Q2 2022 US Foods Holding Corp Earnings Call
To continue the momentum coming out of our first quarter and to deliver on our long range plan, which we introduced in February .
Today I am pleased to report that U S foods continues to make progress against our plan and delivered strong earnings growth in the second quarter, let's.
Let's turn to page three where you will find three key takeaways from the quarter.
Our Q2 results demonstrate good progress on executing our long range plan I'd like to thank our hard working associates across the country for being a critical part of this progress and for continuing to serve our customers. Despite the challenges facing our industry.
Second U S foods continued its market share momentum from Q1 again delivering market share gains in key customer types and third our results further reinforce our confidence to deliver strong results. Despite the challenging macro environment affecting our industry, while U S foods and the industry as a whole continued to face headwinds related to inflation.
And in food cost and fuel as well as a challenging labor market, we remain well positioned to win in this marketplace.
On page four you will see key highlights from the second quarter <unk> net sales for the quarter grew at 15% year over year and we saw continued gross profit per case strength driven in large part by progress on our long range plan initiatives that we will discuss momentarily.
As a result, adjusted EBITDA grew 11% on the quarter.
On supply chain optimization, we continue to make significant strides as a result of the investments we're making in the business. We continued the implementation of new warehouse selection technology in our facilities and we are on track to complete this in September <unk>.
Additionally, freight income per case continues to gain momentum as our inbound logistics initiatives progress.
Lastly, we are driving month over month improvement in our service levels to customers, while operating in a very challenging and fairly stagnant vendor supply environment.
Our customer service levels, although still just shy at pre pandemic levels have improved nearly 120 basis points from the start of the year.
Moving on we continue to invest in enhancing the customer experience U S. Foods has led the industry for over 10 years in this area and digital is paramount to our success.
We are launching our next generation digital tool, which we call Moxie, which is all about increased speed confidence and control for our customers. This is a step change to the customer experience from a performance and ease of use perspective Moxie will begin rolling out in the third quarter and we are excited to bring you more updates and.
The coming quarters.
In Q2, we continued to expand our chef store footprint as well as assortment on our U S foods direct online marketplace and last but not least our team based selling approach and value added services continue to be differentiators and are helping us drive share gains in key customer types.
A recent example is renewing our strategic partnership with toast.
This collaboration demonstrates our commitment to building deeper relationships with our customers by providing the right technology solutions to save time and improve the customer experience.
Finally, I want to focus on the significant continued progress that we're making on environment, social and governance or ESG.
We recently launched a partnership with Calera, one of the world's leading hydroponic indoor vertical farming companies to expand our portfolio of local farms that we source from to support our serve local program launched in 2018 to serve local program is designed to better connect U S foods customers with local farmers producers and manufacturers.
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Additionally, we remain committed to reducing the environmental footprint of our operations and recently announced a science based climate goal to reduce absolute scope, one and two greenhouse gas emissions by 32, 5% by 2032 from the 2019 base year.
We are working to reduce emissions by optimizing routing to reduce miles driven deploying new lower carbon footprint vehicle technologies and investing in alternative fuels.
Plans include converting our compressed gas natural gas vehicles or CMG to renewable natural gas and introducing 42, new CMG vehicles to our fleet by the end of 2022.
In addition, our California broad line distribution center fueling stations have been converted to providing renewable diesel fuel for our Vista Corona Livermore and Lemon ride a diesel fleet and our newly opened sacramental facility Leverages renewable diesel fuel and its onsite fuelling station.
We also plan to introduce 30, new electric trucks into our La Mirada, California fleet by 2023.
In our facilities, we continue to optimize the efficiency of our building operations by investing in renewable energy and adopting energy efficient equipment and technologies.
Page five illustrates why we believe U S. Food is well positioned in the current environment. It starts with our diversified customer mix, specifically, while restaurants represent over half of our sales mix. We are very focused on other customer types, such as health care and hospitality to continue to propel our business forward.
Health care, and hospitality, where about a third of our business prior to the pandemic and we would expect them to return to closer to that level as these two customer types fully recover.
We are also driving market share gains in key customer types independent restaurants continue to perform well in case volumes are well above 2019 levels.
As you May recall U S foods is relentlessly focused on growing with the right customers leading to ongoing optimization of our customer mix to ensure we are gaining market share profitably.
And as a result, we continue to exit a small number of lower margin <unk> more complex, primarily chain customers and typically replace that business with more profitable and more flexible and healthcare or hospitality business as well as chain business.
That is a better fit and less complex.
We are continuing to improve margins of our existing chain business to reflect the current operating environment.
In healthcare, we are pleased to report a positive trend in the case growth relative to 2019. This is a result of new business wins and improved bed occupancy rates in the senior living segment as well as retail shops opening back up in hospital settings.
Hospitality, we continue with significant year over year growth given the recent macro backdrop, we will be closely monitoring development in this customer type as the increased inflation levels and work from home trends impact customers' willingness to travel.
As a pure play U S. Only business, we are well positioned to leverage our differentiated tools and capabilities to support the growth of our diverse customers.
As I mentioned earlier this differentiation has historically enabled us to win share in our key customer types and we expect it will continue to enable us to do so.
Customers are telling us that they appreciate our service and commitment to helping them grow and to fight through these difficult times to them use boost as much more than just deliver groceries.
Italy, as a reminder, and rising inflationary periods such as these U S foods is able to pass much of this inflation through via via our contracts and pricing tools.
Also as the health care and hospitality customer types continue to return to 2019 or normal levels, we will benefit from these tailwind by topline growth and supply chain efficiencies.
And lastly, it's important to note that U S foods has a track record of resiliency during challenging economic times for instance, during the recession of 2000, 2008, 2009 U S foods maintained essentially flat earnings and saw our case volume hold up reasonably well declining only by mid single digits.
With that let's turn to page six to walk through how our strong performance in the quarter translates into progress on our long range plan to drive profitable share gains expand margins and improve operational efficiencies.
We are on track to meet or exceed our targeted growth rate of one five times. The market. We are continuing to win in the marketplace as demonstrated by our share gains in key customer types as I noted earlier.
Earlier, the U S field team based selling approach continues to be a differentiator relative to our competition and is an important ingredient in our customers' success to.
The continued expansion of our cash and carry business chef store illustrates the power of our Omnichannel strategy. During Q2, we opened a new store in Lynchburg, Virginia.
We expect still to open four to six stores. This year and are building our capabilities to accelerate that pace in future years.
This strategy allows our broadline customers to fill urgent needs between deliveries during the week to help meet demand. It is also an excellent way for potential customers and consumers to get to know the outstanding lineup of U S foods private labeled products and high quality fresh offerings.
Turning to the margin expansion or optimization pillar, we had strong gross profit results again this quarter.
As we shared on our last call. We are seeing significant momentum with our inbound logistics program initiatives. This program continues to drive significant efficiencies and meaningful freight income expansion.
Italy U S foods continues to grow its exclusive brand penetration rate for Q2 organic penetration grew by approximately 80 basis points versus the prior year.
Our cost of goods program is also performing well and ahead of schedule with approximately 25% of our total vendor spend already under consideration.
Turning to operational efficiencies, we are making solid progress in the midst of a very challenging macro environment first as a result of our continued focus on routing optimization and network planning cases per mile across our network are modestly above 2019 levels. Despite case volume being down mid single digits compared to 2019.
That is a significant achievement, we still have significant opportunity ahead as I mentioned earlier U S. Foods is on track with our warehouse selection technology rollout, which is expected to be completed later this quarter I'm.
I am excited about this rollout as it will continue to support our warehouse team members and enhance the selection process, leading to better productivity and job satisfaction.
Similarly, our outbound service levels to customers continued to deliver month to month improvement, which is a testament to the hard work of our associates given the vendor fill rates remained challenged.
It's important to note that the warehouse labor environment remains challenged for us and our industry. However, we are confident that we have the right plans in place to address turnover and associated productivity headwinds.
On page seven you will see a summary of our strategic imperatives as we enter the second half of 2022, we're encouraged by our <unk> momentum and will continue to update you on the performance of our three pillars of profitably growing market share optimizing gross profit and improving operational efficiency.
We are and remain relentlessly focused on building upon our first class customer service program and platform. We will continue to make investments in our business to provide an enhanced and differentiated service platform at U S foods.
And finally, as we create value for our shareholders. We will remain prudent around our capital allocation priorities. Our focus continues to be investing in the business, reducing our leverage returning cash to shareholders and pursuing tuck in M&A opportunities. We will continue to execute against these priorities and focus on driving long term.
<unk> ahead, and thus expect to create significant shareholder value. We've made strong progress against our plan to date and expect to continue building on this momentum.
And with that I'll pass it over to Dirk to review the financial performance.
Thank you Andrew and good morning.
I'll walk through some highlights on our second quarter, and then spend time on several key macro considerations that continue to be a factor in our industry and the broader economy as well as on our 2022 outlook.
I'm on page nine.
Overall, we're very pleased with our second quarter financial results.
Demonstrate the continued progress we are making against our plan initiatives and outcomes.
Adjusted EBITDA grew 11% from the prior year to $368 million for the quarter.
In addition to strong EBITDA dollars.
Our adjusted EBITDA per case was above Q2 of 2019.
Q2, adjusted EBITDA was the best quarter relative to 2019 since the pandemic began.
So we're very encouraged with the outcome, which we believe demonstrates the actions we're taking are truly delivering results.
Adjusted diluted EPS increased as well and was 67.
Q2, net sales were $8 8 billion.
Which was an increase of 15% over prior year.
Total case volume was flat to prior year and food cost inflation was 15%.
Our Q2 year over year case growth was negatively impacted roughly 375 basis points by the mid 2021 exit of the grocery retail business. We temporarily added during the pandemic and a small number of strategic exits.
As you'll recall Q2 2021 was also the strongest quarter from a volume perspective since the pandemic began with a very strong recovery.
I'll talk more about volume on the next page.
We continued to drive robust gross profit dollar growth again this quarter, our adjusted gross profit dollars increased 14% from the prior year and we generated strong adjusted gross profit per case for the quarter.
Opex remain higher as we continue to invest in staffing and work on improving supply chain employee retention.
Reducing turnover remains a top priority for us as we face the challenges higher turnover presents similar to many other companies.
Okay.
Looking at page 10 within volume independent cases were flat to prior year after growing nearly 80% in the prior year.
We have 35% hospitality growth and two 4% health care growth offset by eight 7% lower chain volume and the retail exit impact I noted earlier.
Our chain decline was driven largely this quarter by a smaller number of lower profitability and more complex strategic exits.
We expect volume to improve through half two.
The combination of the retail exit and the lower margin strategic access was about a 375 basis point negative impact on total case growth and had a small impact on net EBITDA.
Yeah.
We continue to focus on the health and quality of our customers.
And on the Opportunistically growing with chains, while increasing our margins.
We delivered share gains again, this quarter and key customer types, specifically for independent restaurants, Q2 share gains were among the strongest we've seen since the pandemic began demonstrating we are winning in the market.
I talked about volume compared to 2021, however, I know most of US continue to focus on volume relative to 2019 as well.
As a key anchor of a normal environment.
Q2, 2022 total case volume was approximately 6% below 2019.
Which is a more than 200 basis point improvement from Q1.
Independent case growth was 4% above 2019.
Health care cases were about 7% below 2019, demonstrating continued improvements at.
In hospitality was approximately 15% below 2019, which also has further improved from Q1 results.
We're continuing to improve relative to 2019 and are encouraged by the continued share gains in key customer types.
On page 11 through Q2, and as we look at have to the macro environment remains challenging for our entire industry and our customers.
Starting with labor the labor market continues to be better than it was in 2021 from a recruitment perspective.
In the second quarter, we continued to hire for expected volume growth.
Our markets are broadly in a very good position when it comes to staffing.
As I talked about last quarter, the primary challenge remains retention.
Which is not unique to us turnover remains higher than it's been historically.
For reference our warehouse turnover is nearly double what it has been historically and roughly half of that workforce has been with us for less than a year.
New associates are significantly less productive than tenured associates anecdotally, our understanding is that our retention challenges are very similar to other companies.
A positive is that a likely isn't permanent and we are taking steps to address it such as limiting hours worked for new hires to allow them to ease into the job and retraining, our frontline supply chain managers and supervisors on effective management.
Unemployed engagement practices and processes.
As planned and as Andrew noted, we're finishing the deployment of our new warehouse selection technology and deploying processes, leveraging our continuous improvement team to make the jobs a little easier.
With turnover remaining high we aren't making as much progress on productivity improvements as we expected. However, we are focused and are seeing a number of signs of improvement throughout our network some of which Andrew discussed earlier.
Inflation, whether it's fuel or food is something we are watching closely.
Food cost inflation continued in the quarter with year over year inflation of 15%.
Year over year inflation has slowed and sequential inflation continues to be below the peaks of mid 2021, which is a positive.
Inflation in Q2 has been more on the grocery categories and other categories and we've continued to be successful in passing it through to customers we.
We don't expect the supply chain challenges for the remain that remained for our industry more broadly.
We to be resolved in the near term.
We've made continued progress improving our service levels to customers through Q2, despite stagnating vendor service levels.
Our net promoter promoter score data indicates our service levels continue to be as good or better than others. As we continue to identify and act on ways to improve service for our customers.
Overall volumes remained solid however, we will continue to watch for behavioral changes week to week results can vary and we're watching for trends.
Independent growth versus 2019 has continued to be 3% to 4% above 2019 in recent weeks healthcare continues to slowly improve and it's been roughly 6% below 2019 in recent weeks hospitality remains mid teens below 2019 and has shown continued improvement in recent quarters.
We are strategically taking share in key customer types and continue to watch the macro environment for changes in demand.
The macro environment remains a challenge however, our business and industry as recovery tailwind from health care and hospitality and we are seeing share gains in key customer types.
We also benefit from serving many customer types and eating away from home is a staple in most people's routines, which makes it quite resilient potentially even more than in prior downturns.
We are pleased with the strength of our Q2 results and we expect to continue making meaningful progress and specifically on actions to improve the continued high turnover in supply chain.
We're reaffirming our 2022 fiscal adjusted EBITDA adjusted diluted EPS, Capex and net leverage guidance provided in February .
However, we now expect higher interest expense to be $245 million to $255 million for the year as a result of the fed's more aggressive interest rate increases through 2022.
And finally, we still expect to achieve the higher end of the earnings outlook range, assuming there's not another amacrinal lightwave or macro slowdown.
I talked about our Q2 earnings macro factors and our outlook now on page 12, I will just spend a moment on our capital structure.
We reduced our net leverage compared to the second quarter of 2021 as well as the first quarter of this year.
Our net leverage ratio was four two times at the end of the second quarter, which is a 1.2 turn reduction from a year ago.
And <unk> turn reduction from the first quarter of this year.
Net debt dollars are relatively flat as we've continued to necessarily invest in working capital via increased receivables from deflation as well as additional inventory due to the vendor supply challenges, we and the industry continue to face.
Leverage reduction as one of our four components, we outlined as part of our capital allocation strategy Andrew noted earlier.
We continue to make progress toward our leverage goal of two five to three times net leverage and are committed to achieving it.
Our business has strong cash flow generation, which we expect to use for debt reduction and our other stated priorities.
Just in closing I am pleased with the significant progress, we're making which we demonstrated in our Q2 results now back to Andrew.
Thanks Derek.
<unk> U S foods continues to make progress in executing our long range plan. Despite ongoing challenges in the macro environment. We continued to deliver positive results. This is a testament to the hard work of all our associates at US foods and I think all of them for their continued focus on execution and dedication to serving our customers with.
That operator, please open up the line for questions.
Thank you Sir.
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Please go ahead caller your line is open.
Yes.
Hi, This is Lauren Silberman credit.
<unk> Suisse.
I wanted to thank you for all the color today I wanted to ask about independent case growth.
<unk>, 4% versus 19, I believe you said it looks looks like an acceleration from one Q. So can you talk about what's driving that underlying acceleration how much is coming from new customer acquisition versus wallet share.
Are you running with independent customer accounts 19, and then you mentioned I think Keith growth remains 3%, 4% about 19 in recent week can we assume youre not seeing any meaningful shift in customer behavior trends.
Thank you.
Yes, Hi, Laurent it's Andrew Thanks for the questions.
I'll try to remember each of the parts to it so remind me if I miss any of them.
Yes, I think overall, we feel very good about the momentum we're seeing in our and our independent restaurant growth and I would say that the growth is being generated through I'd say a pretty balanced.
Mixed between increasing penetration with existing customers as well as going after new.
Still slightly down in terms of our customer count versus 19, but we are seeing a significant improvement in our share of wallet.
As we move forward that momentum and sort of the.
Proven I think that you would attribute to really given given the market itself has probably been largely flat from one two we've actually seen a pretty sizeable Derek mentioned one of the best.
Share improvements, we've seen and certainly significantly better than we were in Q1 in terms of our market share in the <unk>.
Segment, so feeling really good about the momentum we havent seen as Derrek mentioned, a meaningful change in behavior. Although obviously that is something we're monitoring very closely but the fact that we've been able to gain share in this environment also gives us some optimism that we will be able to mitigate.
The impact if any of any slowing of demand on the independent segment.
Did I cover all your questions.
Yes.
Right.
If I could just ask one more did that a long term targets I know a lot of uncertainty in the environment should we see a more challenging consumer environment. What gives you confidence in delivering on the longer term guide or to what extent is that macro uncertainty being factored in.
Thank you.
Good morning, Laura This is Dirk so ultimately I think the important thing to come back to us our focus in the plan, which is control the controllable and we put a plan in place that we feel very good about we're continuing to execute our last two quarters have really shown good progress against that and I think the thing that we've learned during COVID-19 is you need to be at.
<unk> nimble or do you want to put it and so as we see the environment adjust we will adjust accordingly, but we're continuing to execute against our plan and very pleased with the progress we're making.
Yeah.
Thank you very much.
Yes.
We will now take our next question. Please go ahead caller your line is open.
Hi, guys. Good morning, It's Ed Kelly at Wells Fargo.
I just wanted to start with a quick follow up on.
Case volumes can you just provide a bit more color on that.
The decision to exit some of the lower margin.
Contract accounts.
Obviously this has been part of your strategy in the past so it's not new but on the other hand, you still have heated up volumes below 19, I'm just kind of curious as to the calculus there.
And then as we think about.
The back half I think Turkey had mentioned you expect <unk> to improve so I just want to make sure what youre, saying there do you are you, saying that you expect organic.
Total case volume to be up in the back half.
Hi, it's Andrew Thanks, Thanks for the question and why don't I start and I'll ask Dirk to maybe weigh in on that.
Additional detail as far as.
The case volume picture I think we do feel.
And have sort of approach things as we always have a thing we want to we want to grow in the right way, which is a profitable case growth and given the environment. We're in we've been working very closely with our customers, particularly the larger chain groups to ensure that we are we have arrangements that are that are reflective of the environment. We're operating in.
Our goal in all of those conversations is to continue to drive the business forward and work together, but where we arent able to find.
On operating model.
But with those customers we have made the decision in a relatively small number of cases to exit.
And that is something that we would do but we would do typically as a last resort as.
As far as the back half, maybe I'll turn it to Derek to talk a little bit about how we're thinking about that sure. So we would expect to see continued improvement relative to 2019 from from where we've been trending.
Trending assuming us a stable macro environment and continuing to improve against that I think the other point is we're very pleased with the strength of our independent volume.
And the continued share gains that Andrew talked about on the chains and that a small number of education customers that this has been part of the plan and so I think we've been deliberate of course, there is the retail business that we picked up during COVID-19 that I talked about last quarter. So there should be no surprises on that.
But on the change in the education.
I think on that one.
Our focus has been to be opportunistic on those where it's the right fit from a financial and complexity perspective, and I think even as one of our competitors has talked about and you'll see where they have dedicated chain facilities that are breakeven. It really is one we're being opportunistic versus just growing for the sake of growing.
<unk> area.
<unk> is the right answer and we're seeing that show up in higher EBITDA per case, we're seeing that show up in earnings growth and continued improvement. There. So we believe our strategy is the right one and we're going to continue to focus on growing with independents health care hospitality, and then be very thoughtful and opportunistic on the other customer types.
Great. Thank you.
Thanks, Ed.
We will now take our next question. Please go ahead caller your line is open.
Hi, It's John Glass from Morgan Stanley first if I could just further clarify in cases and that it will.
Question.
Is this the last quarter youre going to be lapping the grocery exit so that shouldnt be a factor in the back half and can you quantify what the impact of those chain restaurant exits because I assume that will impact.
Future four quarters or three quarters.
The quantum of that.
The question is what youre doing to reduce labor turnover improved efficiency.
At the end of the training and hours et cetera, but is there something more meaningful.
Our biggest competitor talked about going to a four day work week. For example is one way to do that are the bigger ideas that can really advance that turnover in efficiency and lifestyle to make this more attractive job.
Contemplating thanks.
Sure. Good morning, I'll start with the first part and then maybe Andrew can talk about the second part on retention or turnover on that one for the quarter.
There will be some impact there'll be lesser in the third quarter from the retail exit and then that'll be the last quarter, it's impacted but just for reference out of the roughly 375 basis points impact in Q2.
Order of magnitude about two thirds of that is the retail and about a third of it is the chain exits. So that helps you size up the impact across their I think the other thing too when you look at year over year, it's important to on the changes if you're going to see we're kind of at the peak last year in Q2, a change where we had onboard at some of the new customers.
Exit some of the planned exits. So again this is all part of the plan to hopefully thats helpful. On the go forward Andrew you want to talk about retention, yes sure. Thanks for the question.
I think on the labor front, we feel we feel good about our staffing situation. We are substantially staffed in almost all our markets at this point in what continues to be the challenge as Doug mentioned is our ability to to stem the top turnover.
We are.
Aggressively exploring and implementing flexible shift lengths to allow our.
Colleagues too.
We're able to have a schedule that fits their needs.
We've also taken some steps to significantly reduce ship length for our new hires we find that's typically where the greatest turnover comes from is from that group because it's a tough job let's face it.
And so our ability to minimize.
Minimized those early shifts to get them allow them to sort of harden themselves to the work I think is helping a lot in that area and then really importantly, because we all know that turnover is much a function of who you work for as anything else. We've taken some pretty aggressive steps to really invest in leadership training and.
And.
Development for our frontline leaders.
Our supervisors and managers they are really the critical lynchpin in that relationship in markets, where we've seen turnover.
In a better position to typically it's a direct result of that of that sort.
Wrong leadership and so we've seen it's early days to really start to see significant results in that but we have seen some very promising signs coming out of that leadership training and we expect that to continue.
Thank you.
We will now take our next question. Please go ahead caller your line is open.
Great. Thanks, Pete Peterson from BTG.
The number of restaurants have talked about seasonality returning to the industry something that they haven't had since 2019 are you guys seeing that as well are you seeing seasonality did you feel like.
Trying to maybe slowed a little bit during the summer and are you expecting that to kind of pick up and get back to normal seasonality as we head into the fall.
Hi, it's Andrew Thanks for the question I think we would say.
It's a little hard to tell given the volatility that it still is out there, but overall I think there is certainly a little bit more normalcy returning.
The rhythm of our business.
Which I think is a positive sign but again I think right now it's a little hard to declared as a trend.
Great and then just on the food cost inflation I know this quarter was 15% I think that was a little bit couple of hundred basis points less than what you saw in the first quarter. What are you anticipating in terms of food cost inflation in the back end of the year.
Yes. Thanks.
For the follow up I think we are we are it's obviously hard to predict.
We expect things to go I think we've certainly seen a slowing in the rate of increase but we don't we certainly don't expect.
Deflation anytime soon.
But we are watching it very carefully not only from a from a cost of goods standpoint, but also in terms of the impact it's having on demand and ultimately our customers.
So we have felt pretty good about not only the ability of our organization to pass along that those inflation costs through the cost plus pricing that we typically have in our contracts, but we've also made really great strides working with our customers to help them.
Managed through the inflationary environment, which is something that I think really has paid some big dividends as we continue to help them with ways to.
Address some of their menu types to steer clear of more inflation impacted categories to look at portion sizing and other factors as well and that's really something that again is really true to the brand in the U S food something that we really very proud of.
Thank you very much.
We will now take our next question. Please go ahead caller your line is open.
Okay.
Good morning. This is Nicole Miller from Piper Sandler. Thank you for your time.
The first question.
You've addressed.
Turnover.
But I was wondering to compare and contrast kind of the truck driver DC select there and also the sales person tenure and turnover and the real question is when they work in concert.
You're at your best in any one market locally or in terms of execution, what kind of wallet share gains can you achieve versus where you stand that average.
Hi, Nicole its Andrew Thanks for that question, it's an excellent question.
So I think your first question is how it is turnover varied across driver versus selective versus seller and what I would say is we've seen.
Very consistent turnover within our sellers in fact, even a little bit less unusual that we've seen in past years.
Drivers has seen considerably less increase in turnover versus pre pandemic levels. It's the select are area, where we've seen and I think Doug mentioned twice the turnover rates that we saw prepay.
Pre pandemic, so that's really where the bulk of the turn out when we talk about turnover and Thats really the main place that we're seeing it.
And your second question, which is a great one around the relationship between the three certainly the driver and seller relationship is is an incredibly important one because both have such a significant impact on our customer experience.
And that's why I think seeing especially seeing the reduction in an already lower level of turnover and the driver community has been very positive and one of the things. We've actually started to more intentionally is really creating a working relationship between the driver and the seller to ensure that any feedback that comes from either on this.
Pass along to the other and Thats actually really I think pretty significantly enhancing the relationship they have with our customers as a consequence.
Thank you and then just how would you characterize the inbound flow rates to the outbound service to your customers and is there an opportunity to backhaul.
With your drivers.
Yes, so we have seen.
Continued improvement in our customer service level, which is the thing we're most concerned about and what I think is most.
Sort of a positive and that trend is that we've been able to do so with vendor fill rates that had been largely flat relative to where they were to start the year theres been a bit of an improvement, but not significant and it's and it's been.
A real achievement on the part of the replenishment organization to be able to drive that continued month over month improvement in our service level to our customers. Despite the fact that we are still seeing.
Sure.
Pretty poor service from from an inbound in the challenged particular challenge. There is that the is that the nature of those fill rate challenges. It tends to change from day to day and week to week, it's not always the same categories and so it's a little bit of a.
A moving target, but generally speaking I think we feel very good about the progress that we've made.
And handling.
To your second part just on the backhaul. So we definitely are we backhaul.
A portion of our inbound cases ourselves and that along with a number of the other initiatives. We are going are contributing to the very strong results. We have seen in our inbound logistics or freight income year to date, but that remains a focus.
And just the last one deflation.
It sounds silly now because it would require supply outstripping demand and really easing labor conditions and none of that seems likely but can you just remind us what happened like by type of contract how does deflation throughout flow through gross profit how does it flow through opex et cetera.
Sure.
If it's a product deflation it doesn't flow through opex as much versus it shows up in up in gross profit and the portion of our customer contracts that are a fixed markup per case or per pound et cetera and that.
Case, you're still making the same markups so it doesn't impact profitability at all if you see.
The portion of our contracts that are a percentage markup over if you have deflation. It can decrease that profitability a little bit what we see over time, though oftentimes is so a lot of the center of the plate is fixed so which can be more volatile so that means over time.
Can be a little volatile, but goes up or down but overtime.
A meaningful impact and then on the grocery.
The supplier over time, they tend to go one way from the ultimate manufacturers. So I think when we think through that.
We're watching it closely we have a playbook that we run for inflation and deflation to manage it but as we noted earlier don't expect inflation to show up sort of broad scale in the near term.
Thank you.
We will now take our next question. Please go ahead caller your line is open.
Jonathan Bock with Guggenheim.
So guys when we start with.
Drop size really focused on comparable restaurant locations.
Alright, whether they be independent or chain, what are you seeing with drop size. So I imagine, it's up right dislocations or down alright.
Alright.
Is it up low to mid single digit.
And then obviously thats, probably two X the incremental margin is that a material benefit to the P&L now and kind of going forward.
Meaning I don't know if it's tens of millions of dollars, but as it is.
Not a material benefit as we sit here today.
Okay.
Hi, John its Andrew Thanks for the question.
You may have to repeat the second half of your question just to make sure I got it but on the first half around drop side I would say we are seeing.
Small increase in our drop sizes I think we've reported.
For the reasons that you mentioned remind me the second half of your question well incur.
The incremental margin on that right, it's not it's not your gross margin but.
But it's got to be two X two and a half ex normal margin. So.
That is that is a clear benefit to the P&L as we sit today and you think that will continue.
Yes, definitely clear benefit.
Quantify the range of it but its certainly significant given given the incremental.
Cost of those.
Those additional cases are the marginal cost of those additional cases of relatively relatively low.
Is it continuing that's certainly an area as I mentioned, our share gains, especially in the IND base had been a pretty good mix of growing share of wallet and new and we do expect that to continue and is certainly a big focus.
Independent seller organization is to continue to grow our penetration with existing customers.
Good morning, Jonathan Sorry, just one other thing I would add I think the other opportunity that still lies ahead as you see volume continue to come back in healthcare and hospitality.
Lot of that shows up with existing customers and so that helps from a drop size perspective for those customers, which are already pretty attractive from from the drop sizes. They tend to have.
The other thing I was going to ask right is what maybe makes this environment a little different in some respects than the past strategy.
<unk>.
The tightness in labor so.
So if we get I don't think we see deflation, Brian as we get this inflation.
Do you think the timing lines up right to the top line Deflates.
At the same time that labor cost is easing.
Or the environment creates the macro environment creates an easing.
Or do you have to kind of tee up some proactive cost outs.
The top line Deflates and labor doesn't how do you think about that.
Sure I think they are kind of where you are going to separate levers because the top line. So it was more automatic and you manage your way through it.
I think the.
Okay said.
We would expect for the foreseeable future.
To your point is.
Essentially modest inflation <unk> that likely not deflation I think.
That shows up a little quicker on the cost side that is one where you have to be more proactive in the way you manage through that than you do on the costs on the GP side will come back to is that I talked about earlier is through Covid. What we really learned is again the need to be agile and as we see in that environment on the product side, we have <unk>.
Good playbook on how we run at any inflation or deflation.
And then on the cost side always are looking at.
We manage that across the different spectrums of the cost that.
John maybe just to address the question on labor tightening, it's being a benefit that's certainly will be I mean, one of the challenges that we face with the turnover levels that we are seeing right. Now is just the costs associated with the recruitment hiring and onboarding of those associates as well as the impact that it hasnt productivity.
I think that will certainly be an important aspect if we do start to see some loosening in that labor environment.
Okay. Thank you.
We will now take our next question. Please go ahead caller your line is open.
Brian Moaned Deutsche Bank. Thank you my question is on the strategic vendor management opportunity.
It's an important component of the long term plan, maybe could you just speak to what the organization is doing differently today versus how we manage this area of the business. Prior to then just zooming out a bit just wondering if you could speak to your degree of confidence in the sitting here in August maybe relative to how you felt earlier. This year. However, the strategy is progressing or your partners being receptive.
Are you finding win win situations in your negotiations just any color.
Yes, Thanks, Brian for the question.
I think there is.
First of all as I said in my remarks, we're feeling very good about.
The progression of that initiative.
Or actually ahead of.
Schedule on that and really.
The opportunity there and what may be a little different today than perhaps in the past a couple of things first we have had the volatility over the last couple of years has obviously made it difficult.
To sort of benchmark or.
Our cost of goods as well as and this is precisely as perhaps we have been able to in the past and so I think this is really a large part is just going back and making sure that we are continuing to be as competitive position as we can given our scale.
And I think in terms of the confidence.
We feel today versus versus earlier this year or not I think has grown as a consequence of the really really very productive nature of the conversations that we've had thus far we have found significant opportunities for mutual wins I think just given the way. The world is right now there are some some opportunities to work more closely.
Together to find ways that will not only help us ultimately from a cost of goods standpoint, but also help our vendors.
Production efficiency standpoint in those those are the conversations that have really yielded the greatest fruit.
Thus far.
Thank you and then just a follow up just a question on the.
The permanent CEO search understanding theres only so much you can maybe say just could you comment on how that's going if the pool of candidates is starting to narrow down in any way and then related is there a priority or a preference to find someone from inside the food distribution industry or is that not a particular mandate of the board at this time.
Bob do you want to take that.
Yes. Good morning, this spot for Cathy I think I'll try to take a shot at that so well.
We're really pleased with the progress that we've made in terms of searching for the for the next CEO .
Quickly formed a search committee.
We built.
Spec that we believe can lead the company into the future we hired a search firm.
Part of the process really searching for a proven public company C suite executives.
It would be great. If they had experienced relative to U S foods.
Well supply chain executive for example, not in the food industry could be a very good candidate.
We're really searching for an executive.
<unk> record of creating shareholder value.
And importantly, one that embraces.
Embraces the culture of U S fluid so.
We have a really good plan were well into the process.
Search firm has identified.
Very strong list of candidates and we become the interviewing process. So we're really pleased with where we are with the process.
Thank you.
We will now take our next question. Please go ahead caller your line is open.
Hello. This is Jake Bartlett from true securities on thanks for taking the question.
My first is on the the chain business.
There it seems like very recently last quarter, we were talking about onboarding.
Chain business.
And I'm wondering whether this is maybe an indication that the customers are now that the supply chain disruptions are less of an issue and the ability.
To service the customer is maybe more broadly you are able to be done.
Whether this is a sign of pushback on pricing or whether customers generally feeling like they can now look around for better prices.
And whether that could be more of a of.
As an impact.
As we go throughout the year.
Yes, Jay Thanks for the question it's Andrew.
First of all I think it's important to say that our net new versus lost and chain is actually up slightly so I wouldn't necessarily characterize this as a net negative and it certainly doesn't signal in any way a move away from the right kind of chain business, which is where we've seen the growth.
Coming from change that have more of our urban presence as well as a more of a independent restaurant type offering have been proven to be very attractive customers and new ones that we have quite happily brought onboard and in addition, as I said.
Exit as the last resort, we typically worked with them to find opportunities for the vast majority of our existing customers that has been the outcome.
Just J if I could add this is dirk so actually the exits and we're talking about a chain or where they are part of the strategic exit plan or <unk>.
Regrettable losses remained quite low across our customer types and continue to have a good pipeline there from a growth perspective.
Great. Thank you and then just one on the operating expenses you mentioned that in.
And the training costs are still high overtime and temporary workers.
What kind of what level of cost.
In the second quarter here that you might not be recurring just trying to kind of gauge.
What kind of a benefit we might have as we go forward from the ACA related costs that you're seeing over the last call it year and a house.
Sure. So the last couple of quarters, we haven't specifically quantified that but what I will just say is it remains similar to the last few quarters.
It really is largely driven by what Andrew talked about the higher level of turnover and as we see these green shoots in different areas of the business from a whether it's a productivity or other pieces there.
Yes, we would expect to build upon those and we'll talk more about it as we make progress I think the important thing to take away, though is even though retention again, which is kind of industry and even broader issue.
Even with that being the case, we are still seeing progress whether it be the routing initiative that Andrew talked about whether it be some of the other things there around our process redesign around inbound receiving product et cetera. There that are showing gains. So we know the things we're doing are generating some gains.
Unfortunately in the macro environment, we and others just.
We're still battling with the retention and continue to be relentlessly focused on things to address it.
Thank you very much.
Thanks.
We will now take our next question. Please go ahead caller your line is open.
Great. Thank you this is Jeff Bernstein from Barclays.
Two questions one just on the fundamentals of the business.
Thank you mentioned no change of late in terms of volumes.
But more broadly I know chain volumes were down close to 10%. This past quarter I'm wondering how much of that is the conscious exits you mentioned.
Otherwise any common themes with the accounts that youre seeing.
Maybe by.
Sumer income level are you seeing any changes or quick service versus casual dining any kind of color in terms of.
Change by account or any color on that chain volume being down that 10% and then I had one follow up.
Sure Good morning, Jeff.
So overall the two contributors mainly to the change being down are we talked about the strategic exits and then if you recall last quarter, we talked about softness in a couple of specific concepts and we continue to see that and they happened to be larger concepts. So what we're not saying is we're not seeing any widespread.
Ed.
Trends softening et cetera across different.
Types within the chains, and we see that some whether.
Whether it's in fast casual and <unk> et cetera, you see winners and losers.
The difference ones, but not any specific trend that I would call out at this point and I think the the thing and change that we are continuing to see and do is move toward those customers that continue to be a better fit and we're seeing good results with that.
I think Jeff it's Andrew the other I think we would say is that we haven't we've been watching carefully for but haven't yet seen any meaningful sort of trading down within menu types.
Either and that's something that.
Again, when we say no meaningful change in behavior. That's one of the things we look at very closely.
Understood.
And then in terms of just the broader foodservice distribution industry.
Seeing rational competitive behavior I mean, obviously these are unusual times for well for you guys for sure and for the industry more broadly just trying to get a sense for how you see the behavior of your competitive set both large and small.
Yes, I think we would describe it is as <unk>.
<unk> market right now for sure there is obviously the.
The volatility that continues as well as the ongoing inflation have both.
Then real challenges, we've not seen any significant sort of irrational behavior at this point.
Got it and then lastly.
Bob I appreciate your contribution to the question earlier, just wondering in terms of the most recent board additions just wondering we have.
If you don't get a look inside the boardroom, but what's what are the kind of the areas of initial focus or would you call. It constructive dialogue any change and maybe brand direction or how those early conversations going as you now have kind of a significant change in some of the members on the board. Thank you.
Yes, it's a very good question, we've added five new board members since the beginning of the year. So.
Brought to the board room.
Fresh perspective, a different set of skills and.
And we're really very very encouraged by the addition of the new Board members.
<unk> oriented U S foods.
<unk> jumped into their areas of expertise really aggressively I'll give you. One example.
We added two executives that have supply chain experience, Jim Barber and Clinton Roche both of them have engaged with.
Built on top of our leader of the supply chain.
We have brought really interesting ideas around productivity and staffing that that are things that we are aggressively deploying so we're thrilled with the new additions and really.
We now have a very very strong board in place that we're real pleased with.
Thanks for the perspective.
We will now take our next question. Please go ahead your line is open.
Good morning, it's Alex Slagle from Jefferies.
Clarification on the guidance not release talked about continued confidence towards the higher end of the EBITDA range. It wasn't sure if that also applied to the EPS guide would be.
Leaning on the EPS range towards the lower end is at the higher interest expense or there's an offset there.
Sure. Good morning, So, yes confident in the outlook for EBITDA and EPS still expect stronger I think thats.
Not quite at the strength of the high end given the higher interest expense, but still feel like a good strong EPS outcome.
Likely still leads sort of in the upper half again, assuming a.
Environment that remained similar to where we are in.
Okay, and then a follow up.
On freight in your work optimizing the vendor allowances.
If anything there and just to get additional color how the progress in the second quarter compares to the first quarter, which seemed like it was it was a very solid improvement in the first quarter.
Maybe if you have.
Any comment on how your freight income per case compares to 19 levels.
Yeah, Alex it's Andrew Thanks for the question, we're very pleased with the progress the team has made on freight.
We would say it has actually been a slight acceleration versus the very strong progress we saw in Q1 in Q2.
And it's and it's a function of really just getting underneath.
The.
The arrangements, we have in place to look not only to take over lanes, where they are appropriate but also to push them back when the profitability equation just doesn't make sense. We've also I think made really strong progress and this is an important.
I think catalyst here is that we have.
Made great progress.
Engaging our vendors on a more regular basis, just given the way in which the freight markets have been.
Volatile of late.
Over the last two.
Two or three years.
Finding ways to kind of get more flexibility in the rate adjustments that our vendors are making which used to be only really once a year as I think been a really important contributor.
To the progress that we've made.
Helpful. Thank you.
Yes.
This device, we only have time for two more questions. We will now take our next question. Please go ahead caller. Your line is open.
Okay.
Hi, everyone. It's Mark Hahn from UBS to start are you seeing any changes in how customers are shopping your cash and carry stores you see much of an uptick in interest over the past quarter, just given some of the macro pressures that are out there and then are you seeing any major differences between your legacy smart foodservice locations.
Legacy shafts or launch thanks.
Hi, Mark Thanks, Andrew Thanks for the question I would say, we haven't seen really significant change in customer behavior in terms of the composition of it nor of the categories they're shopping.
That's been pretty consistent really throughout and in terms of between between the legacy foods.
<unk> stores versus the foodservice stores again wouldn't see a big big gap in their behavior. We are very pleased that since we're on the topic too to welcome her.
Better being up to the the team is now leading that organization and he comes with a tremendous retail background and has a ton of great ideas and first among them as I mentioned in my remarks is to find an opportunity to really accelerate the rate at which we rollout new chef stores, because we really are extremely pleased with the perform.
Of that business and are looking for opportunities to continue to expand it.
Great. That's helpful. And then have you seen much of an increase in private label demand from restaurants, and others to help reduce costs and offset some of the pressures that they're facing.
Penetration really picked up relative to the last few quarters are as demand remained pretty consistent across the board.
As I mentioned we.
We saw an 80 basis point improvement year over year and exclusive brands. We think that is in part a function of the.
The better value proposition that it offers our customers and we are continuing to make.
Make sure we're driving that businesses is aggressively forward as we can.
Supply challenges.
I've been a bit of an issue in the past, but we are starting to see that ease up pretty considerably as we as we've been able to source.
As needed additional sources of supply for our exclusive brand products. So yes, definitely we believe it's an opportunity in this environment and we will continue to pursue aggressively.
Yes.
Alright, thanks, so much and good luck.
Thank you.
We will now take our last question. Please go ahead caller your line is open.
Yeah.
Okay.
Hi, This is Kelly bania.
BMO just wanted to ask a little bit about.
How do you think case volume might respond in a moderating inflationary environment and do you think that inflation is suppressing volumes today and maybe just how you think about that by your different customer.
Segment.
Especially health care and hospitality that might be less economically sensitive.
Hi, Kelly as Andrew Thanks for the question, Yes, as we said previously we have not seen a meaningful change in behavior over the last couple of quarters.
In spite of the inflation levels that we're seeing so it's hard to predict what will happen is hard to predict how any moderation will occur in which categories.
So unfortunately don't have a great answer for you on that but I think.
In the main we feel we do feel good about.
Is the.
Our ability even in an inflationary environment to continue to drive margins share market share gains.
Through our great sales organization.
Well, it's a great existing relationships finding ways to build our share of wallet within those customers.
Got it and then just in terms of the health care and hospitality.
Maybe more of a health care I guess, what do you think is the catalyst to really get.
That back to where you think it can be.
Good morning, Kelly Derrick I think on that one it's just it's a lot of it is continued confidence in people comfort in getting back out too.
Getting their seniors into senior living facilities bed occupancy rates have continued to very slowly tick up also I think some of it in cute or hospital systems and staffing they continue to staff up and being able to reopen catering.
Like so it really is that is one where because we have a fair bit of business in healthcare it means.
Little slower recovery for us perhaps than some others, but we are seeing that continued improvement really each quarter that goes by and that that continues to be very encouraging and we think that as we continue as people continue to build confidence that that.
Hopefully continues.
Yeah.
Thank you. Thank you. Thank you.
That concludes today's question answer session I would now like to turn the conference back to Mr. Shah for any additional or closing remarks.
Thank you everyone for participating today, and we will follow up shortly after the call. Thank you and have a great day.
Yes.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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