Q3 2022 US Foods Holding Corp Earnings Call
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Adam Dobrowski Investor Relations you May begin your conference.
Thank you Rob good morning, everyone and welcome to U S Foods third quarter earnings call speaking on the call today, we have Andrew <unk> interim Chief Executive Officer, and Dirk Locascio, Our Chief Financial Officer. Additionally, Bob Koski, our executive Chair will join for our Q&A session. We will take your questions ever prepared remark.
To conclude please provide your name your firm and limit yourself to one question.
Our earnings release issued earlier this morning, and today's presentation slides can be accessed on the Investor Relations page of our website during today's call and unless otherwise stated we're comparing our third quarter results to the same period in fiscal year 2021. In addition to historical information certain statements made during today's call are considered forward looking statements.
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 reconciliations to the most comparable GAAP financial measures are included in the scheduled.
On our earnings press release as well as in the appendices to the presentation slides posted on our website, except to say we are not providing reconciliations to forward looking non-GAAP financial measures as indicated there.
Thank you for your interest in U S food and I will now turn over the call to Andrew.
Thanks, Adam Good morning, everyone and thanks for joining us today first and foremost I'm delighted to report that we delivered strong third quarter results, reflecting continued execution of our long range plan.
U S foods performance to date underscores our confidence in achieving our 2022 outlook.
We remain committed to continuing the momentum from the first three quarters and driving our long range plan.
Let's turn to page three for key takeaways from the quarter.
First our results this quarter demonstrate continued solid execution across the three pillars of our long range plan. Our associates are a critical part of this progress and I'm grateful to them for their focus on execution and on serving our customers. In addition to strong day to day execution U S Foods associates of continue their tradition of <unk>.
Stepping up when our customers and communities need us most most recently during hurricane in which severely impacted many of our customers on the east coast. Our teams worked tirelessly to ensure our customers and the relief agencies, we support could operate effectively and properly serve their customers.
Based on feedback we received our storm preparation and response, our best in class in our industry.
This intense focus on delivering for our customers is a large part of why we've been able to capture market share with key customer types in all three quarters of 2022.
Second with strong momentum in our plan use food is increasingly well positioned to win in an evolving macro environment, particularly in light of our effective management of inflation and deflation our scale and customer diversity and continued recovery tailwind our results reinforce our confidence to deliver a strong finish to the.
A year.
Finally, we expect to drive meaningful value creation for shareholders through a new share repurchase program announced this morning, we are committed to utilizing U S foods strong cash flow to deliver long term shareholder value.
Turning to page four I'll start by walking through our third quarter highlights.
Starting off we once again delivered strong financial results net sales for the quarter grew 13% year over year volume growth strengthened as the quarter progressed, which we see as positive for both our business and for our customers.
Adjusted EBITDA grew nearly 21% for the quarter, an acceleration from our Q2 growth rate or.
Our adjusted EBITDA margins also increased 20 basis points from the prior year as we gained operating leverage.
Finally, we have updated our 2022 guidance toward the top end of our prior adjusted EBITDA outlook range. Our results show the resiliency in our business and the ability of our team to deliver on the plan we put forth earlier this year.
Turning to our customer experience, we launched <unk>, our next generation industry, leading digital tool and we continue to drive market share gains with key customer types, which we expect to continue as we further embed share data into our operating processes.
Finally, we further expanded our omni channel with two new chef stores, which opened in Q3 and early Q4. This brings us to four stores opened to date with an expectation of two more openings before the end of 2022. We also continued to expand our pronto service a delivery service focused on smaller customers and concentrate.
The geographies and are active with that program in nearly 30 markets.
Next we are pleased with our continued progress on supply chain.
<unk> completed our warehouse selection technology deployment as planned this system enables a better associate experience improved selection accuracy and ultimately a better customer experience I.
I talked last quarter about the various actions we are taking to improve employee retention and I'm happy to report that we are seeing progress.
Both driver and warehouse turnover have improved from what we experienced in each one we.
We are not yet where we want to be and we remain laser focused on improving retention by simplifying our core processes strengthening leadership engagement and offering greater flexibility with respect to shift schedules.
Early returns from our seven day work week pilot in the southeast have been promising and the flexibility. It offers proves prove very helpful before and after hurricane in <unk>.
Finally, we continue to make progress on inbound logistics, resulting in further improved financial results and third part party partner collaborations.
This work is well ahead of plan for the year.
Lastly, we've been intentional in managing our capital structure and have reduced our leverage to three seven times as of the end of Q3 2022.
During Q3, we prepaid $100 million on our 2021 term loan.
In October prepaid another $100 million on our 2019 and term loan.
We are also very pleased to have announced earlier today that our board of directors has approved a $500 million share repurchase program a significant step in further demonstrating the strength of our capital structure confidence in our future and focus on shareholder value creation.
We see this move is highly accretive to shareholder value at our current share price and as further evidence of our commitment to being responsible stewards of shareholder capital.
With that let's turn to page five and discuss how our performance in the quarter translates into progress on the three pillars of the long range plan to drive profitable share gains expand margins and improve operational efficiencies.
Looking at our first pillar, we are tracking to exceed our targeted restaurant growth rate of one five times. The market. We are also continuing to win in the marketplace as demonstrated by our share gains in key customer types of independent healthcare and hospitality.
<unk> launch I mentioned earlier is a significant milestone moxie is a step change to the customer experience from a performance and ease of use perspective.
We have been focused on ensuring increased customer speed confidence and control our new one stop shop App is 30% faster than it was before and is similar to the user experience of leading retail apps customer and seller feedback has been very positive and we expect this to extend our technology lead.
In the industry.
As mentioned earlier, we expect to open six new chef stores in 2022, which is the high end of the range. We previously communicated as we open stores, we are building our capabilities to accelerate that pace in 2023.
Let's move on to the margin optimization pillar as a reminder, we've been working on a number of internal initiatives to improve gross profit per case that are independent of market conditions. For example, we continued to build on the momentum from inbound logistics as our process management initiatives.
The program continues to drive efficiencies.
We effectively managed inflation and deflation by running our proven plays in the third quarter, we saw less sequential inflation than we experienced in the first half of the year and yet our gross margins remained strong and in line with the first half of the year.
Cost of goods management program is also performing well and continues ahead of schedule with approximately 40% of our total vendor spend expected to be addressed by year end.
Turning last to operational efficiencies, we are making progress despite the challenging macro environment, our routing optimization and network planning work continued in our cases per mile improved further ahead of 2019 in the third quarter to the best results we've seen to date.
We are pleased with the progress yet remained focused on the benefits still to come from this work and from the routing system replacement in a future phase.
Work, we are doing unemployed engagement flexible schedules and process standardization for example is yielding benefits as we experienced a lower turnover in the third quarter than we saw in the second quarter.
We tackled productivity through a combination of network wide initiatives and targeted optimization efforts in select markets with the greatest productivity opportunities.
Turning next to page six.
We've made significant progress over the last three quarters and expect to build on that progress to achieve our plan.
The entire U S Foods organization is focused on these initiatives and the actions that drive our long range plan and we are relentlessly executing against all three pillars.
As a result, we are enhancing the customer experience and our operational foundation, leading to share gains and significant year over year profitability improvements.
We are a resilient business, serving many customer types given our U S focus our operations are less volatile than others. This positions us well to win even in a challenging macro environment and further strengthens our belief in the rightness and achieve ability of our long range plan.
As we continue to build momentum against this plan, we will prudently allocate the strong and growing cash flow against our four priorities to create shareholder value.
In summary, I am proud of and energized by our progress this year and I am confident we will build on this momentum to deliver a strong 2022 and set us up for a strong 2023.
With that I'll hand, it over to Derek to do a deeper dive into our financial results <unk> over to you.
Thanks, Andrew and good morning, I will start on page eight.
We're very pleased with what we accomplished this quarter, we continued to build on our momentum from the last two quarters.
<unk> demonstrated progress against our long range plan.
Adjusted EBITDA grew 21% from the prior year to $351 million for the quarter, which is an acceleration from our Q2 growth rate.
In addition to strong EBITDA dollars, our adjusted EBITDA per case remains strong it was in line with Q3 2019.
Q3, adjusted EBITDA was the best quarter relative to 2019 since prior to the start of the pandemic.
Adjusted diluted EPS increased 25% over the prior year third quarter to 60.
These highlights demonstrate the actions we are taking to grow and further strengthen our business are delivering meaningful results.
Net sales were $8 9 billion in Q3, an increase of 13% over the prior year.
Total case volume increased 1% from the prior year and food cost inflation was 12%.
Similar to last quarter, our Q3 year over year case growth was negatively impacted approximately 200 basis points by the planned mid 2021 exit of the grocery retail business, we temporarily added during the pandemic.
And a small number of strategic exits.
Independent case growth increased 3% over the prior year.
We continue.
<unk> of strong gross profit dollar growth again this quarter.
Our adjusted gross profit dollars increased 15% from the prior year and as a result, we generated strong adjusted gross profit per case.
This is important because we experienced little sequential inflation compared to large amounts in the first half of the year, Yes, we're able to maintain similar gross profit per case.
Opex remains elevated.
However, as the quarter progressed, we saw positive signs with improved operations turnover and productivity rates.
Lets look at volume further on page nine.
Independent cases increased 3% on top of nearly 25% growth in the prior year.
Hospitality grew 20% and healthcare grew 3% offset by approximately 7% lower chain volume and the retail exit impact I noted previously.
Our chain decline was driven this quarter largely by the strategic exit of a small number of lower profitability and more complex customers consistent with what we talked about in Q2.
Case growth across almost all customer types finished the quarter with stronger growth rates than they started.
And above the quarter's overall case growth for each type.
This was very positive and we expect volume to improve further in Q4, we delivered share gains in key customer types again this quarter.
I will focus briefly on growth relative to 2019, the last full year prior to the outside of the pandemic.
Q3, total case growth was about six 5% below 2019 with IND cases are independent cases.
Forming the strongest at three 3% above Q3 2019, we ended the quarter with strong momentum as our exit rates were above Q3 growth rates for most customer types, we still have embedded COVID-19 recovery gains regardless of the macro backdrop as health care cases were about 6% below Q3 2019.
Jean and hospitality was approximately 14% below 2019, while showing improvement from Q2 results.
We are optimistic about our positive volume trends in September and October as they show continued strength and improvement.
Turning to page 10, we are updating our fiscal 2022 guidance provided previously.
We expect to exceed our volume goal relative to the market Technomic latest outlook for 2022 calls for restaurants to be negative compared to 2021, while we expect to be positive even with a small number of strategic chain exits previously discussed.
Within restaurants overall, our independent growth remains positive and is expected to improve further while the technomic outlook for the year is negative.
We also are on track to exceed the outlook for healthcare and be in line for hospitality as.
As full service lodging an area that has been lagging in recovery accelerates, we expect to further improve hospitality relative to the industry.
Moving to earnings we are tightening our adjusted EBITDA guidance to a range of $1 $2 8 billion to $1 3 billion.
This reflects our significantly increased confidence in achieving the high end of our previously provided range as a result of three quarters of strong execution against the three pillars of our long range plan.
We're also tightening our adjusted diluted EPS range to $2 10 to $2 20 to align with the updated adjusted EBITDA range.
Interest expense is expected to be $250 million to $255 million in cash capex is expected to be $270 million to $280 million.
Total capex, including cash and financing leases for fleet are expected to be approximately $400 million.
Finally, we continue to expect net leverage to be approximately three five times at year end.
Looking at page 11, we made further progress again this quarter in strengthening our capital structure and reducing leverage we reduced our net leverage compared to both Q3 2021 and Q2 2022.
Our net leverage ratio was three seven times at the end of the third quarter, which was a one turn reduction from a year ago and a half turn reduction from Q2 of this year.
We reduced gross debt approximately $450 million compared to Q3 2021.
And during Q3, 2022 prepaid $100 million of term loan and finally to date in Q4, we prepaid an additional $100 million of term loan <unk>.
Leverage reduction as one of the focus areas of our capital allocation strategy. We continue to make strong progress toward our goal of two five to three times net leverage and we expect to achieve net leverage range in fiscal 2023.
I am quite pleased with the progress we continue to make in further strengthening our capital structure and delivering on our priority to reduce leverage.
Turning to page 12.
U S foods, a strong cash flow, we are using to fuel our stated priorities.
We will continue to invest in the business for growth with roughly $400 million in capital invested in 2022.
Against technologies, such as marketing and warehouse selection.
Facilities, such as our new distribution center in New Orleans, and our most environmentally sustainable distribution center in Sacramento, New chef stores and fleet.
We have made significant progress in reducing our leverage and expect to achieve our target range of two five to three times in 2023, we are doing this by using our strong cash flow to reduce debt and growing earnings.
Finally.
We are very pleased to announce a $500 million share repurchase program.
This is a significant step as we have demonstrated meaningful leverage reduction and focus on a balance of further leverage reduction and return of capital to shareholders.
We expect to begin some opportunistic repurchases in the fourth quarter.
It reflects strength in our balance sheet.
The resiliency of our business.
Our strong cash flow generation and the tremendous value we see in our shares.
In 2023, we expect to continue reducing leverage and Opportunistically repurchasing shares in parallel.
These actions and outcomes demonstrate our commitment to a strong capital structure and activities to create shareholder value.
We expect to end the year and our target leverage range inclusive of any capital we may return to shareholders to sum it up I am pleased with our progress this year and I'm confident in our ability to deliver our 2022 outlook with that I'll pass it back to Andrew.
Thanks, Derrick in closing, we continue to be laser focused on driving profitable share gains expanding gross margins and building on our strong operational and financial momentum.
I am confident in the growing strength of our business. Thanks to the initiatives, we have underway and the hard work of our talented team as they continue to focus on serving our customers and executing our long range plan with excellence to put it succinctly we are winning.
And I am proud of our progress.
With that operator, please open up the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Jake Bartlett from <unk> Securities. Your line is open.
Great. Thanks for taking the question.
My first is on independent case growth and from ACC and acceleration there I'm wondering if you could provide detail on what's driving the acceleration.
How traffic is going where the customers, whether that's been a drag or a plus.
Whether the acceleration is driven by more.
More by wallet share gains or new generation.
And then I have a follow up.
Hi, Jake it's Andrew Thanks for the question, Yes, we're actually quite pleased with the balance that we're seeing in that growth. It is actually a combination of both share of wallet gains as well as.
New business and I will also say, we've also seen a reasonable strengthening of our own customer demand, suggesting that they too are growing as well. So it's sort of a combination across all three of expanding share of wallet driving new new customer growth through new customers as well as our customers themselves.
<unk> seen growth in their business.
Great and then I had a question on versus 19, the case growth versus 19, it looks like.
In most segments other than the hospitality and health care, there was a slight deceleration in the third quarter versus the second so I just was hoping you could comment on kind of what what drove that.
Whether your share gains were were similar in the third quarter versus the second.
And just just any commentary on what why those distillery just slightly.
Sure. Good morning, Jake this dark good question. So overall I think we're pleased what we saw was.
At the beginning of the third quarter had a little bit of just like you saw sort of broadly across there had a slower start just with some some.
Slower demand broadly we've seen that continued to improve as the quarter has gone on hence what Andrew and I have talked about just the the confidence in which we exited the quarter and enter the fourth quarter I feel good about trajectory of the case growth I think the important thing is we do continue to see share gains across our key customer types.
And we think just with health care and hospitality also those are continuing to improve relative to 2019 and I expect that to continue as well and is really a built in tailwind so fill the position as well.
We're well positioned to grow with the right key customer types as we've talked a lot about for us it's about profitably growing with the right customer types as opposed to growth just for the sake of growth. So we feel good about the quarter and where we ended the fourth quarter and Jake just to add to your question. We saw share gains that were quite consistent and trajectory.
What we saw in Q2.
Great I appreciate it thank you.
Your next question comes from the line of Nicole Miller from Piper Sandler Your line is open.
Thank you so much a couple of quick ones can you talk a little bit about your fill rates, both inbound and outbound and then any backhaul opportunity, yes, I do believe that's quite fairly material opportunity for you.
Yes, Thanks, Nicole it's Andrew I appreciate the question so we would say.
Our outbound fill rates or fill rates to our customers continued to improve.
The inbound though has been fairly flat versus where it was in Q2, a little bit of improvement.
In some in some key categories, but generally speaking still still fairly flat.
And we continue to basically manage that through two main means one is to diversify our supplier base to make sure. We've got alternatives when our primary arent in stock and secondly to build up a little bit of extra safety stock to ensure that we have products in key categories.
As far as the backhaul opportunity that is something that we have been actively pursuing for quite some time and youll see you have seen from our.
Great results.
<unk> income results.
Those efforts are really paying off I think we still got some opportunity to continue to go after that and Thats something that that team is very focused on.
And remind us the inbound like I've asked this question I guess of late.
The opportunity to.
I understand the Domino effect, there or is that something.
On the manufacturer side with their own labor their own inventory their own capacity like what is what is the what's the problem today.
I think it's all of the above continued challenge that the only thing I'd add to that list as continued challenges raw material supply.
In some in some of our categories.
The system is still.
Got some.
Got some challenges that is working through we're definitely starting to see some improvements in.
Even though our fill rates in absolute terms havent improved as much as we would like our de facto fill rates have improved because of the diversification of supplier base. So we are still getting the product, which is not getting it from the usual sources in all cases.
And then thinking back to prior recessions or really any period of macro consumer weakness that you could speak to you.
Did you us foods I.
I guess sales rate I guess, it might be organic go up or down.
And more importantly in terms of your share when you think back to those types of prior periods.
You take share from bigger and smaller peers or do you see share two smaller or bigger peers.
Good morning, Nicole This is Derrick that's a good question. So overall, our industry and our business has shown itself to be quite resilient. So if you look at.
A very tough recession in 2008 2009.
Cases were down mid single digits of earnings were relatively flat. If you look at other though outside of 2008 2009, the last three or four inflation induced recessions you saw much less volume declines. So it was a very very small impacts.
That's a demonstration of the resiliency of our business one of the things that.
I think if you look back even an 809 in prior we were a very different company a lot of work around differentiation that we've done has been since then and so we would expect that all the same things that are resonating today for us to take share across these key customer types to continue to resonate and in fact I think that.
<unk> us even better through whether any kind of challenge that comes then we were in the past. So I think we're well positioned and even though we can't control the macro we can't control the execution of our long range plan and the initiatives to drive that and that's what we're going to focus on.
And last question please.
How does less inflation this inflation impact the top and bottom line and what is the lag until you see that impact versus the market movement in the underlying commodity items.
You.
Sure so.
Overall, what we see is that.
The lag is relatively short so again most of our contracts or not.
Non contract price tends to be call. It within a month it can be from a week to a month or so I think it's a pretty quick.
But the positive thing is in the third quarter. So we saw the least amount of sequential inflation that we've seen since I think it was the beginning of 2021.
Very small amounts relative to the first half of the year yet our gross profit per case remained quite strong.
That demonstrates the resiliency of the business and.
And within that sequential inflation in Q3, we actually saw many center of the plate protein categories that saw some deflation and our processes.
<unk> two earlier in the Playbooks that we have we managed through that quite effectively and so those are the categories.
<unk> is actually that we think are more likely to show the deflation.
And almost all of those categories tend to be a fixed markup over whatever our cost is so therefore overtime not really impacting our overall profitability. So quite quite pleased with the progress quite pleased with our management through it and where we where we're positioned from an inflationary or deflationary environment.
Thank you very much.
And your next question comes from the line of John <unk> from Guggenheim. Your line is open.
Hey, I wanted to start it.
Independent cases, right. So I think you've said you've seen improvement thus far in the fourth quarter.
Any quantification of that right.
It's fairly modest, but maybe that's wrong and is that coming from.
A number of accounts where drop size.
Then lastly, just on that topic right. If the market grew slower do you think you can flex up.
The one five to <unk>.
Maintaining the current level of growth.
The market would impact.
Your ability to grow.
So John Thanks for the question, Yes, we would say.
A meaningfully better.
Right then we saw overall in the quarter.
And that would be driven by a combination of the factors you mentioned as I said in the earlier question from Jake It's we're pretty happy with the balance that we're seeing in the way we are driving it.
<unk>.
And.
Yes, I was just going to say on the second part of the ability to outgrow.
But we think is.
And the environment, it's hard to know exactly where we shake out if you see a slowdown but I think what we would expect as we would expect to outgrow period, and I think that the thing that would be a factor that would potentially enable us to even outgrow further would be.
Our differentiation in the offerings that we have to customers to help them succeed is something that.
It helps them through difficult environments, and we've seen that in the way we help customers manage their way through COVID-19 with the PPP loans, how to get them how to how to use them effectively as well as how we are helping them manage through it.
Inflation in their businesses. So I think if anything we're probably better positions, but the work that we're doing we think is.
We will allow us to continue to take share.
And John just to add to that I think one of the things. We've learned most through Covid really is is the ability to.
To be nimble and agile and redeploy.
Our resources, where the growth is and I think thats been a pretty significant contributor to what has really been very steady sequential market share gains period over period over the course of the entire first three quarters of the year.
And then maybe the second one Derek usually give a little bit of an update right on staffing.
Collectors and drivers right, so where do we stand on that and then I'm curious on a go forward normalized basis right do you think labor hours, how much below case growth can labor hours with the benefit of productivity right and I assume you would you expect.
Hourly wage rate.
Well that grow mid single digit or there's an opportunity to bring that in lower than that.
Yeah, John why don't I start and then maybe <unk> a little bit about what we're seeing on the rate side as far as our staffing situation. We feel very good we're in a very solid position in the vast majority of our markets.
As I mentioned in my remarks, we saw turnover take a pretty meaningful.
Reduction over the over the course of the third quarter and that was a combination primarily I think driven by some of the initiatives, we've taken to better engage our workforce and create a culture that they want to be part of those.
Those are really starting to show some real impacts, but we've also undoubtedly had a little bit of help from the macro environment as.
As well, so I would say right now feel pretty good.
About the about the staffing situation.
I'll maybe start on the second part of the question.
We've seen primarily as we as we get to a better places obviously that has an almost immediate impact on our productivity and that is starting to show up.
In our business.
The other thing we've also seen is a lot more straight time.
In our in our facilities much less need for over time, which is probably the first impact that we're going to likely youre going to see.
More than necessarily overall hours reduction in the short term.
Yes, John I think to get back to the point on what we're looking at costs going forward. So.
I do think we can get back to an environment, where cost grow in line to less fan cases, I think that the part that's a little hard to know exactly is at what pace that happens just knowing that so much of it is driven by the turnover and the retention factor and as Andrew said, we're pleased with the early signs we're seeing there.
We know, we're not where we want to be but we're going to continue to be focused on improving that I think from overall wage inflation perspective.
As we as we see them as we look ahead that does appear to be coming back I'll call. It closer to historical levels of inflation tied to know depending on what happens with the macro exactly where it settles, but I think the important takeaway. There is it doesn't appear as though last years level of outsized increases appear to be the new norm, but as you would expect.
Watching and managing that quite closely.
Okay. Thank you.
Your next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.
Yes, hi, good morning, guys.
I just wanted to zero in on.
A couple of things.
Alrighty, but in terms of gross profit per case.
Derek you pretty intentionally highlight the fact that inflation and celebrating yet cost.
That's probably the case in Spain.
Strong and even this quarter it looks like and we'll consolidate it alright, I guess, what I'm trying to figure out are you implying that level.
Level is sustainable.
And then as we think about going forward in the next year.
With the continued benefit of mix is that a line item that you could even grow from here just kind of curious as to how youre thinking about gross profit per case off of this level.
Sure. Thanks.
Thanks, Ed Good question, you're right that was very intentional and highlighting that and I think really what we're just trying to make sure is clear to people is the durability that we think is there in our gross profit per case.
And any in the environment, where you see it in center of the plate of.
Deflation, which is where we think more of that.
Potential of deflation is more likely than in grocery and we're managing through it so to your point, we do think as we look ahead. We think we can continue to have strong and growing gross profit and that really is underscored by the points of both Andrew and I made of.
The majority vast majority of our gross profit gains are coming from the things we're doing in our four walls as part of our plan as opposed to deflation and inflation and the pieces of inflation that are help especially on the parts of the business that our percentage markup. We think are sticky. So overall I feel like we're very well positioned.
Very happy with the progress we made this quarter and look forward to continuing that into 2023. In fact it is a good example, as we think of 2022 and even when we when we look ahead to 2023. So much of the work that we've done on our initiatives. This year across the spectrum of the pillars, we think position us.
Very well and will drive a lot of the earnings growth as we get into 2023.
Okay.
Alright, and then just a quick follow up.
On where you stand in terms of customer exit.
I know you noted sort of retail and then some other miscellaneous.
But.
Are you now at the point, where you are really focused on more sort of like the net case growth going forward, meaning a lot of the exits are behind you.
Sure. So I think that out of the 200 basis points.
But we talked about this quarter a little under half of it was the grocery piece of retail that is fully lapped by the end of the first or by the end of the third quarter. The other piece that's changed will continue through Q1.
What I would say is our focus has been and continues to be around growing with the right customers. So it's about growing profitably as opposed to just case growth I think when you look at any business.
Looking across and having sort of some level of I'll call. It hygiene and what's the right mix and replacing customers with better customers as part of what we and you would expect I would think others to do as we go through there. So overall it is about growing the business, but it really is about growing the business with those more profitable customers and.
Hopefully, which you see this quarter is with 21% EBITDA growth.
We are well positioned as we think to exit 2023, sorry, 2022 and enter 2023.
Awesome. Thank you.
Thanks, Ed our next our next.
Question comes from the line of Lauren Silberman from Credit Suisse. Your line is open.
Thank you very much and I will just start with the announcement of the share repurchase program, which I think of US first can you talk about higher capital allocation priority change and just those priorities and where buybacks fit in relative to reducing debt. Thank you.
Sure. Good morning, Lauren Good question. So this is exciting for us to be in a position to talk about this and I think it's really been Andrew used the word intentional we've been very intentional in the way, we manage our capital structure.
And so really what this does is it fits right into one of the four priorities that we've talked a lot about and what we've said regularly as we don't need to get all the way to the three times high end of the range in order to begin this but what I will be clear about though is that we remain committed to reducing leverage to getting in that range and we think thats.
Going forward this.
Sort of the repurchase.
Opportunistic way to again create shareholder value, especially with our shares at the levels, they're at but secondly that we would expect in parallel to further reduce debt and we'll grow earnings as well as repurchase shares and think that we will be expect to be in that range of two five to three times by the end of next year inclusive.
Of any capital that we return. So this really is about just.
Because of the strengthening of the capital structure of the maturity as part of our whole priority and plan that we've been managing to.
It is just the next step in that journey and very pleased with our ability to announce that today okay.
Great. Thanks, and then on the gross profit side can you talk about what youre seeing with private label and more challenging environment would you expect to see an increase in the level of penetration and I guess its tongue forward, most meaningful initiatives and opportunities you see to get that level even higher.
Yes.
Hi, Lauren it's Andrew Thanks, Thanks for the question, Yes, we absolutely.
Have seen throughout.
Great opportunity to improve our penetration.
One of the challenges of course has been supply.
Most of our arrangements are with a limited number of suppliers.
From pre Covid times, and we've had to significantly change our thinking around that to have alternatives in place I think we've done a really good job of doing that we're very very good spot now from a from a fairly stable supply foundation to really aggressively go after those increases we've seen a natural improvement as customers tend to seek out the value of that.
The control brand represents.
And we expect that to accelerate as we get into.
Much better supply situation. So, yes, definitely expect to see that penetration level go up.
Over the next several quarters.
Okay, and just a last one on the gross profit per case, how much of your business is on a percentage markup and the dollar amount that you're willing to provide that.
Sure.
Straight percentage, it's about half of the business and then the other half is a combination of either a fixed markup <unk> kind of more spot pricing on noncontract type of business.
Perfect. Thank you.
Thanks.
Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.
Great. Thank you very much a couple of questions. The first one just on the foodservice chain business you mentioned the decline in that business relative to independent growth.
I'm just trying to get a sense you mentioned.
Portion of that is intentional exits of certain business.
We've heard from others that maybe there is an actual slowdown in the actual trane business. So just trying to get a sense for the balance between what you consciously exited versus what perhaps is the.
The business slowing down and then maybe the outlook you see for that going into 'twenty three.
Sure if we if we compare the decline that we're seeing are still either amount below 2019 levels. Almost all of that is the combination of these exits that we've talked about as well as the two concepts that we've talked about that have more meaningful reductions in same store sales.
Absent those two things are chain businesses relatively in line with where it was 2019 I think to your point, Jeff. So we're watching it closely you do see across the different chains you see some that continue to perform very well you see others that don't perform as well we'll continue to watch to see if you see any kind of a sort of more discernible.
Slowdown, but again those are typically on the lower end of the margin spectrum and we think that even the change that we have brought on board in growing our well positioned in the environment that we're in so our key is going to continue to be with growing with those key customer type sand and then being very opportunistic in the all other.
Understood and then you mentioned on the commodity inflation side.
I think youre, implying you would expect continued easing.
They're not that means as a basket.
But it would fall into the single digits as we close out.
Two.
Is there actual.
Deflation a couple of times I know you're mentioning it's specific to center of plate, but is there a concern that the overall basket would turn to deflation or perhaps that wouldnt be a concern at all any kind of sense for where you see that basket of inflation going in the short term and whether or not it would be concerning if it went to deflation.
Yeah. So so obviously, it's a little hard to predict as we've all discovered over the last several quarters, what inflation is going to do.
I think with Dirk has sort of signaling is we have seen a little bit of easing off in a couple of the commodity categories and we feel very good about our ability to manage through that.
Our expectation as we look forward, though and I think we said this in the past is is is there could very well be and likely will be some easing off on the commodity categories, but we don't expect to see.
At the same level of easing in non commodity categories typically.
Prices go one direction in that area and that we expect therefore, there to be a fair amount of stickiness in the non commodity categories from an inflation standpoint.
Got it and lastly, just because we're now.
A month or so away from 2023.
So reasonable to assume that the prior guidance is achievable I mean, it seems like youre coming in 'twenty two at the upper end of ranges.
I know you've talked about growing at one five times the market, but I think you had also thrown out there.
The billion dollars of half on EBITDA and margins getting back into that mid 4% range is that realistic for 2023 or has the more recent dynamic made that.
Those goals change either for better for worse.
Sure. So I think Jeff we will update that when we release, our Q4, but what I would tell you is just kind of reinforcing what Andrew and I. Both said is we're very pleased with where we're.
Progress we're at to date and that where we expect to exit 'twenty two with so I think with that we feel very good about where the businesses. We feel very good about the progress against the plan and so we will let you can take with that which you may and again look forward to talking about it more in February .
That's pretty clear thank you very much.
Your next question comes from the line of Mark Carden from UBS. Your line is open.
Good morning, Thanks, so much for taking the questions. So to start on moxie. It sounds like Youre hearing good feedback. So far would you expect for this to be a reasonable tailwind or it's been deployed so far in <unk> or is it still too early from a ramp perspective, and then more broadly how should we think about the pacing of the broader rollout over the next few quarters.
Yes, thanks Mark.
So we definitely are very pleased with the early returns from Moxie Moxie.
Really primary benefit in the short term.
Being a further inducement to all of our customers to get on the E Commerce platform, which we've talked about in the past.
All sorts of benefits.
We've been told in.
We would agree that this is this really is comparable to any of the sort of leading retail platforms out there in terms of ease of use and functionality.
As far as far as the sort of the tailwind and impact on independent case growth, we havent we havent.
Specifically tried to isolate on that but it's clear that the momentum we're seeing is likely driven at least in part.
Bye Bye moxie in terms of its rollout it is basically now rolled out.
Across our business for our local customers, we still have some.
Work to do to make the platform available to the entirety of our national customer base.
As we've got some.
<unk>.
We need to make it.
Make some adjustments to the to the platform in order for it to fit their order guide setup typically but that is something that we'll be actively worked on and likely come come and start to see in the first half of next year.
So very very pleased with what we've seen from them from a local standpoint haven't sort of isolated the specific impact of moxie, but have very little doubt that we are seeing many of the benefits that we've seen historically of getting folks on that e-commerce platform being driven by increases from as a result of using marketing.
Okay, Great and then my second one is a follow up to <unk> question. After your recent debt Paydowns, how does your exposure to fixed and floating rates shake out and how are you thinking about the next there going forward.
Sure. So we ended the quarter size of.
End of Q3, we were about 55% fixed so the additional 100 million from variable would increase the percentage of variable or sorry at fixed a little bit I would expect that the additional debt that we will pay down going forward will be against variable rate debt. So that will continue to increase the fixed over time.
Great. Thanks, so much and good luck.
Alright, Thanks, Mark Thanks, Mark.
Your next question comes from the line of Kelly Bania from BMO capital markets. Your line is open.
Hi, good morning, Thanks for taking our question.
Just a couple of follow up here on an inflation impact.
Yes Juan.
Do you anticipate that.
Moderating inflationary environment may or may not impact the competitive environment.
So that's part one and then I'll.
Do you think.
Do you think there could be some stronger volume growth hard to tell with all the volatility how.
And it's really impacted volume I guess I'm just trying to ask.
The question is if we start to see completion.
In place and really start to moderate here could you have stronger volume growth.
Opposite to that.
Yes, Thanks, Kelly, it's Andrew I appreciate the question.
I think we would say as far as what we're seeing in the competitive environment today and have done too much of.
The last couple of years is Theres still continues to be I would say is a fair degree of rationality.
From a pricing standpoint.
We're obviously.
Obviously, all looking for opportunities to.
To reduce our cost of goods and allow us to price to a more competitive level and thats something that well.
Will I think continue to be a priority for everyone, but I don't anticipate necessarily a meaningful change in the dynamics that we're seeing in the competitive environment as a result of that and as far as volume growth is concerned we've been obviously very paying very close attention.
Not only to our relative price position to the extent, we're able to determine it but also.
Share gains by category and paying very close attention to category.
Softening in where we have seen that softening we've taken some steps.
To adjust our prices if we believe thats the issue so.
But I would say overall, we've not seen a great deal of impact even though prices have continued to continue to go up at a quite a considerable rate not saying it couldnt someday happened and certainly something we're going to continue to pay close attention to but we have been feeling very good about the way in which we've been managing the balance between margin and volume growth.
And the environment based on the fact that we've been able to grow our margin at a pretty good rate while at the same time growing market share at an equally good rate.
And your next question comes from the line of John <unk> from Jpmorgan. Your line is open.
Hi, Thank you.
I'm going to just take a step back and this might be an obvious question.
When you look at your most profitable market segments, I mean, obviously independent restaurants, but perhaps we could put the healthcare and hospitality as well, but the focus on independent restaurants.
What are the key reasons in 2022, why you might be losing some customers. What are the reasons why you haven't been able to gain new customers I wonder if that's kind of changing and if youre kind of identifying the factors.
Like what you could do what you could improve the end to make your customer base stickier and to grow your customer base, you know maybe that how that's evolving and Dodge.
Josh we've talked about so many things, but what you think the most important thing that U S foods can do outside of just straight price obviously.
To really really drive retention, if that's maybe changed relative to a couple of years ago. When this obviously a dynamic environment.
Yes, John Thanks for the question I think we would say we've been very pleased really with the with the way in which we have grown our business across all our key segments.
As reflected in our market share gains sequentially from from really the beginning of the year through till today and.
And we expect to see that continue and I'd say, there's a couple of reasons for that I think.
Or as the supply environment gets to a better place.
It allows what we believe to be some of the important differentiator as we have as a company to really sort of come to the fore.
Namely our team based selling the great innovative.
<unk> platform as well as the technology that we bring to our customers and so I think combination of those things as well as.
Just some of the great work the team has done around just focusing on on going after business in the areas, where it is growing have been really.
Made as sort of the year. The success, it's been in terms of our ability to continue to grow to grow share across those key key profit profitable segments you mentioned.
Let me ask you this I mean, I remember some years ago.
In terms of overall route efficiencies there were changes of the day or time of day that maybe customers are getting their orders.
The customer wasn't necessarily happy about that could have influenced.
The deliveries I mean things like the minimum number of cases that a customer would have to order I mean, where those types of changes that were made a few years ago, maybe obstacles or is that not really a factor I mean, just just trying to think about what how maybe the customers' demand for flexibility may have changed in your ability.
<unk> to serve that flexibility.
Yes.
Look that's the balance.
And.
Getting back to your question as well one of the things customers are quite prepared to pay for his strong service but.
You'll find many customers typically want to have their products delivered within a pretty tight window and thats something we always strive to do but we can't be everywhere at once so we have to build our roots in a way.
That is most logical to sort of minimize miles what we have found.
That I think has really been a.
Very effective.
Our approach has been has been too.
Prioritize our really our most profitable customers.
And building those routes and that has allowed us not only to create some efficiencies, but also to ensure that those.
High value customers get the service that they deserve.
I think we will continue to build upon as we move forward.
But theres a lot of things we've also been exploring as we mentioned earlier.
One day work week, which has we think some really important benefits from a from a selective turnover standpoint, but we also think theres an opportunity by spending some of the volume across the week of creating a much better service experience for our customers as well, which is why we're very optimistic about what that could bring.
And John maybe.
Thank you for that.
Just real quick as you know.
I think specifically on the drop size in fact, we've not seen an issue in fact that can almost be in some cases, a worst customer experience because.
Do you have more small drops on trucks that cause competitors.
To be late but one of the things that's I think underscores our focus on the customer here is so the things that Andrew talked about on the core sort of broadline delivered customers. We also have our pronto that Andrew talked about which is our small truck services live in almost 30 markets and that is largely dense more urban air.
He has that allows for smaller customers.
And that has very attractive economics on there and it allows us more flexibility later cutoffs for those customers.
Have lots of storage space et cetera, and we think there's still a runway. There are directed we've talked about which is a much broader assortment online that's more of a direct ship and then finally of course, the cash and carry which we continue to add to and that allows our existing customers to do fill ins as well as other smaller customers to shop their way. So it really is about we think serving the right <unk>.
<unk> with the right options as opposed to having a broadline try to be all things to all people.
Excellent. Thank you.
Thanks, Thanks, John .
Your next question comes from the line of Alex Slagle from Jefferies. Your line is open.
Hey, Thanks, Good morning, Congrats on the progress and yes that is actually going to ask you about that seven day work week pilot.
Sure.
Even with the program and maybe what you were looking at in timing, but come at a little bit of that but if there is anything more there.
Otherwise I did just wanted to follow up on.
The working capital I guess that positive shift we have here is it fair to say, we've kind of transitioned to this becoming more of a tailwind now.
You said at the end of 'twenty, three dark getting debt within the range of two five to three times or maybe two five times if that was the target just wanted to clarify those.
Sure. So overall I think there's really not much more to add excuse me on the first part that Andrew mentioned on.
The seven day work week. It is a pilot as he talked about early positive returns, but early on so we look forward to updating as that progresses, but really a good win for sort of the associate the customer and the company. If it were able to successfully I think overall, we look to next year Youre right. So working capital a good positive good good.
Shift I think that as the recovery continues in certain customer types I think it will be I don't know that its a tailwind, but it gets closer to being a more normalized working capital environment as we as we look ahead.
And then I think finally can you remind me of the last part of your question.
Alright.
Net leverage target.
So I wasn't specific two five to three times is the range that we expect to be within that if we have anything more specific to add we will do that when we do our 2023 guidance in early.
Early in next year, but just reiterating pleased and on track for our three five times that we talked about by the end of 2020 twos are really making sure that we're delivering against the commitments that we have put forth.
Great is there any.
The calendar shift impacts or anything in fourth quarter to think about.
I think there might have been last year.
There is a little bit I'm trying to remember I think it is that the new year's holiday shift.
So if I remember it potentially a modest negative to Q4, but again fairly modest quite modest got it.
Alright, thanks very much.
Your next question comes from the line of John Glass from Morgan Stanley . Your line is open.
Thanks, very much just look back on the balance sheet and I. Appreciate all the conversation about buybacks and sort of balancing that now you still have a large amount of variable rate debt.
One what do you intend to do about that is that something that you can actually then I guess, maybe as an adjunct to that if you will.
Neither to hedge or to go back to the market and fix the rate what do you think the prevailing rates are to do so if it is added prohibiting factor right now.
Sure.
So overall, we do expect to continue to reduce that variable rate to your point. We are we do look at our capital structure in that mix and when we have an update we would definitely provide that.
We don't think that the current market as an inhibitor to potentially being able to take some action on more likely a form of a financial instrument and a new new issuance, but to the extent that we have an update we'll provide that I think the important thing is even at the rates that they are at right now our overall borrowing rates are.
So.
Quite solid.
And we will manage.
Manage that I think we are.
Relatively well positioned in the environment.
Thank you.
On market share growth Youre appears that in Houston talk about this holistically right to go out one for whatever times the market, including all segments.
Can you talk about maybe what.
Your business in that context, what you think youre growing at relative to the market.
I know you said you're going to exceed your one five times target for restaurants, I mean, what is that right now what are you growing at.
So overall, we would expect to be largely in line with the market.
Our goals for the overall business, which would be about one time or a little over one time, we do have the retail piece that we would pull out and this year again, but other than that we expect to be in line.
The important thing to take away and the reason that we separate it and don't talk about it maybe in the same way that they do is because not all growth is the same. So if you had outsized growth in chain or K through 12 education that is not our focus and we really are targeted at.
Outgrowing in those key more attractive customer types and I think what youre seeing is youre seeing that show up in our.
Larger increases in profitability overall, and so we'll continue to grow and grow smartly and you should expect out of us.
Okay. Thank you.
Thanks.
And your final question comes from the line of Peter Saleh from <unk>. Your line is open.
Great. Thanks for taking the question.
I just wanted to ask about.
Seasonality and we've heard from many restaurant operators the seasonality kind of return.
The summer slower in the summer and kind of accelerated into the fall.
Can you guys comment on the seasonality in your business, particularly in hospitality and if theres any in healthcare as well are you seen that seasonality return.
So just any comments on <unk>, which I think was.
Maybe a little bit in the fourth quarter last year and a little bit in <unk>, just any comments on that would be helpful.
Sure Peter Thank you for your question so.
Maybe I'll start with <unk> and to your point Omicron.
Limited impact in Q4 more so in Q1.
As we think about the seasonality I think.
In the summer some of the slowing it's also.
Hard to tell exactly if it's seasonality because that slowing also happen about the same time as you had fuel prices really spike and we see that oftentimes that is.
They were very closely correlated as far as timing on that the important part for our businesses.
Increased exit rates that we talked about in the strength into the early part of Q4 I think we are beyond that.
The seasonality that I would reference not as much on healthcare as a hospitality you do have some of the holiday events and that'll be something we're watching closely as that and other larger group events come back I think the other final thing in hospitality is as you have events around football and things in the fall and watching that closely there.
Those would be the main things that I would think about there.
So that will continue to watch as the year goes on.
The other thing I'd add is just.
We continue to have we think some real.
Untapped recovery in.
Those two pretty important segments of healthcare and hospitality.
And so it will we think continue to be some.
Sort of.
Baseline acceleration in those in those segments that will sort of defy the seasonality that typically is associated with them.
That we expect to see probably over the next the course of the next year or so.
Yes.
Thanks, and just my luck.
Last question would be I think you mentioned several times some deflation in center of the plate.
Any way to quantify what youre seeing and is there any evidence to suggest that that won't continue into <unk> and into 'twenty three.
Okay.
We don't typically quantify at that level, but I would say we saw in some categories are pretty meaningful.
Pullback.
But those categories are I think returning to sort of more normal volatility I would describe it than necessarily systematically reverting back to a deflationary world. In fact, we've already started to see a number of the poultry category start to creep back up again.
It just continues to be such volatility in the market from a supply standpoint that that's I think driving as much of some of the unpredictability of it.
Idle.
The team is foreseeing.
A continued downward trend, but instead more volatility than perhaps we've seen where it was where the trajectory was typically.
Mostly upwards.
Okay.
Great. Thank you very much.
Okay.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Okay.