working together attitude of the organization I think we've seen a real step up with the new additions.

Had as I mentioned not only.

Really I think strong improvements to our I T. With the addition of John Thompson as well as our Chief supply chain Officer, Bill Hancock, and and then the program off as I mentioned, all three have made I think a very meaningful impact not only on their functions, but also on our coherent and cohesiveness as a team I also mentioned.

In my remarks that Bill has made very significant supply chain additions. He has an extensive network from his time in retail and in our tire distribution that he's there.

Incredibly effectively into and then.

Every single one of the higher that he has made has meaningfully improved.

Our capabilities in those areas. So we're very very excited about both the team and its ability to move forward and Nicole This is Bob I'll just add.

You've seen that we added two supply chain deeply rooted supply chain skills to our board and Jim Barber and Quintin Roche.

Both of them bring extensive skills extensive experience and an extensive rolodex and so we're excited to have that additional capability at the board level to to enhance our bill's efforts around the supply chain.

Thank you for that maybe.

Maybe switching gears to capital deployment. This is an excellent plan at least on paper at the very least we can put all the pieces together right and thinking specifically about capital deployment and the deleveraging effect of the plan, but at what pace do you start to think about share repurchase and dividend.

With a permanent.

Permanent CEO or after phase one two or three how are you thinking about that.

Sure. Thank you. Good question. So as you noted we have four very clearly defined capital priorities that I talked about earlier and one of them is share repurchase. So our near term is really focused on investing in the business for growth and delevering, making very good progress and as I talked about before we expect to reach that range of two and a half to three times leverage.

Next year. So what are we will be doing over the course of this year is doing the work to get ready and evaluate the different options for sure.

Return of capital to shareholders and would expect to talk further about that later this year and into early next year. So excited about the opportunity we have strong growing cash flow in our business that allows us to really deploy that capital in different ways, including back to shareholders.

And then just a final one this is more of a curiosity on the cash and carry business. What trends are you seeing there I'm trying to think through.

Does that business go up because of recession, you know is there any signal with that business that piece of business.

Yeah. Thanks, Nicole for the question, we certainly saw a sizable bump in their business during the early and mid stages of Covid.

And that was a combination of factors, obviously driving that it's a very.

Well priced very.

Cost effective option for for many of our customers and I think what Youll see.

In the event of a slowdown is that that becomes a more and more viable option for our customer base and so we expect it to be very resilient in whatever macro environment, we're playing in.

Thank you very much.

Next question comes from the line of Jeffrey Bernstein from Barclays.

Yes.

Great. Thank you very much.

Two questions one just on the market.

The market share opportunity, which I think is the.

The first bucket of the same.

Seemingly the funnel that helps with the other two from an EBITDA expansion opportunity.

Just wondering if you were to flash forward three years it would seem like the current period as we move through Covid would offer significant opportunity from a market share perspective. So I'm just wondering as you look at your business, how you'd prioritize the buckets in terms of picking up new accounts further penetrating existing accounts.

Maybe M&A of smaller competitors are in fact closure of those competitors like how would you prioritize the biggest opportunities to drive that first bucket in terms of market share growth.

Yeah, Jeff It's Andrew Thanks for the question.

Short answer is we actually want wanted to be looking at both penetrating existing customers as well as driving new.

When we are in balance across those two priorities, we see very very strong growth and market share performance. Obviously, the more we can build share of wallet of our existing customers that are very those are very profitable cases, given that we're not stopping the truck.

Anymore and it's marginal.

Cost to deliver is very very low, but we also need to be always on the lookout for new opportunities to grow our business through new and one of the things I think it was most promising about our Q1 result is that we saw both of those in balance.

In Q1.

Got you and in terms of the smaller competitive set I mean, it seems like we're hearing about all the challenges of the past year or so of the the biggest players I'm just wondering the ability for the small and mid sized players to survive and thrive through this period. It would seem like they would be under significant pressure I'm. Just wondering if that's something you can see whether there's any industry data that would demonstrate that.

Thanks for the question no. We don't really have a clear sense of that obviously, Jeff. It's we our share data tells us how we're doing relative to the market doesn't give us the specifics around where it's coming from but we certainly have seen a.

A pretty strong balance and where we believe that growth is coming from from both smaller players, but also from our larger competitors. It's been it's been very very balanced.

I think the other thing Joe what we see as our large customers. It really has raised over these last couple of years the importance of <unk>.

Scaled solid reliable distribution partner and that's really one of the things combined with our service model and technology that has really opened the door to a lot of this growth on the larger national customers and even on the independents the resilience the ability to manage through a far less than ideal.

Vendor supply situation with independents, Andrew talked about Q1 that we gained share with our target customer types or early read on April as with independents are we had a very good share growth again, so I think as Andrew talked about in his prepared comments just.

Good very good momentum building on that.

Got it and just lastly, you gave good color from a commodity inflation standpoint, and an outlook. There I'm just wondering if I can get your thoughts from a labor standpoint, I think you made mention of it.

The environment, improving I'm, just wondering whether there's any quantification in terms of.

Shortages or maybe basket inflation that you might be seeing or.

Turnover hiring any kind of metrics you can provide to demonstrate that maybe.

Maybe things have topped out and you're starting to see some improvement. Thank you.

Yeah. Jeffrey this is bill I. Appreciate the question you know in our industry the best way to offset the labor challenges is to get more productive and we've done that from the fourth quarter into the first and we're continuing to see consistent month over month improvement on that turnover is the biggest headwind I think any company has right now in terms of driving additional productivity.

And that's why you know like Andrew mentioned earlier RCI efforts continuous improvement are focused on how we onboard associates, how we schedule that team and the technology that the interface with we finished a very large proof of delivery device deployment for our drivers. It helps onboarding faster helps them be more productive and then inside.

The warehouse by mid point. This year, we will have fully deployed our new selection technology, both software and hardware that both helps onboard faster and helps that team be more productive we are seeing stabilization in the labor markets. The one call out I would have there is class a drivers that challenge is not going away for anyone anytime soon which is why we are.

<unk> to invest into training our own building our own pipeline, we are offering new jobs to folks that don't have a class eight today, we'll put them through a school, we'll make sure they get full training and then offer them that full time job right. After that so they can join the team.

Great. Thank you best of luck.

Next question comes from the line of Brian <unk> from Deutsche Bank.

Hey, Thank you I just a question on the vendor management presentation talks about optimizing terms in line with your purchasing scale I'm. Just wondering if you could build on that a little bit it kind of makes it sounds like your current terms with vendors are perhaps not in line with where they should be today, but I'm not sure if that's right or what the magnitude is so to speak.

The magnitude of that opportunity and maybe what the timeline is.

Start to realize the benefits.

Yeah, Thanks, Bryan it's Andrew.

So we see it really more as as a hygiene play to continue to make sure that we're examining our cost of goods with all of the supply disruptions in the demand volatility that we've seen we have a very different looking mix of products than we have in the past, we think theres an opportunity to make sure that we are.

Really focused around our cost of goods in those in those new categories and segments to make sure that we are consistent with where we believe we should be but theres also a bigger opportunity there, which is defined real win win opportunities for both ourselves and our supplier community. So it's really more in the spirit of partnership that we entered these conversations.

To find ways to make ourselves a lower cost to serve and in return.

Achieve a much better cost of goods.

Okay. Thanks, and just a follow up on another initiative the routing improvements you know it looks like it expanded from a pilot to enterprise wide.

Implementation, just give a little bit of history. There when do those pilots start what did you see that encourage you to move forward enterprise wide and then just a sense of the magnitude of that opportunity in the timeline until when you fill it gets fully deployed and youre seeing the full benefits.

Yeah like Andrew mentioned earlier this is built by the way it is.

Kind of a two phase project phase one is looking at our current routing system and what waste exists as we've taken new share and customer patterns have changed throughout COVID-19, it's created opportunities where theres waste inside of our routing. So that first phase that we're in right. Now is focused on ripping out those wasted miles, our leading markets are seeing 10% or greater than <unk>.

<unk> on cases per mile versus that same time period in 2019, and we think there's additional upside on top of that so that work is ongoing right now delivering results to the bottom line that re mapping effort that kicks off here in just a couple of months, we will have that fully deployed by the close of this year and that's an opportunity to make.

Sure that as we brought on those new customers, they're mapped to the most efficient D. C. In terms of mileage and service levels, both our internal and NPS data validates that the service levels, we're providing as we go through this are as good if not better than they were in 2019.

Thank you.

Next question comes from the line of Peter solely from V. P. I G.

Great. Thanks.

To come back to the conversation around the hospitality business I guess at least in the first quarter I think that's still down in terms of case volumes.

15% to 20% versus pre pandemic.

Can you give us a sense on how many of your customers pre pandemic. Maybe every ordered is this just a function of this is a function of lost customers are just smaller basket sizes from the customers that are ordering just trying to understand how that.

Segment recovers back to pre pandemic levels. Thanks.

Good morning, Peter I think that takes you right down in the mid teens and have seen continued improvement there probably remember that this business was down 70, 80% right. After COVID-19. So it's taken a little longer but seeing steady.

Leisure had returned a little sooner I think the encouraging thing is seeing business travel return a number of the airlines cruise lines et cetera, all had comments on both leisure and business that were positive.

So we feel good about that trajectory I think that we're not seeing so much fewer customers as opposed to as customers. A few things as you have conferences and things like that that haven't fully return from a business perspective.

As you'll have operators that are kind of working to get their staffing levels to the right place. So they can open all of their dining venues and expand hours et cetera. So I would expect that to continue to improve and at this point. It appears as though the demand remains quite robust and the improvements to continue likely from a macro perspective and then.

Our.

Sales team continues to focus on Onboarding, new customers and that's really across each of our customer types. So we're bullish on the continued recovery for hospitality.

Okay.

Great and then just on the private label mix can you just provide an update on where you are today and are you seeing any more shift as your restaurant partners, maybe trying to avoid some of the higher inflation or they are they considering more private label brands or whats the dynamic going on there. Thank you.

Yeah, Thanks, Peter it's Andrew.

We see our private label mix is.

Roughly where we were.

In 2019, we've seen a nice recovery back to that we've had obviously significant supply issues. During the pandemic that resulted in order to ensure we were getting product in us.

Consolidating some of our private label offering we are seeing that coming back.

Very quickly and we are absolutely seeing the trend that you've anticipated which is.

As a result of inflation there is even greater value in our in our private label brands than there was before which is seeing a really strong.

Move into those brands. The other factor that are an important contributor to that is it because supply has been so difficult.

Throughout the pandemic many of our customers are much more willing to try alternatives than they were before and so we are seeing that as a real enabler of those conversions.

Thank you very much.

Next question.

Comes from the line of John <unk> from Guggenheim Partners.

So let me start maybe for both Andrew and Bill.

How far can you push the envelope on existing warehouse automation right for me.

Cost and disruption standpoint.

And then secondly, it's much easier right with Greenfield to put it in in the first place.

What do you think the network looks like.

I don't know three to five years from now.

Maybe maybe a few fewer but you also want to stay close to the to your customers. So how does the network evolves.

Yeah. John This is bill great question, when we think about automation and that really is a dual path both brownfield and Greenfield Andrew mentioned earlier, you know our work on the brownfield side is coming first we see the biggest opportunity to retrofit existing facilities versus Greenfield and that's why we're bringing our first brownfield testing online.

By the close of this year and we look forward to sharing some additional results with that later on on the Greenfield side that work is happening in parallel with our network plant. We've identified those focused markets, where we feel like we're going to be capacity constrained in the years to come and creates really good opportunity for us to invest in a greenfield site and if we're going to invest in a greenfield site we want.

To fully explore what a automated solution looks like.

Okay, and then secondly, you talked about fresh leadership.

Maybe some sense of fresh market share versus non fresh right and I know one of the challenges has been.

Perception wise right taking share from specialty operators.

This is not just us it's all the broad liners on product quality.

So talking about getting over that hurdle and where your share is.

How fast that business can grow.

Yeah. Thanks, John .

You've hit on what I think is a really big opportunity for us and as I mentioned in my opening remarks, one of the things we took the better part of last year to focus on was just getting our produce quality consistent day in and day out we have put in a quite significant process as well as technology.

Enablement.

I think has allowed us to be as good as anyone out there and we have now started to stand behind that to a customer activation pilot, we have going in a couple of our markets and that is showing really really strong results. We have we have slightly lower share in produce but actually slightly higher share in center of plate, So theres a big opportunity.

<unk> grow that produce business, but both will benefit from from that relentless focus on quality.

Customers, if they can count on getting high quality product day in and day out.

Really really.

It is a huge source of loyalty and a great way to onboard new business and so we're very feeling very good about the progress we've made on that front.

Okay. Thank you.

The next question comes from the line of Kelly Bania from BMO capital.

Hi, good morning, Thanks for taking our question.

Wanted to just maybe ask about the.

The long range plan.

This was outlined in February and it sounds like you're happy with the early progress and are backing.

Today.

But with a lot of.

Leadership changes I'm just wondering if you can comment should investors take comfort that this plan is the best route forward for the company is.

As their broad support for that long range plan does it need to be more aggressive or it's just the leadership team to execute that at the highest level.

Anything you can comment there.

Yeah.

Sure Kelly, it's Bob.

I'll try to answer that question the long range plan.

<unk> took almost a year to come together, we are we waiting until we got outside the impacts of Covid, where we felt comfortable to two to articulate it but it was a very much of an iterative bottoms up based plan and and so consequently, it's it's impact and it's it's it's rooted all the way down through the <unk>.

Organization, having said that we're also going to remain very flexible to adjust that as the markets change as the as the as the dynamics change you know as Dirk describe the fuel issues that exist today they weren't on the radar when we were building the plant we've adjusted and so we'll continue.

To adjust to the realities of the market and the realities of the environment and we're comfortable that the way. It's built it gives us the flexibility to adapt as well as now you know we have some new voices in the boardroom that can have an influence and an impact on and really add value to the formation and the execution of the plan.

So so we're we're comfortable that we will remain very agile as as time unfolds, but we believe the three fundamental pillars of the plan are exactly the right ones to grow this business and create shareholder value.

Great.

And maybe just to follow up the new operating model.

It sounds like that's been in place for.

For a year now.

Just can you help us understand.

How that's been working any examples.

Tweaks along the way as you have gotten feedback on how that's working and maybe just bigger picture, how does that new operating model compared to the industry.

If there is any industry standard or no arm.

Yeah, Kelly Thanks for the question.

I guess I'd answer that in a couple of ways. The first really the core to two this adjustment that we made in implementing the new model was was to create these excellence organizations on both the commercial.

Team as well as on bills.

Hi chain team and they are seasoned pros, mostly from the field, who really understand the field and how it operates and what they are allowing us to do in a way that we've not been able to do anywhere near as successfully before is that they identify the document.

And then they deploy best practices from around the country across the country. So a really good example of that it's been a big part of why we've seen such strong market share growth is something we call. The recipe, which is our focused attention around where growth is in the market and allowing us to to direct ourselves.

Our focus into the menu types that are growing in their area and go after those with relentless execution.

Another. Good example, bill you may want to talk about is around some of the work we did on the supply chain side, Yeah. Kelly when you think about this new operating model you pull that expertise from the field you identify what market in the field is best in class at a specific function you've tried to replicate that for the organization are two quick examples one being our.

Ortman work, we identified our market, that's most efficient with their assortment and that ultimately lead to driving a 15% reduction in skus across the network much more efficient on the supply chain side, we reduce spoilage, we've reduced that redundancy I'll makes it easier to execute the business and then flipping over to the routing side that routing initiative was built by these <unk>.

<unk> teams, we identified the market that best in class inside of our network and we've replicated that behavior to get that 10% improvement we addressed.

Our next question comes from the line of Mark Carden from UBS.

Good morning, Thanks, a lot for taking my questions. So it sounds like there's been minimal demand destruction to date with inflation do you guys think this is more due to consumers simply wanting to get out more now the code restrictions have softened.

Or is it still more of a factor of pent up demand from restaurants, just not having enough labor to operate if desired capacities.

It's Andrew Thanks for the question Mark No I think it's I think it's more the former than the latter I think what we're seeing is a.

A strong desire from consumers to get back to normal on in many aspects of their life and dining out is a big part of that.

Great and then as a follow up how does the current environment impacting demand for some of your specialized consulting services could these be materially accretive to margins or is the bigger benefit just coming from customer loyalty.

It's both it's probably more on the customer loyalty side, we have.

Done I think.

Credible work over the course of the pandemic.

Both identifying sort of major.

The challenges that our operators are facing and then quickly deploying.

And resources against those.

The examples abound, whether it goes kitchens, whether it's navigating the cares act.

And then most recently the tools I mentioned around managing inflation all of those things I have no hesitation, saying is our industry, leading both in terms of their their.

Value, but also in terms of how quickly we've been able to get them up and running it's a big part of I think what our advantages in the market and it's something we're going to continue to leverage.

Great. Thanks, so much and good luck.

Thank you.

Ladies and gentlemen, we still have time for two more questions.

The next question comes from the line of John Glass from Morgan Stanley .

Thanks very much my question goes back to comments a couple of a couple of questions.

Questions ago about our operating performance and best practices is there a big operating performance difference among regions are amongst sites in other words. When you look at the system are there are there regions that are lower and therefore, it can be brought up to the system average and maybe inside of that can you just talk about SGA and their margins.

Are they where are they relative to when you purchased them and is that opportunity still.

Sure. Thanks, John .

I'll touch quickly on from a commercial standpoint.

We've seen.

It's not so much systematic differences, but just opportunities to get better.

As in any large group theres going to be a parade of distribution and that's what we see in our in our markets. So the opportunity really is to take those strong performers learn what theyre doing differently and deploy those to.

To the to the markets that are that are not performing as strongly.

Yeah.

Okay.

Yeah, Hey, John Good morning on that question, So Vas, Jay or food group. So their EBITDA margins were a little bit lower than the broadline. When we first bought them that business I would say that's performing well in light of the current environment. So from the north and northwest and West has been a little slower to recovery, but we expect that to.

Continue to recover and in those markets food group has been predominantly number one or number two in share and we expect to build upon that as we go ahead I think the other thing is we've talked a lot about our integration from a system perspective as Don we've completed our last facility here in the first quarter, that's going very well.

Synergies are well on track for the $65 million that we talked about we achieved we talked about more than $40 million last year. So.

All in pleased with how that progress is going on that are key strategic assets and just as the team continues to work there through the macro recovery plus really driving share gains. We think that's going to continue to be an increased value driver for us.

Thank you for that.

Where are you on this our pricing tool implementation. It sounded like there was maybe some activity based pricing such that you could charge customers differently, depending on how much labor and trucking is required where are you rolling that out and is that the right way to think about this this pricing tool.

Thanks, John So we are on track for deployment.

Starting later this year and into early next and we're feeling very good about about the capabilities that will provide us with.

Okay. Thank you.

The next question comes from the line of Andrew Wolf from C. L. King.

Alright, thank you.

Can you provide some more color around the better pricing and terms. He spoke about earlier in the call I think you said with existing.

Large customers, new large customers presume, that's chains, where maybe others.

Why is this happening now and you know how durable do you think the soon.

Sure. Good morning. This is Dirk I'll take that one so it is so.

That comment is geared.

Sort of.

More to some of the larger customers and as we've talked about really for the last number of quarters. So it's not really a new specifically, it's really making sure that some number of those customers that tend to be at the lower end of the profitability that we're aligning their margins with the current operating environment and so it's working closely with those customers and.

And a number of cases it can be increases in what we charge them, but there's also it's a pretty complete work with them. It can be things like adjusting a delivery frequency. It can be having them are lying on more of our own private brand, which saves them money. So things like that that all about the dynamics, we think it is pretty durable.

Sort of the demand and capacity in the industry is very different than it was three or four years ago and in each case really what it's doing is I can think of a few larger customers where this environment has built some of the best relationships collaboratively between the two teams that we've had historically and it's sort of geared around success.

For both so think it's durable and expect to continue to work with customers on that.

Great I just have a slight follow up different question, though.

If I did my math right. It looks like mix contributed maybe a couple of percent or 3% to sales.

To check that.

And you know it's interesting in an inflationary environment, there's a contribution from mix I presume, it's well I actually want to ask you why it is but I think there's some sense of the you know the restaurants are getting more confident in adding more fancy items, but.

Could you give us some color on that and also like you know how long that could.

Normally an inflationary environment, you see Mexico. The other one so it's just kind of a confounding trend.

Yeah. So this is similar to what we've seen in the last few quarters, you're right. It is about 3% and a lot of that has to do with just our independent case growth as you continue to see that outpaced the business and the success, we've had and that's a place where it shows up as a proof point that it is it is real and we are growing faster than the market on that Andrew commented earlier.

And what either one of his answers or our prepared comment that and we really haven't seen a systemic trade downs and there yeah, we see demand remain robust and so.

Overall, I feel good about the demand environment and.

Yeah, that's really what's driving a lot of the mixed benefit.

Okay.

Got it thank you.

There are no questions at this time and now turning to call back to Bob Koski.

Thank you operator, so so let me just quickly summarize thank you for your interest and your questions. This morning.

I would summarize on a couple of points. The first is we're pleased with the quarter that we just announced.

But much more importantly, where we're excited about the opportunity to continue to drive our long range plan. We believe our strategy is correct and this quarter just begins to validate that our actions are going to deliver a.

Shareholder creation of shareholder value and that's really what we're focused on as we move forward. So.

A large thanks to my colleagues in U S food for their great work and thank you again for your time this morning.

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

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