Q2 2023 US Foods Holding Corp Earnings Call
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the U S Foods second quarter 2023 quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question.
During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Adam Dobrowski director of Investor Relations you May begin your conference.
Thank you, Rob and good morning, everyone and welcome to <unk> second quarter fiscal 2023 earnings call speaking on the call today, we have David Whitman, Chief Executive Officer, Dirk Locascio, Chief Financial Officer, We will take your questions. After our prepared remarks conclude please provide your name your firm and limit.
I'll ask one question and one follow up.
Our earnings release issued earlier this morning, and today's presentation slides.
On the Investor Relations page of our website during today's call unless otherwise stated we're comparing our second quarter results to the same periods in fiscal year 2022.
In addition to historical information certain statements made during today's call are considered forward looking statements. Please.
Please review the risk factors in our 2022 Form 10-K for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in such statements.
Lastly, during today's call, we will refer to certain non-GAAP financial measures.
All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website, except that we've not provided a reconciliation of forward looking non-GAAP financial measures.
Thank you for your interest in U S food and I'll now turn over the call today.
Thanks, Adam Good morning, everyone and thank you for joining us today.
It's hard to believe that have already been at U S foods for seven months.
During this time I have continued my focused effort to get deeper into the business and interact with more of our associates customers suppliers and investors.
I'll start today by sharing highlights for the quarter and progress against our strategy and long range plan before I hand, it over to Dirk to review, our financial results and updated fiscal 2023 guidance.
We remain intensely focused on executing our long range plan and it shows in our strong financial results again this quarter as we delivered record adjusted EBITDA of $432 million.
We achieved 17% adjusted EBITDA growth through a combination of profitable volume growth and margin expansion.
Additionally, we delivered healthy total case growth of 3% led by 5% independent case growth underpinned by five 5% growth with broad line independent restaurant customers.
Along with 7% healthcare and hospitality growth.
This is the ninth consecutive quarter, our team has gained independent market share.
Finally, we accelerated cash flow generation through our earnings growth and working capital improvement.
Our strong cash flow year to date has allowed us to invest in the business for organic growth pre.
Prepay additional term loan debt and return capital to shareholders via share repurchases.
As a result of our strong performance for the first half of the fiscal year and continued momentum we are increasing our full year earnings guidance, which Stuart will share later.
My expectation is that we will continue to execute our plan.
And build upon our strong momentum.
Now, let's turn to slide four.
Our strategy guide, how we operate and what we focus on to win at U S foods under our four pillars of culture service growth and profit.
Last quarter I introduced a simplified model, which is much clearer for our associates. So we can be more action and outcome oriented across the company.
These changes are resonating with our organization and are helping us remain focus which contributed to our strong second quarter results.
The other key changes I made was to our organizational structure, bringing our core region President's onto my management team.
And that change has been outstanding.
Having them at the table as improved communication between our functions in the field and streamlined our decision making regarding execution of our broader strategy.
I'm going to briefly focus on second quarter progress points against the culture and service pillars, and then Derek will talk about the growth and profit pillars later.
Turning to slide five.
First pillar is culture, because our culture and our people our strategy.
Instilling a stronger safety culture has been our focus since the day I arrived at U S foods.
I'm pleased to say that we have made very good progress in just seven months.
Our second quarter year over year results improved approximately 20% compared to the prior year through a combination of tone from the top and focused programs to drive results.
We have good early momentum with significant opportunity remaining.
On a related note I would like to recognize the 13 U S foods drivers who are recently named to the International Foodservice Distributors Association truck driver Hall of Fame.
This prestigious accolade is only awarded to those who have exceptional safety records, including 25 years of service without an accident.
What makes this year, even more special is that Alicia cyber one of our drivers based in Loveland, Colorado with 27 years of service was the first ever E Mail driver elected to the hall of Fame.
What makes this year, even more special is that Alicia cyber one of our drivers based in Loveland, Colorado with 27 years of service was the first ever E Mail driver elected to the hall of Fame.
We are proud to have these world class drivers dedicated to safety and U S foods as we strive to provide our associates customers and business partners and the communities we operate in a safe and has a free environment.
Additionally, we recently published our 2022 corporate social responsibility report and I am proud that we have made continued improvement across our three focus areas of people product and planet.
I encourage you to go to our website to read about our progress from our sustainable products and U S Foods scholars program through our compressed natural gas trucks and scope, one and two emissions reduction.
Moving to service on slide six.
As a reminder, our research tells us that the most important services to our customers our on time, correct orders and high quality fresh products.
Our product service levels to our customers are back in line with pre COVID-19 levels.
Vendor service levels to U S foods have also steadily improved however, they remained slightly below pre COVID-19 levels.
This progress is yielding positive results from a service level perspective, and it's also helping us reduce our working capital.
Our routing initiative continues to make progress and in the second quarter, we delivered the best cases per mile metrics in the last three years.
We're also preparing for a pilot of our new routing software later, this year, which will significantly increase our capabilities I look forward to our learnings and the progress we will continue to make.
Finally <unk>.
<unk>, our digital customer platform has now been fully rolled out among our local customers and feedback continues to be very positive as our net promoter score results.
Turning to slide seven I'll walk through our second quarter highlights in a bit more detail.
We grew adjusted EBITDA by 17%, despite essentially no sequential inflation and in fact modest year over year product cost deflation driven by center of the plate categories.
Our adjusted EBITDA margins also increased 60 basis points from the prior year as our initiatives continue to ramp up and we gained operating leverage this quarter.
Year over year total case volume growth was healthy at 3%.
This growth was led by 5% growth in independent restaurants, and 7% growth in both healthcare and hospitality, while chain cases were down 4%.
Our independent case growth was negatively impacted about 70 basis points from slower growth in our chefs stores as we work through our systems conversion, which is largely behind us now.
This means our broad line independent customer case growth was five 5% for the quarter.
This opportunity results this quarter are primarily due to no longer lapping Amazon.
The softer macro and the impact on same store sales across most of our chain customers.
Health care and hospitality continues to demonstrate strong growth driven in large part by healthy net new business.
We are pleased with our target customer types continue to outperform the industry, resulting in share gains.
With that said, we still have opportunity to improve performance as we focus on more consistent execution.
We have good momentum and expect it to further accelerate.
Moving to our customer experience, we again gained year over year market share in our target customer types. As we remained focus on executing our differentiated strategy for.
For independents. This is the ninth consecutive quarter of share gains, which demonstrates the progress we continue to make.
I am happy to report that marquee is fully rolled out to our local customers reactions continue to be very positive.
We are releasing regular updates based on customer and seller feedback to improve this industry leading platform.
We are now beginning to rollout moxie to our national customers.
This platform combined with our other leading digital tools and service model.
Enable us to continue to service, our national customers, well and build it and convert a strong new business pipeline, especially in our target customer types.
We also actively expanded customer usage of vitals, our technology suite for health care customers to leverage <unk> added capabilities and help our customers more effectively manage their overall costs.
Very importantly, we continued to make progress on our supply chain excellence journeys during the second quarter.
In addition to our improved momentum in safety, our productivity performance also improved year over year and sequentially for both delivery and warehouse, which is very encouraging.
I am pleased with the progress we are making and expect us to further accelerate that progress in the back half of this year and into 2024.
Our flexible scheduling and seven day delivery pilots are progressing well demonstrating results in line with our expectations, including a double digit percent reduction in turnover in each of our pilot markets.
As I called out last quarter, our near term focus will be to expand flexible scheduling broadly.
We only rollout seven day delivery Opportunistically, where capacity is constrained.
Our team is actively working to expand the flex scheduling approach and we expect to have more than half of our locations live on flex scheduling by year end, which we believe will further improve associate satisfaction and retention.
Finally, we continue to strengthen our capital structure and prudently allocate capital to fuel long term growth.
Through earnings growth and additional debt reduction, we lowered our net leverage to three times, which is the first time, we've been in our target range since it was established.
Our debt ratings were upgraded by both rating agencies, demonstrating our strong progress and underlying business momentum.
In parallel to the continued leverage reduction we spent $166 million on share repurchases.
Shortly after the end of the quarter, we closed on our first tuck in acquisitions in six years Randy Foodservice.
As part of our continued investment in R&D, we are slated to break ground on the expansion of our R&D distribution Center. This month, which includes approximately 10000 square feet of construction, providing additional loading dock space for eight new refrigerated loading base to support our growing customer base in the area. We are excited to welcome the rent.
The associates and I look forward to working closely with this high quality team to drive future growth.
Each of the actions we've taken on deploying capital in a balanced manner reinforces our commitment to being responsible stewards of capital to drive long term shareholder value creation.
With that I'll hand, it over to Dirk to go over our financial performance and guidance in further detail.
Thanks, Dave and good morning, everyone.
Let's turn to slide nine.
We are very pleased with what we accomplished in the second quarter and a strong momentum we continue to have a U S foods.
Adjusted EBITDA grew $64 million or 17% from the prior year to $432 million.
Which was a record quarter for U S foods.
In addition to strong EBITDA dollars, we expanded our adjusted EBITDA margin 60 basis points from the prior year as our gross profit grew significantly more of the opex.
Finally, adjusted diluted EPS grew 18%, which is also a record.
Within our results net sales were $9 billion in the second quarter and.
An increase of two 1% over the prior year.
Total case volume increased two 7%, partially offset by year over year food cost deflation and product mix impact of <unk>, 6%.
As Dave mentioned case growth was healthy overall, and especially in our target customer types.
Case growth slowed from the first quarter largely as expected since we no longer had a year over year benefit from omicron lapping in the second quarter.
We faced the headwind to case growth in the second quarter, primarily from our system conversion at Schuff store. However, we have largely worked through it at this point and are seeing sales improve.
We are pleased with a five 5% broad line independent case growth.
We did see modest year over year product cost deflation and it was driven by center of the play as grocery still showed year over year inflation in the quarter Sn.
Essentially we had no sequential inflation and still are not seeing deflation in grocery categories, which is encouraging since.
Since grocery categories are predominantly a percent markup and more impacted by deflation compared to center of the plate categories, which are largely fixed markups and not as impacted by deflation.
We continued our strong gross profit performance this quarter as our adjusted gross profit dollars increased 9% from the prior year.
Most of this strength is due to the excellent progress we have made over the past year with our long range plan initiatives across cost of goods logistics management and pricing.
Our initiatives have been critical in mitigating the increased operating cost wheat and the broader industry.
Opex was above the prior year for the second quarter, albeit significantly less than the increases we saw in the past two years.
The second quarter year over year increase in Opex per case was largely driven by increased salary compensation and higher incentive compensation costs as distribution cost per case was better than the prior year.
We continued our progress against both the growth and profit pillars, and I'll spend a few minutes on each of these.
We are.
<unk> on profitable growth and share gains in our target customer types by leveraging our differentiated service model digital capabilities and unique products we.
We are on track to exceed our one five times goal for restaurant volume growth for the full year led by strong independent case growth in.
In the second quarter, we drove year over year share gains in each of our target customer types and continue to develop a strong health care hospitality and new business pipeline.
As Dave mentioned this was our ninth quarter in a row of independent share gains.
As we grow faster with our target customer types that helps our customer mix and drive profitability.
Next a profit on slide 11.
In addition to profitable growth, we continue to make progress on our initiatives to increase EBITDA margins are.
Our team effectively managed a relatively volatile quarter for commodity categories as we leveraged our processes and maintain our strong gross profit per case.
At the same time, we further progress on initiatives such as cost of goods, our Cogs improvement by working jointly with additional vendors. We remain on track to address a total of 60% of Cogs by the end of fiscal 2023.
We continue to advance our efforts to drive operational efficiencies as productivity improved year over year and sequentially for both delivery and warehouse.
Our flex scheduling pilots are progressing well and demonstrated good results.
This powerful initiative has a twofold impact.
It gets associates more schedule flexibility.
And provide U S foods with better associate engagement and retention.
Ultimately this adds up to a win for our customers through software service.
Finally, we are progressing with our indirect procurement work and have identified a number of opportunities, which we are pursuing and will ramp up further value creation in 2024.
I'm now going to pivot from earnings to cash flow.
Turning to slide 12, we continue to increase our strong cash flow and expect to build upon us as we grow earnings or.
Our strong cash flow allowed us to continue reinvesting for growth and to further strengthen our capital structure.
We have and will continue to prudently allocate capital against our four priorities to invest in the business reduce.
Reduce leverage.
Return capital to shareholders and pursue accretive tuck in M&A.
To strategically expand our distribution network.
Year to date, we have invested approximately $200 million of cash Capex and fleet leases.
<unk> projects to expand fleet.
Improved analytic insights and improved technology and supply chain sales to enable further organic growth.
I'll talk further in a moment on reducing leverage in parallel with the debt reduction, we repurchased $166 million of shares in the second quarter.
$150 million of which came from the KKR stock sale.
Following this repurchase we have $286 million remaining on our $500 million share repurchase program.
In early July we completed the acquisition of Randy Foodservice and are excited to welcome the resi team to the Us foods family.
This is our first tuck in acquisitions since 2017, and we're thrilled about the quality of this business and associates.
Moving to slide 13.
We meaningfully reduced our net leverage compared to year end 2022 through a combination of net debt reduction and earnings growth.
You can also see on the slide a significant progress over the past 12 months.
Our net leverage ratio was three times at the end of the second quarter, which is the top end of our target leverage range.
We continue to prioritize debt paydown and prepaid an additional $60 million of term loan in the second quarter, bringing us to $125 million of prepayment year to date.
Our overall debt structure is in good shape and we don't have any maturities until 2025 that said, we're looking ahead to the 2025 maturity and expect to proactively address that in the next quarter or two.
Actions this quarter resulted in credit upgrades from both rating agencies, we remain.
Focused on creating value for shareholders and allocating our capital prudently across the four parts of our capital allocation strategy.
Now turning to guidance on slide 14.
As a result of our strong year to date results and outlook for the full year, we are raising our full year adjusted EBITDA range to $1 five 1 billion to $1 $5 4 billion.
And our adjusted diluted EPS range to $2 55.
$2 65 per share.
We remain on track to reduce leverage to below three times by the end of the year.
We are well positioned to deliver against this guidance and expect to be at the higher end of the earnings guidance. If the macro remains similar to what we're seeing currently.
With that I'll pass it back to Dave for his closing remarks.
Thanks, Kurt I'll close where I started.
Seven months into my role I Couldnt be more excited about U S foods and the opportunity ahead for our business.
Slide 15 summarizes our investment thesis and why I am so bullish.
U S foods as a strong company and we continue to get stronger.
We're a leader in a highly fragmented industry and a pure play U S. Only based distributor focused on broad line distribution.
Our business is resilient across various macro backdrops and U S. Foods offers further stability through our laser focus on controlling the controllable and executing against our long range plan.
We are targeting independents health care and hospitality for growth were.
We believe our differentiation adds even more value and we're seeing the results in our outsized growth and continued share gains.
This progress has been driven by the quality of our strong team our service model and.
In our digital capabilities, including Moxie.
I believe these are all compelling reasons to invest in U S foods we.
We are focused on building on the company's core strengths, while finding ways to more effectively execute our strategy and accelerate our rate of improvement.
I am confident this combination will lead to a very bright future for U S foods and all of our stakeholders.
Finally, I would like to thank our 29000 associates for their continued dedication and the excellent work they do each day to help our customers make it.
Our associates are critical to our success, which underscores why you matter is a very important one of our cultural beliefs.
With that Rob Please open up the call 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 and your first 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 it looks like you took meaningful market share in the independent channel, albeit with a bit of a slowdown in case growth relative to last quarter outside of some of the disruption, which Jeff start which it sounds like you have largely worked your way through what are you seeing with respect to the health of this customer overall and any changes.
And then how youre thinking about the channel's contribution to your growth in the coming periods.
I appreciate the question Mark we are seeing strong health of the operator and independents and if you recall I mean, we were.
We're expecting the performance that we had in the second quarter. If you recall, we had the omicron lap go.
<unk> here in the second quarter and as we provided color last quarter. We saw some softness into March that bled into April may and June got sequentially stronger.
And while we don't give quarterly guidance I can tell you the start to the third quarter. It has been at or slightly above what we saw exiting the second quarter trajectory. So we feel very very good about the health of the operator, but more importantly, our ability based on our differentiation to continue to take share in that segment of the business and then besides that health care and hospitality remained very very strong.
Long, we're taking share in both of them and we have very strong pipelines across the board.
That's great and as a follow up just on the inflation, how much deflation intensify as the quarter progressed, how much risk do you see it ultimately impacting our grocery category sales.
Then when you think about next year and the $1 7 billion EBITDA target is that contingent upon a return to a more normalized inflationary backdrop do you have enough fleet with your initiatives to get that in a variety of scenarios. Thank you.
Good morning, Martha Stewart, so overall, the inflation deflation picture was pretty similar across the quarter. So you side changing.
<unk> really as you are lapping prior year, but if I think of it through the quarter grocery.
Overall still continued to see for the quarter up a little bit of inflation. So we still haven't seen inflate deflation popping out there and in the proteins a lot of that is coming from the lapping of much more inflation a year ago and as I said in my prepared comments, we will take that because those tend to be more fixed markups and our teams have very good processes to manage.
Service so even in this environment, a very little inflation.
Inflation or modest deflation, we think we're very well positioned to manage through it and as you've heard me say a number of times as we focus on controlling the controllable gross profit a strong gross profit growth. We've driven is really predominantly been from a number of the initiatives we've executed.
Great. Thanks, so much good luck guys.
Okay. Thank you.
Your next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.
Hi, guys, good morning, and nice quarter.
I wanted to start with that.
I wanted to start on the cost side, you mentioned distribution cost per case.
Better than 2019, I think we look at the progress in Opex per case and the progress is very good.
As we look out the next couple of quarters I mean, it seems like Opex per case.
Maybe year over year is minimal growth that seems like you might be entering a period.
Can you just talk a bit more about.
What's.
What's driving the.
The cost per case.
On the distribution side down are we thinking about this right going forward.
Obviously, there's puts and takes around wage inflation, just any any help there would be great.
Yes, I appreciate the question and I'll start at the higher level of circumstance to weigh in on the near the specifics, but as we've said the last couple of quarters, we feel very good about the momentum we're getting on productivity both in our warehouse and delivery and you've heard me say on the call there.
We had sequential improvement.
As well as year over year improvement in both and so the initiatives. We're driving we're very excited about we expect those to continue to get traction in the back half of this year and I would point out to you or to your point. This is five or six quarters in a row, where our operating expense growth has continued to decline and thats based in large part by the good work our team is doing.
<unk> supply chain.
And the only thing I would add is in the quarter as I commented overall distribution cost per case was lower than it was a year ago.
And the two areas that really drove our increase were a seller compensation, which is driven by the strong gross profit results. We've had and then secondly incentive compensation, which is a.
It's a good place for going to a higher cost because it drives teams continue to perform at a stronger level. So we feel as Dave said very good about the progress and the path ahead, and our ability to effectively manage costs and gain leverage.
And then just a follow up one on gross profit per case, the 6% gain this quarter, which.
Some deflation, that's obviously very encouraging.
As we think about the quarters ahead is there any reason that you should at least be gaining in that.
Gross profit per case.
And just where you stand today it doesn't seem unreasonable at all it has at least a low single digit year over year gain there continuing.
But maybe just some color there.
Where do you think you stand in terms of like the.
The innings in terms of day.
The upside here.
Sure. Good question so for the second quarter adjusted gross profit dollar growth of about 9%. So pleased with that and I think the if I think of the year over year, you may see some lesser year over year increases just because we've had such strong gains as we're lapping now as we get to your point get back to a more normalized environment, but <unk>.
To feel very good about the durability and strength of our gross profit per case and I think the way. We continue to look at it is there's not an <unk>, we're going to continue to focus on the gross profit gains at our goal here is to continue to run the place to grow gross profit faster than Opex to drive our margin because as you know our overall.
EBITDA growth is a balance of profitable growth, especially in those target customer types of leverage and we think we have where we're happy with the progress we've made and we have a long runway ahead.
Thank you.
Thanks, Ed.
Your next question comes from the line of Brian Harper from Morgan Stanley . Your line is open.
Yes, thanks, good morning, guys.
Can you maybe just comment also the chain restaurants I know.
Kind of not the.
Customer focus at this point, but.
Any change in trends with case volumes for change.
Yeah, I'll take you back Brian Good question I'll.
I'll take you back to some of the commentary we had in the last quarter and if you recall one of the things I've said, when we were down a little bit less than the market was don't read too much into that it has in large part to do with the portfolio of changes each of the competition has number one number two we.
We weren't surprised at all because of the lapping of the omicron effects that we pointed to in the first quarter and then the second thing is the backdrop within the chain segment has gotten softer as the Euro has progressed I'd point to two things one is the technomic data.
Said changed we're going to be up about 200 basis points back in January they adjusted that to flat for the year in May and then the recent black box data had the second quarter for change down anywhere between 2% and 3% and I think they pointed to about two 7% in July so it's really a traffic issue and change and as you point out.
That's not our focus we're going to be opportunistic unchanged.
In hard on health care hospitality independents and continue to run our playbook.
I think Brian hopefully, where you continue to see here in the second quarter is that going to.
Pretty normalized operating environment.
Covered the fact that our overall independent still growing at five 5% in the broad line, which as I said in our first quarter call. We think sort of in the mid fives is a very strong case growth, we're taking share healthcare and hospitality is not by chance that we're growing still at 7% well above market and so.
Those are the things that were to continue to control the controllable.
Despite the macro backdrop and feel good about where we stand and in our outlook.
Okay great.
Great.
The deflation rate Ya, sorry, if that was sort of steady through the second quarter or is that.
Do you think it'll be something similar.
The second half or how are you thinking about that and then also just you had kind of the LIFO benefit from lower inventory values will that still be kind of a factor in the third and fourth quarter.
Sure maybe I'll take them in reverse so LIFO is hard to predict based on deflation or.
Our inflation what happened there and I'll remind you that the way we report adjusted if backed out of there. So that is not a help for us in our adjusted EBITDA numbers.
<unk> is helping our overall GAAP numbers.
The second part is.
In the second half of the year, yes, it was pretty stable in the second quarter again, the second half of the year. If we continue to see some deflation at this point based on what we're seeing I expect it to be a continued to be driven primarily by the center of the plate categories as.
Grocery as I mentioned before are still really hasn't shown signs of deflation there.
And even if we see some modest.
Additional deflation in proteins, we feel very good of our ability to continue to drive our strong results.
Thank you.
And your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.
Great. Thank you very much.
Two questions. The first one just on the <unk>.
Follow up for the total case growth.
And I know, we dissect it and independents were better than the changeovers.
But in total I guess, a little bit of a slowdown.
Just wondering with this concern of a slowing macro or maybe what your expectation is for the back half total case growth within your updated 23 guidance.
And then Dave you mentioned the upper.
Doug you mentioned the upper end of earnings guidance. The macro holds I'm just wondering what that assumes for total case growth for the second half for the full year.
Yes, I appreciate the questions.
I would point to the comments I made earlier on the stability in the independent space and the health of the operator, holding up quite well, particularly as we flip the calendar here into the early part of the third quarter importantly, our our ability to continue to take share.
I'm getting nothing but more confident around that given the strength of our team our ability to lean in in a local market basis.
Provide the best value and product offerings, and really understand where we can target those independents.
That continues to get very very strong all of that contemplated in our back half outlook. So we would say we're in a very stable environment and we will continue to take share there.
And I already commented on the on the chain space and our focus there and I think if you just come back to Dave's comment that he made in his prepared remarks, just around the <unk>.
Wrapping up <unk> I mean that is two or 300 basis points across much of the business and so when you think of Q2 being a very normalized environment I think the business is still growing at 3%. When you have a lot of businesses that are really going backwards pretty meaningfully and the fact that we are growing much faster than that and he is tired of customer types, which are more value added more profitable et cetera.
So we feel very good about where we are what we saw in July and the.
The stability of the overall macro.
Understood.
Then a follow up just on the EBITDA margins.
Talked about 60 basis points of expansion to the four 8%.
I think you previously noted that for full year 'twenty four so a year from now you would hope to get back to at least four 6%, which was pre COVID-19 levels I know, there's seasonality at play and it's difficult to compare the second quarter of this year to kind of a full year guidance for next year, but David If you were just taking a step back I mean, how do you assess the ultimate potential for those margins over time.
Whether you look at comparable peers, whether youre looking at.
Historical trends, just trying to get a sense because again at least this quarter youre already above kind of that pre COVID-19 level again stripping out seasonality, but just your thoughts on the EBITDA margin going forward. Thank you.
I feel good about our ability to control what we can control not so much concerned to your point around with our peers are doing but what we're doing inside our company and as you've heard Doug say here a couple of times. This morning.
We're focused on initiatives and things that we can control and we think theres still a lot of juice in the squeeze and so I'm feeling increasingly positive about my comments last quarter around our ability to deliver against that $1 7 billion plus or minus in 2024, and obviously, we will have more to say about that as we get further into the year and provide guidance for <unk>.
Next year, but nothing gives me reason to pause.
<unk> continued to gain confidence around our ability to execute and ramp up both our growth and profitability.
Thank you.
Thank you.
And your next question comes from the line of Kelly Bania from BMO capital markets. Your line is open.
Okay.
Good morning, Thanks for taking our questions.
Just wanted to talk about.
About EBITDA margins I guess historically your your second half EBITDA margins and in total are a little stronger than you are.
First half, but your guidance seems to imply a little bit of the opposite may be a little bit lower in the second half. So just curious if you could talk about how much of that is conservative.
Or are there factors that might be impacting the margins in the second half or any change in maintenance seasonality that we should be thinking about as we think about the second half.
Sure.
So overall please.
Pleased with the progress we've made on the overall margins I think as we think about the outlook for the year, even what's embedded in there, especially my commentary about the higher and that includes being in a normalized environment, a pretty healthy EBITDA growth rate on the second half of the year.
High single to low double digits, so feel good about ability there I'm not going to comment on specifics within the different lines, but what we do expect as we do expect to continue to still make progress on our EBITDA margins and I think theres still as Dave commented plenty of opportunity ahead, we.
We feel good about where we stand at the halfway point and our outlook for the balance of the year.
Okay. That's helpful and maybe just to follow up.
I don't think we have your sales outlook for this year or have had that but I guess.
Just curious if or to what magnitude deflation.
<unk> impacted the outlook.
For this year and next door, if that really was already in your expectation for the year or if you kind of had to internally make any changes to your outlook given kind of where pricing is.
To help us kind of understand how that evolves.
Our expectations for this year and next.
Sure I think that.
Just because inflation and deflation a bit harder to predict so it may impact the sale of dollars, but it doesn't really impact our overall given that's come primarily in the protein categories.
Our strategy and what we've executed against so that theres not been a whole lot we had to adjust what we're focused on as you know is really the case growth and the strong case growth that we have and continue to have across the business I think that though we do watch the different categories very closely and where we may see inflation or deflation is showing up but in the current <unk>.
<unk>.
We're going to stay the course.
I think that will generate the continued momentum that you've seen over the last four five quarters.
Thank you.
And your next question comes from the line of John Heimbach <unk> from Guggenheim Securities. Your line is open.
Hey, guys wanted to start with the.
The broad line independent growth right, if you think about.
Growth in distribution points, Brian growth and location served versus drop size.
Im curious how they relate to each other which one is bigger.
And then maybe Dave your thought on wallet share.
And.
Without giving numbers I guess, but thoughts on how high is up.
It still seems that for you and others, it's way too low versus what it should be.
Yes, we're good.
John we feel good about it again with the backdrop of the health of the operator that I mentioned earlier our.
Our ability to take share as strong I'm pleased with our REIT currently of new account generation.
But I do believe there is ample opportunity for us to continue to penetrate our existing customers, while we're bringing on new ones.
Then ramp up the penetration of those new customers through the course of time, our team get that algorithm very very well and is extremely extremely focused on it.
And in the quarter I would say the new account generation was a bit strong penetration.
So the first part of your question, but we're squarely focused on both and have a lot of confidence in both going forward.
Okay, and then maybe to totally different topic.
Gross margin was healthy when we had inflation it should be.
Also healthy with deflation, but if I look at the vendor management.
Procurement that set of opportunities versus mix.
Both product and customer, which one do you think is bigger let's say looking out 12 to 18 months.
As vendor vendor management piece larger where do you think they are equally sized.
I'm not sure I'd give a nod to either one of those at this point to your point, John We've got a lot of activity going on in both areas and Theres still a lot of room for improvement in both.
John If you think about what you think a bulk relates to continuous journey.
And Thats when you think about the customer mix piece. That's why we are relentlessly focused on outgrowing when he started customer types because of the value add and we think we can bring the overall.
Profitability mix that comes with that.
Okay. Thank you.
Thank you.
And your next question comes from the line of John <unk> from Jpmorgan. Your line is open.
Hi, Thank you I I know in previous calls you've kind of talked about and maybe some opportunities around indirect spend.
Low hanging fruit I think.
Maybe some of the word on addressed previously was.
As previously used.
Are we in that journey I guess, how much is kind of showing up that you actually might want to consider and is this just maybe getting more out of your current spend or is actually reducing total dollar spend part of the opportunity.
Hi, John Thanks for the question so it really is.
We progressed, where we've now identified a number of opportunities we've begun to go after them expect to see some modest dollar show up later this year and then ramp up over the course of next year. So good progress since we talked about it last quarter and it really is a lot about optimizing our current spend and so in these cases.
As you just heard US talk about we're targeting typically try to offset our cost inflation as much as the camera productivity and this is one of those levers as we as we try to do that so good progress and we think there is plenty of opportunity yet.
And Dave from yes from your perspective, as you gave kind of come in and kind of seen the way that U S foods as previously structured.
Are there any kind of thoughts.
Thoughts that are emerging that the longer that you get on and spend time in the seat of just maybe.
Things other than just some of the regional structures that you've done at things that can be differently and.
Your continued exposure to the chef store is that a business that we should expect increased capital and over time or is that under evaluation.
Yes so.
Yes, I feel very good about the momentum that we've got chef stores I'll just take that one quickly.
Obviously, the complication around the systems conversion that <unk> made it a little difficult to get a handle on the underlying volumes in those sort of things still believe very much in.
And the value of the business case, and the synergies with broad line and we'll be looking as we get the system stuff behind us.
The right data linkage to prove that to ourselves, but opportunistically going forward as I've said last quarter I see a lot of opportunity really in all areas of the P&L Importantly, I'd point you to what I said last quarter is that we ramp up this thinking around continuous improvement in productivity and efficiency in that 3% to 5% range.
We will have more to say about that but as Stuart just highlighted the intent to offset inflation by getting more efficient and productive every year is a constant theme that you will see us talk about here going forward in the business and I believe that's a fairly significant change in the organizational thought processor, but more to come on that in the future.
Thank you.
Thank you.
Your next question comes from the line of Alex Slagle from Jefferies. Your line is open.
Hey, Thanks, Good morning, a couple of follow up questions.
One I was wondering if you could clarify how the new routing software benefit to come I guess in 'twenty for us is that already contemplated in your views.
Unable to get toward that previous $1 7 billion EBITDA target for 'twenty, four or could there be upside relative.
That are related to this.
Yes, there always could be upside, but that was contemplated as part of the long range plan when the company put that out in the $1 7 billion target for next year.
Got you and.
Turnover and retention.
Any additional color there on the progress through the <unk>.
Driver turnover, you've gotten that back towards 19 levels already in.
Warehouse turnover was still above but maybe just some updates on how far you've gotten where that goes.
Really good progress in both areas.
The turnover in the warehouse and on the outbound side continues to persist a little stronger than the deliveries to your point, we're not quite back to where we hope to be at this point in 2019 levels. However.
Got three quarters in a row now of continued reductions in turnover an improvement in productivity both in.
In delivery and warehouse into our discussions around things like our flexible scheduling initiative and the significant ramp up that we've got on that in the back half of the year and more than half of our markets. After this pilot phase here in the first half gives me a lot of confidence that we will continue to drive significant improvement there, but getting back to where we hope to be so really good.
Denim and more to come.
Okay. Thanks.
Thank you.
And again, if you'd like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of Andrew Wolf from C. L. King Your line is open.
Thank you good morning.
Good morning, taking the market share youre, taking with independence.
What are you basing that could you share with us what your belief is the independent sector.
For foodservice distribution as is growing or not growing like what are you comparing that to.
Sure. Good morning, Andrew This is Derrick.
We've talked about it externally, we do a relative the technomic because thats what.
You guys and many other investors have more access to internally, we use on a month to month basis, we use an NPD data set because it's much more granular and actionable and so when we talk about the share gains.
On a regular quarterly basis thats used to NPD data so.
80, or 90% of the industry provides and so we're seeing share gains using that so it's an independent measure everybody the same.
Please.
If you look at Technomic, Dave said, the Technomic outlook I believe for this year calls for independents to be down a couple percent change to be flattish kind of overall restaurants up for yourself. So if you think of where.
Where we are relative to that of the strong independents continuing to grow at 5% to 6% and again then in chain.
Bit slower, but again that hasn't been our focus and.
We will it will take all day continuing to grow at a much faster pace with independent health care hospitality and that remains the focus.
Okay. Thank you.
On your sales associates.
Obviously with the increase in <unk>.
Selling more they are going to make more money, but could you talk about sales product <unk>.
The associated sales associate productivity.
As you know hiring new folks.
As a driver of the market share.
Okay.
Overall, the way, we think about it we look at market share. Its overall, how we're doing in markets. How we're doing by category and by restaurant types and then underneath there. There is as you expect there would be a fair we have a performance management process of how individual sales reps are performing but in parallel we do continue to act.
We hire sellers, especially in those markets that are growing at a faster rate. So it really is a blend and as we think about share gains we expect that to be driven by both performance management, but definitely by continued adding a sellers in those markets that are growing faster.
Okay, well I guess more of the same and it's working right now.
And lastly.
Following up on your lower.
Cost per case in distribution.
That includes fuel and mileage right. So.
As we unpack different things, we look at from the warehouse to delivery.
It sounds like it would be more on the delivery side given.
Some of the progress you are already making.
On the routing.
Some income.
Bringing stuff back.
Obviously fuel is that.
On a dollar basis is that the way to think about where most of this.
Better results are coming versus.
Not incrementally just sort of like for the quarter.
Okay.
I'll come back to where Dave talked about earlier in his comments on that.
While we're pleased with is saying we're seeing productivity.
<unk> in both warehouse and delivery so they are both contributors.
<unk> impact side, yes on our fuel on routing et cetera, and they each contribute so without parsing out the individual I think the more important takeaway is when we think upstream on the retention of the turnover et cetera, seeing improvement and ethylene to overall lower cost per case and thats demonstrating what we're doing is working and we expected to do more of that.
Okay.
Okay. Thank you.
And your next question comes from the line of Jake Bartlett from Jewish Securities. Your line is open.
Great. Thanks for taking the question.
So my question is about gross profit per case, and the ability to to maintain that and you understand that that proteins incentive played are generally priced on a dollar mark up so the deflation doesn't impact it but my question is whether that could.
Now for.
Greater price competition. So it seems to me the biggest risk is that competitors trying to drive business more with price.
Service levels as they have over the last few years, so how would you assess that risk.
Are you seeing any.
Any kind of more aggressive pricing out there how do you.
We expect to approach pricing going forward.
Overall, we feel good about the durability of our gross profit I think for the last few quarters. We've been asked how we thought we would fare with lapping large inflation a year ago, and hopefully whatsapp people Athene as we've demonstrated still strong gross profit results despite that and that comes back to the <unk>.
We have had on our own execution of initiatives driving the results that we're seeing I think that from a macro and competitive environment. It continues to be stable its really back to.
Pre COVID-19 in world, where it's a competitive industry and Thats, where we operate in but we haven't seen the level of irrationality that.
Any different than you would see in a normal environment. So it's a quite healthy and we expect to continue with strong gross profit driving solid very good EBITDA growth.
Great. Thank you so much.
Thanks.
And your next question comes from the line of Peter Saleh from B P. I G. Your line is open.
Great. Thanks for taking the question I just wanted to come back to the chefs.
Or conversion issue can you just elaborate on what the system issue was and is the 70 basis point impact fully confined to the second quarter or do you think any of that will bleed into <unk>.
Sure Peter Hi.
Overall.
When we think through there.
We had to convert off of our system under a new system by earlier this year as part of our purchase agreement, which we did to all markets are converted and its not uncommon. Unfortunately for when you have conversion to this magnitude to have some challenges, which we did see let me just put it into context. So when we talk about the sales challenge there it down low single digits, but when you.
Compare that to independent et cetera in the broad line or up five 5%. It has a more meaningful impact there and some of the challenge there were out of the gate conversion resulted in issues, where orders werent fully going through et cetera. So we had less product on the shelves et cetera. That's all been remediated. It has been for a few.
And we've been focusing on continuing to get customers back in the store to recoup that and do you expect to.
To get back to growth in the second half of the year.
Great and then just on the on the leverage being around three times currently.
How are you thinking about capital allocation kind of going forward is it more debt pay down or do you think you will shift a little bit more to share repurchase at this point in time.
As EBITDA continues to grow on the leverage kind of comes down naturally.
Well I would expect and as.
You know Dave comments. So we did close early in the third quarter on the remedy foodservice acquisition. So that is a Q3 use and and then on top of that I do expect for the near term a continued balance of debt pay down and share repurchase. We think both are important and we're going to continue to focus on both I think.
The good working capital performance this year as the team service levels or improve our teams have very methodically gone through and found those opportunities to remove some of the added stock. We added wind vendor service levels were lower while still focused on maintaining high customer service levels, that's allowed us to generate even stronger working capital number.
This year, which has helped with the funding of the acquisition et cetera. So that's directly answer your question and half to expect it to be balanced, but you will see our first tuck in M&A, which we're excited about.
Thank you very much.
Thanks Peter.
And we have reached the end of our question and answer session. I will now turn the call back over to Dave <unk> for some final closing remarks.
Thank you all very much for joining us today, our business is strong and I have great confidence in our ability to accelerate our momentum and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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