Q3 2023 US Foods Holding Corp Earnings Call
Good day, everyone and welcome to the U S Foods third quarter 2023 quarterly earnings call. Today's call is being recorded and I would now like to turn the conference over to Mike Reed Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you Lisa good morning, everyone and welcome to the U S Foods third quarter fiscal 2023 earnings call.
On today's call, we have Dave <unk>, CEO and Dirk Locascio, our CFO.
We will take your questions. After our prepared remarks conclude please limit yourself to one question and one follow up.
Our earnings release issued earlier this morning, and today's presentation slides can be found on the Investor Relations page at our website at IR U S foods Dot com.
During today's call and unless otherwise stated.
Our third quarter results to the same period in fiscal year 2022.
In addition to historical information certain statements made during today's call are considered forward looking statements.
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 those savings.
We are excited to announce we will host an investor day here in the Chicago area on June of next year, where we will outline our strategy and the key drivers of our new long range plan beyond 2024, along with our cash flow generation and capital deployment plan.
More details will be set in the following months.
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 presentation slides posted on our website, except that we are not providing reconciliations to forward looking non-GAAP financial measures now I'd like to turn the call over to Jay.
Mike Good morning, everyone and thank you for joining us today.
Before jumping in to our Q3 highlights I want to officially welcome Mike Neese as our new senior Vice President of Investor Relations.
Mike brings 25 years of Investor Relations experienced U S foods, including time with performance Food group Andover first source.
I am thrilled to team up with them one more time.
Additionally, Mark behalf join US foods in late September as executive Vice President and General Counsel.
With more than 30 years of experience Martha is a seasoned business adviser with exceptional expertise in corporate governance.
Commercial and M&A transactions and leading high performing teams.
I look forward to Mark his many contributions to the company.
And now let's turn to today's agenda.
I'll start by sharing highlights for the quarter and our 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.
Yes.
In the third quarter, we continued to make significant progress against our long range plan broadly across the business.
We are improving the safety of our associates.
Our independent cases, while accelerating market share gains enhancing our margins driving increased cash flow and meaningfully reducing our net leverage.
Our strong third quarter and year to date performance are a result of our continued growth and market share gains in our target customer types.
Accelerating operational efficiencies and the dedication of our 29000 associates.
I am proud of their relentless focus on delivering best in class service to our customers.
In executing strategic initiatives under our long range plan.
Building on our differentiated team based selling model industry, leading digital innovation and continuing momentum.
Our team delivered strong case volume growth.
Each of our target customer types independent restaurants, healthcare and hospitality at year over year market share gains.
Importantly, we accelerated our independent share gains in exclusive brand penetration sequentially.
Resulting in our 10th consecutive quarter of year over year share gains in this important customer types.
We demonstrated a profitable growth and margin expansion during the quarter with meaningful improvement in operating leverage.
We delivered adjusted EBITDA growth of 15% and expanded our adjusted EBITDA margin by 50 basis points.
Finally.
We accelerated cash flow generation, allowing us to invest more in the business pay down debt repurchase shares.
And execute tuck in M&A.
Turning to slide four our strategy guides, how we operate and what we focus on to win the U S foods under our four pillars of culture service growth and profit.
We continue to reap benefits from the inclusion of our core regional presidents on my executive leadership team.
We're communicating better and aligning our teams more effectively to ensure faster execution.
One important example is our recent decision I made to further streamline the organization and address feedback from the field by having our local sales teams report into the regional presence.
This is a centralized corporate commercial function.
Also Jim Circle, our EVP and Chief Commercial Officer has informed me of his decision to retire effective December one.
Jim has been a trusted leader in voice on my executive leadership team.
During his more than 31 years with the company Jim has made countless contributions to propel our company forward.
I want to thank him for his steadfast leadership and his many contributions to our company and our people.
After much thought and careful consideration given jim's pending retirement.
I have decided to not backfill jim's role instead.
Instead, we have restructured our commercial team to create even greater collaboration.
More streamlined structure and the platform for accelerated execution of our strategy.
As a result, Randy Taylor, our EVP of field operations has taken on additional responsibilities for sales excellence and.
In marketing.
In addition, <unk> has been promoted to EVP chief merchant reporting to me.
And Dave has expanded role he will continue to be responsible for ensuring the U S foods product value proposition exceeds our customer expectations.
That we are competitive on cost of goods.
And then we have the right product portfolio through his leadership of our merchandising function.
Yeah.
In addition to the organization changes we are making we continue to place increased emphasis on accelerating profitable growth and.
And we wanted to ensure that we reward our sellers for delivering on that growth.
We are currently working on some likely revisions to our territory manager sales compensation plan.
Which will even more closely linked their compensation to the key elements of our profitable growth plan.
We will share more about any potential modifications during our fourth quarter call.
We are also accelerating our investment in our local selling capacity in fact, we increased our local seller head count each month in the third quarter.
We plan to continue those additions in the low to mid single digits into 2024, and beyond which has already been contemplated in our long range plan.
We will be more focused than ever on profitable growth with the right tools and support processes to ensure our sales teams are successful.
Collectively these changes will ensure better alignment between our field and corporate teams, while reducing handoffs and creating additional organizational efficiencies.
Most importantly.
They will further propel our company with the right focus on serving and supporting our customers and driving profitable organic growth.
Turning to slide five.
I will now briefly discuss our third quarter progress against our culture and service pillars, and then Derek will talk about the growth and profit pillars a bit later.
The safety and wellbeing of our associates is Paramount at U S Foods and is critical to our success since day, one I have stressed the importance of improving our performance to providing even safer operating environment for all of our associates.
Our strong results have been driven by our actions to execute more effectively on fewer but more impactful initiatives.
While reinforcing safety as a personal value.
One example is our safety leadership training, where we will provide behavior based safety process training to approximately 3500 operation leaders by the end of this year.
This example, combined with other initiatives has led to steady improvement in our safety performance.
Our results improved in the third quarter compared to both the second quarter of this year as well as the third quarter of last year.
In fact, the third quarter was our best safety results since the first quarter of 2021, with our injury and accident frequency rates, both better than the prior year by 25% to 30%. However.
There is more work to be done and we won't rest until were zero accidents and injuries.
Turning to the responsible portion of our cultural pillar through our recently published false group Scoop, we rolled out a new climate conscious product innovation category within our serve good portfolio.
Serve good features products that meet our sustainability criteria, including products that are responsibly sourced or contribute to waste reduction.
When asked nearly two thirds of our customers say that it is important to them to make sustainable choices that limit their impact on the environment.
One example is our newly unveiled monogram carbon negative cutlery that utilizes greenhouse gas derived bio materials to create a negative carbon footprint.
These climate conscious innovative products in to support our plan to reduce greenhouse gas emissions.
We're excited to have nearly 1000 products and our serve good portfolio, which spans multiple product categories.
Additionally, we are focused on winning center of the plate proteins and fresh produce and over the last several years, we've upgraded our assortment in these key product categories.
Importantly, our fresh produce category is our fastest growing category year to date.
And we estimate we have captured approximately 400 basis points of market share over the last two years within our target customer types of independent restaurants health care and hospitality.
I am proud of our sustainable and healthy offerings that will ensure we continue to meet our customers' current and evolving needs.
Moving to slide six we continue to focus on best in class delivery, specifically on time and in full service levels to our customers.
We continue to improve our customer service levels for product availability and we are essentially now at pre COVID-19 levels.
On time service to customers is also a key focus area for us and our new routing system pilot as part of the broader routing optimization work. We have had underway is a prime example of how we can further improve service.
We launched as a cards routing pilot in our first market.
We continue to learn from this pilot and intend to pilot a second location before year end with National implementation plan for 2024.
Our routing improvement initiative combined with our move to the cart will enable us to improve service levels to our customers, while also reducing miles driven and fuel consumption as highlighted by our third quarter performance, where we delivered the best cases per mile in our company's history.
In addition.
Our flexible scheduling initiative is making solid progress as we have moved from the pilot phase to broader deployment across our network and it's now live in 16 locations.
We continue to see significant improvements across our network and especially in our pilots including year over year reduction in turnover turnover that is approximately twice the rate of improvement versus our other locations.
30% improvement in safety and continued improvement in productivity.
We remain on track for half of our locations to be live on flex scheduling by year end.
Finally.
We also continue to invest in our market, leading customer facing digital technology with marketing.
Our agile development has delivered many improvements to make it even faster for customers to place orders and manage their business.
Our deployment to local customers is complete and we.
We now have 30% of our national customers on Moxie with full deployment planned in the first half of next year.
In terms of the digital customer experience. We believe we continue to lead the industry. Our net promoter score has been strong since our launch and has improved even further results.
From an e-commerce penetration perspective, we're at 84% for the total company in our locally managed business improved 50 basis points to 73%.
<unk> is well on its way to being the Premier all in one digital toolset for our customers to order.
<unk> deliveries.
Bills and manage inventory.
And as we continue to focus on the customer experience. We further expanded pronto in the quarter, which is our small truck delivery service focused within targeted dense geographies today <unk> has a presence in 35 markets.
I am pleased with our progress and the return on the investments we are making to provide best in class service to our customers.
Turning to slide seven.
I'll walk through some third quarter highlights and Dirk will go into a little more detail later.
Total case volume growth was 4% and we drove growth in each of our target customer types again, this quarter with volume, increasing nearly 6% for independent restaurants, 8% for healthcare and 6% for hospitality.
Adjusted EBITDA grew double digits and margins further increased.
We remain focused on increasing our gross profit per case faster than operating expense per case and accelerating profitable share growth as we did this quarter.
Both healthcare and hospitality continued to deliver strong growth driven in large part by healthy net new business.
We remain focused on growing in our target customer types and expect to continue that momentum.
<unk> already spoken about several of the good progress points with our customer experience and supply chain, so I won't be repetitive here.
Moving on we continue to strengthen our capital structure and prudently allocate capital to fuel long term growth.
We further reduced our net leverage to two nine times, and we repurchased more than 700000 shares for $29 million.
We expect to remain below three times levered for the remainder of the year with further improvement into next year.
Finally, we closed the <unk> acquisition earlier in the third quarter and this morning, we announced the acquisition of <unk>, Our second tuck in acquisition this year.
<unk> is an independent foodservice distributor in central California, with approximately $600 million in annual revenue.
We will provide additional scale for us in central California.
We expect to close the transaction by year end.
We have strong momentum as we finish out 2023, and we expect that momentum to carry us into 2024.
Before I hand, it over to Dirk I would like to not acknowledge the brave men and women who have served in the armed forces.
On Veterans day. This Saturday, we will celebrate our 500 associates, who have so courageously served our country and you can see some of their faces on slide eight.
We are grateful for their service and celebrate them and all veterans on this important day.
We are committed to supporting veterans in their transition back to civilian life.
They offer skills that are remarkably competitive and transferable to the work, we do in food distribution, including driver selectors supervisors and corporate roles.
We have an employee resource group dedicated to educating our associates on the value of a veteran recruiting veterans supporting and recognizing our U S foods veterans and providing volunteer and community engagement opportunities.
I would like to recognize Jennifer Castillo, who is president of the those who serve employee resource group.
Jennifer is a senior manager in merchant merchandising excellence, who served in the U S Navy and successfully transferred her skills and mass communications to the corporate world.
We thank Jennifer for her efforts in leading this valuable employee resource group.
All veterans for their service to our country.
And we wish all of those who have made personal sacrifices to protect our freedoms, a very happy veterans day.
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 10.
The execution of our strategy is driving sustainable operating leverage improvement as we delivered strong adjusted EBITDA growth again this quarter.
Net sales were $9 1 billion in the third quarter, an increase of two 1% over the prior year driven by total case volume growth of 4%, partially offset by year over year food cost deflation and product mix impact of one 9%.
Our independent customer case growth was nearly 6% for the quarter Randy added approximately 80 basis points of growth for independents chef store volume negatively impacted our total independent cases by about 80 basis points the.
The system conversion is largely behind US we are laser focused on driving volume back into our stores, we expect chef store volume to be flat to modest growth as we exit 2023 and accelerate that growth in 2024.
We saw modest year over year product cost deflation of approximately one 3%, which continues to be driven by center of plate as grocery still show year over year inflation in the quarter.
We continue to make progress executing our long range plan initiatives.
Our gross profit per case increased three 6% during the quarter compared to the prior year. Our adjusted gross profit dollars grew seven 7% from the prior year driven by an increase in total case volume and cost of goods sold optimization.
Adjusted gross profit as a percent of sales was up nearly 90 basis points to 17, 3%.
Our adjusted operating expense per case was only up one 1% for the quarter.
Which is our best per case year over year performance this year.
The five 2% increase in adjusted Opex dollars was largely driven by increased volume.
Adjusted operating expenses as a percent of net sales were up approximately 40 basis points to 12, 9%.
We are pleased with our gross profit per case growth exceeding opex per case growth as we drive profitability and seek ways to be more efficient.
All of this led to 15% adjusted EBITDA growth and we expanded adjusted EBITDA margins by nearly 50 basis points.
Finally, adjusted diluted EPS grew 17% to <unk> 70 per share.
We have demonstrated strong leverage through the P&L with operating expense per case growing and about one third the rate of gross profit per case.
And we expect to maintain an operational discipline.
Turning to slide 11 for a growth pillar, our digital capabilities and unique product portfolio are attracting new customers and driving sales.
In addition, our differentiated service model and focus on operational excellence is leading to profitable growth.
With our solid independent case growth, we are on track to significantly exceed our one five times goal for restaurant volume growth for the full year.
We drove year over year share gains in each of our target customer types improved our independent private label mix by 140 basis points and continued to develop and convert strong health care hospitality and new business pipeline.
We're seeing improved mix and margin expansion as we outgrow the industry and focus on more profitable customers.
We are focused on profitable share growth as evidenced by our third quarter gross margin improvement and our 10th consecutive quarter of year over year share gains and independents.
As we focus on our digital innovations moxie of saved our sellers over 50000 hours with its new self service capabilities. In addition to the significantly improved customer experience.
This frees up hours for our sellers to accelerate growth and help our customers succeed.
Next to profit on slide 12.
In addition to profitable growth, we continue to make progress on our initiatives to increase EBITDA margins.
Thanks.
We drove further progress on initiatives such as cost of goods sold improvements by working jointly with additional vendors.
We remain on track to address a total of 60% of cost of goods by the end of the year.
We continue to advance our efforts to drive operational efficiencies as productivity improved year over year for both delivery and warehouse.
Now I'll turn to cash flow.
Turning to slide 13, we continue to increase our cash flow and expect to build upon this as we grow earnings and effectively manage working capital.
Our strong cash flow means we will continue reinvesting for growth and further strengthen our capital structure.
Our year to date operating cash flow was $935 million.
We invested approximately $270 million in Capex and on fleet leases, including projects to expand expand fleet enhanced analytic insights improved technology and supply chain and sales to enable further organic growth.
Our ongoing Capex target is approximately one 3% of net sales as a rule of thumb over time, we spend about one third of Capex on fleet, one third for maintenance and one third from growth, which includes advancing our technology capabilities.
We also paid $142 million for R&D in the quarter.
We will continue to remain opportunistic in selectively pursuing tuck in M&A like <unk>, where it makes sense and at reasonable valuations.
In addition, we repurchased 727000 shares in the third quarter for a total of $29 million.
And so far in the fourth quarter, we have repurchased an additional $20 million, leaving $237 million remaining on our $500 million share repurchase program.
Moving to slide 14.
Leveraging our free cash flow and timely debt paydowns, we reduced our leverage from three seven times to two nine times over the past 12 months. We are now within our target range of $2 five to three times and expect to remain there.
In August we reduced the margin on our term loan due 2028 by 25 basis points.
September we refinanced the 2025 senior notes by completing a $1 billion offering the market was constructive for us as we move $1 billion.
From secured to unsecured debt and extended our maturities.
Our overall debt structure is in solid shape, we don't have any maturities until 2026.
We remain focused on creating value for shareholders and allocating capital prudently against the four parts of our capital allocation strategy.
Now turning to guidance on slide 15.
As a result of our solid year to date results and outlook for the full year, we are raising our full year adjusted EBITDA range to $1 54 billion to $1 $5 6 billion.
And our adjusted diluted EPS range, $2 60 to $2 70 per share.
We are delivering on our long range plan and we are growing adjusted EBITDA and adjusted EBITDA margins, we've reduced our leverage to within our target range and are deploying capital to deliver strong returns. We believe we have the right strategies in place to deliver strong profitability this year and into the next several years.
I'll now pass it back to Dave for his closing remarks, thanks, Sir we can.
Continued improvement in our results reflects our team's hard work over the past few years to build a differentiated platform that positions us to win in any environment.
I am pleased with the progress we are making as we execute the four pillars of our strategy, which is driving improved safety productivity and profitable growth. Despite the lack of market tailwind.
And we will continue to be at the forefront of technology with our <unk> platform and our overall digital strategy.
Our focus on continuing to improve our customer value proposition has resulted in strong case growth and consistent market share gains specifically within independent restaurants health care and hospitality.
We are growing our adjusted EBITDA and enhancing our margins are.
Our leverage is now below three times.
Even with this tremendous progress we have a long runway of profitable growth and shareholder returns in front of us.
Assuming stable macro backdrop, we believe our long range plan will lead to further margin expansion over time.
And we remain committed to be at or near $1 $7 billion of adjusted EBITDA in 2024.
And I want to be very clear this is not the ceiling for future earnings growth.
We have a lot more sales and earnings growth potential in 2024, and beyond and we look forward to highlighting our exciting future at the upcoming Investor day on June 5th.
We're just getting started and we will continue to execute our strategy gaining profitable market share within our target customer types enhance our margins and strategically deploy capital.
We are in a great position today, and we believe we have sustainable competitive advantages to outperform the market well into the future.
It's an exciting time at U S foods and we appreciate your interest.
With that Lisa Please open up the line for questions.
Thank you I would like to ask a question on the phone lines today. Please press star one on your telephone keypad.
Binder to remove yourself from the queue that is star one again.
We'll take our first question from John <unk> with.
We'll go next.
Hey, Dave let me start.
The sales force investment or the investment Youre, making in sales right.
How would you parse that out between the various pieces of a team based selling right you've got different different positions and then secondly, the Org chart. The org change having those guys reported due to the regional Vps, what do you think that will do operationally.
Great.
Ill take the first question that you asked there John and good morning.
We're excited about the investments we're making in the sales force that we've been doing that for a while and we continue to accelerate that investment and we will be at that low to mid single digits for a long time to come.
Mostly tms.
But I'm excited about our team based selling model, where we have our consultants and specialists.
As well as our chefs teaming up in front of the customer will make fractional investments in those other two groups relative to the Tms just to continue to make sure. They have the support they need in front of the customer.
And then in terms of the Org changes really excited about where we're going.
Jim and his retirement just gave me the opportunity to think about differently. How I wanted to think about the organization and efficiencies and as you know every anytime those handoffs between corporate and the field that creates slower decision, making opportunities for inefficiency and we just need to continue to move faster. So it was an opportunity for me to rethink it and moving our local sales organization.
<unk> back into the field, where the customer interfaces just made all sorts of sense. So.
A small change, but I think it will prove meaningful through the course of time.
Alright, and then my follow up.
The three target types.
How would you parse out the case growth between new accounts and drop size.
My guess is it's different independent versus health care and hospitality the composition is different correct.
Yes, no I think I think thats right in an independent side, let me start with that first our cases per line are relatively flat given what you've heard broadly about some of the foot traffic, but we are continuing to decrease our lines per drop up.
Low single digits. So we continue to penetrate those customers both when we get them initially, but also through the course of time and Thats, an exciting opportunity for us to continue to drive in terms of growth and as I mentioned in hospitality and healthcare, we're generating a lot of net new customers and new business as we've talked in the past we believe we've got a highly differentiated mom.
Mulder, particularly in health care, where we've got great technology differentiation to help our customers not only in our back office from a cost productivity standpoint, but also with.
With our customers and the folks that are seeking the care to help manage their nutritionals to be efficient in how they bring in inventory and to do that all met automatically no. One else has the capability that we have there.
And then the same store sales I would say contribute more.
Gross to health care and hospitality.
Relative to independents.
We've got a differentiated model, we're winning in all those places that we continue to tell you we're taking share in all of them and we've got a long runway of growth ahead of us and I think this really speaks to the power of the differentiated model that we have.
We've got all these target customer types that many of our competitors don't have.
I think that will prove to be a very resilient model for us through the course of time.
Thank you.
Thank you.
We will take our next question from Kelly Bania with BMO capital markets.
Yes.
Yes.
Good morning, Thanks for taking my question.
I just wanted to touch a little bit more on gross margin, obviously quite strong.
Can you just help us break out.
The inflation deflation impact.
And then also just talk more broadly about strategic vendor management and in your cost of goods initiatives.
Reduction initiatives, there and what you're learning as you work through.
This initiative with your suppliers.
So let me start and I'll ask Dirk to fill in the details here, but yes.
The other point I want to make Kelly and I. Appreciate the question as we've been through periods of large inflation here and now two consecutive quarters of deflation and what you've seen us continue to do regardless of whats going on there is continued to expand our gross margins and particularly our gross margin per case.
And as Stuart highlighted we're going that at a much faster rate than our operating expense per case is growing that's a winning model. We expect that that will continue specific to your SPM question. It's a piece of work that the company has been doing for quite some time as we said we'd be through about 60% of our Cogs by the end of this year, we are maintaining that and we're making very good progress.
Yes, so that element of the gross margin improvement along with our penetration of exclusive brands, which we said were up 140 basis points in.
And independents this quarter, along with our work to continue to optimize our freight lanes.
And improve our mix, that's the winning formula to continue to expand our gross margins and as we say we control our own destiny in that regard and we're doing a nice job of it.
The only thing I would add is just to reinforce <unk> point that inflation deflation really a moot point when we think of year over year as he said, it's been relatively flat for some modest deflation, but those are in categories that are impacting earnings. So the improvement you're seeing is really all back to a point of control the controllable things that we're doing in our four walls.
As opposed to the external marketplace.
Okay.
Great. Thanks, and then just wanted to.
Given opportunity there maybe catch a little bit more on the one seven.
Long range plan target and as you get closer to 'twenty four.
How the different components of that may be working towards reaching that whether parts of it are ahead or behind or where there's maybe.
More opportunity just wanted to give you the opportunity to kind of.
Talk us through that a little bit more.
Yes, great question and I'll, just say, we'll say more about our guidance for next year on our fourth quarter call, obviously, but I'm very confident to be at or near that $1 7 billion and just through the course of time here in my first 10 months I've gained nothing but increased confidence Kelly the momentum and what I love about the way we are delivering our results is we've got great balance across the P&L.
We're we're working in the right target customer types, we're delivering the right amount of growth profitably, we're improving our expense ratios.
And importantly, driving the outcomes that our customers need.
So there's not one area. This outsized I would say in terms of the impact there. We've got great balance I expect that balance to continue into 2024 and beyond.
Thank you.
Thank you.
We'll take our next question from Peter <unk> with BTG.
<unk>.
The environment is changing a little bit here, we're starting to see in a couple of quarters now.
Deflation that you guys are seeing restaurants have taken a lot of price and we're seeing some more discounting among the larger chains are you seeing any change in behavior. Among your independent restaurants, or just help us out in terms of their health and their trajectory going forward.
Yes, I think the health is very solid.
<unk> had some foot traffic challenges through the course of the third quarter, there, particularly with the chains, which continued to see lower foot traffic sequentially. While our results improved I think the health of the independent is very stable and as you've heard me say in the past I believe theyre going to win out in the long run here and importantly, we continue to have a differentiated model that enable.
US to continue to take market share and support their businesses.
With our great products and service with our people, but also our technology. So we think we're differentiated there and regardless of what's going on in the macro.
We're going to continue their penetrate that healthy customer base and importantly, I think overall, there's less rock restaurants out there than there were pre.
Pre pandemic, but we've seen sequentially new openings of restaurants, and I would say our penetration is largely.
Probably equally split between new openings of locations as well as penetration in taking share from others in the marketplace. So it's it's a pretty well balanced approach at this point I would expect to see continued openings in locations through the course of the next few quarters here.
So we're seeing that part of the customer base pretty healthy and stable.
Great very helpful. And then just on the indirect spending I think you guys had mentioned.
Past couple of quarters.
Some cuts that you'd be making there can you just talk to us a little bit about.
Where the progress is on some of those indirect spending cuts is that more of a 2024.
Event or have you started to cut some of those expenses. Thanks.
Good morning, Peter and we have started to see some small safe.
Savings begin to accrue already we do expect that to accelerate as we go through 'twenty four, but that's moving along well and really as we plan. So it's good to see some things come to fruition of it more to come next year.
Thank you very much.
Thanks.
We will take our next question from Alex Slagle with Jefferies.
Hey, Thanks and congrats.
Just wanted to follow up but it looks like that the gap between the chains and independents slightly narrowed a bit quarter over quarter. I mean is there any stabilization or a relative improvement in chains and youre seeing a more improvements to come.
So I think just broadly in the market the foot traffic was slightly down sequentially Q3 to Q2 and as I've said in the past really the performance is relative to who you have in your portfolio relative to the winners and the folks who arent going as well, we outperformed what was going on with foot traffic this quarter.
I think that's relatively stable we have some things in the pipeline that I think will continue to show improvement through the course of time and into next year Middle of next year, we're targeting the rate change that we believe we're going to win and as we said in the past we will continue to look for optimization opportunities within our portfolio.
And a question on project I guess, it's grown to cover about 35 markets now, what's the broader Tam and this opportunity sort of where it can go and timeline to think about.
Yes, we made aggressive investments in Costco Youll continue to see us do that as an opportunity to serve our customers better.
The frequency of deliveries, particularly in these urban areas that are difficult to reach customers want fresh products delivered more frequently than that.
It's a great platform for us to do that so we will continue to be thoughtful about where we take it but we see a long runway of opportunity there to continue to penetrate across our portfolio with pronto, We love that model, we're excited about it and it's getting great traction.
Alright, thank you.
Thank you.
We will take our next question from Lauren Silberman with Deutsche Bank.
Thank you and congrats on the quarter.
To ask about capital allocation.
250 million or so in buybacks year to date.
Trading at a big discount to history had really strong fundamentals momentum.
Can you expand on your willingness to further lean and how youre thinking about capital allocation of buybacks versus M&A or debt pay down and then specific to M&A today, you think about not accretive opportunity for the business.
Yes, So let me start to say, we will always invest in organic growth in our company first and we think that's the highest return and supporting our customers is Paramount. We continue to look at expansion opportunities across our network and we will be thoughtful about those but.
But we will continue to drive that first and as you heard me say, we don't need to do any acquisitions in this company I love our footprint will take opportunities like we did with Ramsey and the one we announced this morning to help us with efficiencies taking miles out of the system and local market density.
Let me just say a word about <unk> since you brought up M&A and the way we think about it.
Very excited about that acquisition, we said $600 million in revenue.
It gives us an opportunity in the central Valley, where salad Ddos is roughly half chain and have independent.
Where we don't have a footprint to serve the independent customer in that Central Valley really none of our competitors do so we're excited about it from that standpoint, we're excited about it from the standpoint of helping us optimize the chain business that we have in that central and northern California footprint. So we'll take miles out and serve that part of the customer base better.
I guess I would say I'm most excited about the multiple we're paying for that which is a fraction of what we paid for renzi and a fraction of our trading multiple so as we said we will be thoughtful and disciplined about any acquisitions and we won't do any that don't make sense and we won't overpay for them and solid Danos is another great example of that in terms of your question around share repurchase.
We're obviously under trading are potential wins hugely undervalued in my view, you've seen us ramp up our share repurchases I think we'll be thoughtful about that going forward returning capital to shareholders is important after we do the things we need to make sure we're growing and supporting our customers well.
Obviously more to come on that through the course of time, but we've been leaning in hard on share repurchases and we will continue to do that.
Great. Thank you for that and then just a follow up really impressive case growth trends can you talk about anything around the cadence of trying he thought there at the clutter and make that youre willing to provide any color on October and similarly anything you can provide on what your thoughts are in place throughout the quarter in China.
Thank you.
Yes. Thank you I think sequentially through the quarter, we saw things soften a bit in the market as I've said earlier and Thats why im so excited that our independent case growth actually accelerated sequentially from Q2 to Q3, and we continue to accelerate our market share gains. So it underscores the importance of the differentiated model and the differentiation that we have actually in the marketplace.
And in terms of the start to the fourth quarter I think it's largely in line with what we saw in Q3 I would say October started a little slower for us as we were lapping a strike from one of our large competitors in the first couple of weeks of October we saw that volume bounce back as we would expect in the back half of the quarter and we expect to be relatively in line with Q.
Three and.
And importantly, continuing to take market share in those target customer types.
Hi, Kelly and I and deflation. So we actually saw that year over year deflation improve or lessen as we went through the quarter and in October we actually saw a modest year over year inflation.
The improvements are primarily coming from center of the plate. So as that begins to become modestly inflationary and then grocery.
Still very modest levels of inflation. So we think that's encouraging.
Thank you guys very much.
Thank you.
We will take our next question from Brian Harper with Morgan Stanley.
Yes, thanks, good morning, guys.
Eric just on that on that comment would you expect that there is now going to be kind of modest inflation across the business in <unk> and then into early 'twenty four.
Good morning, Brian.
<unk> <unk> is a good indicator of the latex back into the black or some modest inflation I think as we see that there's been more driven by proteins, which can be more volatile I think that's the part that's harder to predict but I think what's encouraging is you see the stabilization of proteins you see still a modest inflation in <unk>.
Grocery and so I think that that indicate more likelihood of some level of inflation here in the quarter.
I think that the most important part that I could come back to is what.
We talked about earlier that even with really modest deflation that our gross profit still remained quite strong at just I think demonstrates the durability of that we've talked a lot about and why we're so bullish in our GP being able to stay strong and an expectation that in future years, we can continue to expand further.
Yes, Okay makes sense and then.
Opex per case like you talked about and keeping that in check how would you kind of rank. The main drivers of that at this point do you think it's mostly about just kind of continued improvements in productivity and.
Are you seeing much yet from kind of digital expansion.
Scheduling et cetera, or like how do we think about which of those drivers might become more important as you go into.
The subsequent quarters.
While it is start with we're quite pleased with the performance as I said in my prepared comments, our best year over year per case performance that we've had and that's really driven by distribution to supply chain costs and so I think that is a key unlock I think when you think across other parts. Yes, we will get some leverage will continue to take some action.
On productivity.
I think all the things all but what you see when we talk about the improvements as flex scheduling is coming to life as year over year productivity continues to improve for delivery and warehouse. All those are translating into per case improvement and so that gives us good confidence that we are making traction we still have plenty of runway ahead, but also.
We're pleased with that and see a lot of opportunity remaining.
Okay.
All right and we'll take our next question from Edward Kelly with Wells Fargo.
Hi, guys good morning nice quarter.
Maybe just to follow up on an opex per case.
Obviously very good results.
But productivity.
When a worker standpoint, I don't think it's back to 19 levels, you talked about things like the routing the flex scheduling.
How do we think about the growth in Opex per case going forward on a sustained basis.
In terms of in terms of modeling and then specifically if you think about Q4.
And Opex.
Opex friction doesn't increase their Q4 versus Q3, which would suggest that it might actually be down year over year.
I don't know, if that's too aggressive assumption, but maybe speak to that as well.
Okay.
So ultimately I think win with distribution and the productivity. So we actually for the third quarter, our delivery productivity was about 2019, where else isn't quite there, but it's making progress. So we're pretty encouraged and I think the whether it's a flex scheduling you heard Dave talk about our case per mile from there.
Routing work, we've done over the best in the company history, and what I think we each like about the work. We're doing is it's not all just about taking cost out it's about the customer experience customer service and things that that are taking our making our company more productive. So it really is a good balance there.
I think as you look ahead.
For the fourth quarter, whether it's sort of in line with prior year, and a little bit higher or lower I think the encouraging part is that we're seeing very modest levels of increase in per case, and I think that comes back to what you've heard us say from the beginning this year is when we have inflation cost inflation of 3% to 5% a year our goal is.
To offset as much or all of that as we can and I think youre seeing that as we make progress coming more and more into fruition. So our goal remains that from quarter to quarter that can bounce around a little bit I'll use. An example for opex that you may end up with a little better performance in the fourth quarter.
But we're pleased with the progress we're making.
Okay, and then Dave just a follow up for you.
Yeah.
Making some adjustments to sales compensation model hiring salespeople.
Hearing this from competition as well obviously the large players.
A bit more focused on.
Gains at higher market customers.
For you is can everyone when it environment, meaning the larger players.
And how confident are you in a differentiation at what U S foods and filling that allows you to continue what we're seeing.
Today and that type of that type.
Backdrop.
Yes, great question.
I'll take your second part first I am highly confident and the differentiation of our model and that's the winning model I believe and we can drive growth effectively and productively with our sales team, but that team based selling model. As you continue to hear me say is a real differentiator I see it working every single day for our customers and we're going to <unk>.
To drive it hard and I think Thats why you may hear us talk about sales head count growth.
Slightly lower level than to hear from some of our competitors I think that really is a differentiation.
In our model and we will continue to lean in and around that in the first part of your question remind me again.
Well, it's just.
I guess, it really pertains to.
The idea.
The large <unk> players, we're all sort of investing in salespeople on.
Is there enough opportunity beyond that.
That everybody can win the market the market looks at this as you versus your other publicly traded players here some game out.
Inaccurate is that at the end of the day.
I think this is still a very highly fragmented market as you know the big three have.
40% nominally roughly plus or minus a share so that that's still very highly fragmented I think you'll continue to see us take share collectively from some of the smaller players.
I think about our business relative to others, we still have a relatively small share of the independent market space. So the runway is long I think for growth. We all have different models. They all have their pluses and minuses, but I think there's room for everybody to continue to win in this market.
One other thing that I'd highlight that I think is a differentiator in our go to market. Our focus is with our three customer types that we're targeting and then what you see is it's not just about the independents.
Have we had 8% growth almost in health care, we are 6% hospitality. We've continued to do that we continue to have.
Excellent new business pipeline converts and healthcare and hospitality. So if you look at how that translates into in those most attractive are key customer types. That's led to overall the strongest case growth out of it I think.
Competitors in work, we're pleased that we have but the model we have the ability to continue to grow at accelerated and gained share in all three of those types of leading to overall solid case growth.
Okay. Thank you.
Thanks, Ed.
We will take our next question from Jeffrey Bernstein with Barclays.
Okay.
Great. Thank you very much two questions. The first one David I think we've confirmed the industry data and our restaurant commentary showed that there was a slowdown to close maybe the summer maybe August September and I think you confirmed that the chains foot traffic slowed in the third quarter.
The question, we've been getting a lot of it just why.
I think a lot of people immediately jumped on the idea that the headwinds on the consumer are finally, taking hold.
But then many of our restaurants are actually said less of.
Consumer concerns and more just a return to normal historical seasonality in terms of month to month or quarter to quarter.
In fact, some have actually set the industry's recovered somewhat in October so I'm just wondering.
Your thoughts one are you surprised that maybe youre not seeing a similar uptick.
In October and do you think there's any credence to the thesis of a return to seasonality just wondering your thoughts on whether or not we should be concerned of a broader consumer slowdown or whether the seasonality does hold some water and then I had a follow up.
Yes. It is it probably has something to the seasonality piece, although we don't spend a lot of time thinking about that Jeff because relative.
Relative to our model and the things that we're winning in around.
I keep telling our team to focus on the things, we can control and whether there is a broader slowdown in the market. There is still a lot of cases out there for us to go get people are still going out to eat it's going to ebb and flow just like it always has been a difficult time to get a handle on things with the rebound since COVID-19 in restaurants that are gone offline and them coming back it's really it's been a.
Little bit Helter skelter here as you know for the last year or so.
But regardless of all of that I think what I'm seeing and what I said earlier stability I think that's the key right now is stability and then our ability to lean in where we want to and those three target customer types continue to support our customers.
Sure.
Okay and on that note.
It seems like you've got strong momentum across your business lines I'm just wondering.
Can you kind of bless the at or near $1 7 billion for next year, but what's your greatest concern as we look to 'twenty four I'm, assuming maybe its more macro versus your internal plans, but what are you looking at to get a gauge for your outlook for 'twenty for whats. The biggest concern you have or among your team.
Yes.
From a macro standpoint that would probably be it.
But it would have to be a major significant macro things give me a lot of concern I've got a lot of confidence in our ability to hit that target for next year, given the momentum that we have and what I can see coming in the future in terms of continued share gains productivity work that we have underway and our ability to control that outcome.
So, yes, I guess I'd have to point to a macro but it would have to be more than just a minor slowdown.
Got it and then just lastly, the M&A just to follow up it sounds like the discussions maybe are a little bit more productive.
Completed a couple of them I know peers are talking a little bit more about it do you think both sides are coming to more reasonable terms in terms of valuation.
And how do you think about it in terms of your opportunity is it more of a geographic opportunity or is it just a particular line of business that you'd be interested in focusing on just trying to get your sense, yes.
Yes, there's a bit more geographic focused in both cases, both renzi and sell it now.
Serving those markets and some capacity, but not very efficiently. So there's still ample opportunity for that across our network to strengthen our position in local markets. There may be something that we do product portfolio why is this.
<unk> I don't see any major gaps in it but if the right thing comes along at the right time, we'll certainly take a look at it but I think you can think about it in similar fashion to what you've seen us too with the two that we've talked about.
So far this year and in terms of valuations.
Heard me say is that salad was extremely reasonable and a fraction of what we paid and elsewhere. So we're going to we're going to do the things that made sense, because we don't have to do M&A, we really don't.
So it's going to be thoughtful, but it's going to be the right. One for us solve a problem for us and as valuations that makes sense for us every time.
Thank you.
Thank you.
Yes.
We will take our next question from Jake Bartlett with Trust Securities.
Great. Thanks for taking the question.
I was telling you pertains to you, but as well as your larger competitors, who are all increasing your sales forces pretty aggressively I guess.
I'm wondering it seems like there's a disconnect to the overall market growth.
ROE pressures are there it doesn't seem like the market has gotten much bigger than expected.
How should we interpret the kind of the wide scale increase in the sales force give.
Given the macro background that doesn't seem to be better than expected.
Yes, I think you can interpret at least I can only speak for us and how we are.
How we're thinking about it Jake but I think it speaks to the underlying opportunity that we see in terms of growth and look as we continue to take share we're going to grow somewhat with the market that's going to be very low single digits, we're going to continue to penetrate the market and take share and that's going to drive an incremental growth in that low to single digits.
<unk> to mid single digits head count increase will add another increment of growth on top of that and so that's the way we're thinking about the algorithm given the relatively fractured nature of this market in this industry. There is still ample opportunity for us to take share regardless of the macro.
Yes, I think Jay the other thing to keep in mind, if we're growing independent is at 6% on a regular basis as we have for the last number of quarters.
<unk>.
We do want us to be adding sales sellers because thats also we're getting good leverage as we're adding sellers by growing cases faster than that but at the same time, making sure that we're reinvesting in reinvesting, especially in those areas, where we're growing faster.
Got it great Thats really helpful and then.
In the context, it doesn't certainly doesn't seem like it's happening so far.
Gross profit per case remain robust and have been robust for your larger competitors as well but.
With a lot of these salespeople coming on industry wide.
The macro is still somewhat under pressure and do you expect price competition to increase it seems like thats still a risk to the gross profit per case story out there hasnt come to fruition, but how much of a risk do you think that that is all the sales guys people hitting the <unk>.
Market are going to have to start competing a little bit more on price.
Yes, I think this has always been a competitive industry it always will be.
Things change during Covid and I think I would describe the competitiveness out there now is it back to pre COVID-19 levels. It's very fragmented there is a lot of competitors out there.
That doesn't deter us at all we've got a differentiated model and I think it underscores the importance of two things. One is all the initiatives that we have underway that we control to continue to drive that improvement in gross profit per case, and then looking at ways to continue to get more productive and take cost and waste out of our system and that's why the 3% to 5%.
Productivity target of solar.
To us that's why the moxie penetration is important because it allows our sales team to be much more productive in front of the customer and not chasing the back office stuff, but selling the value that we bring selling great products and importantly, helping our customers solve problems.
Great I appreciate it.
Thank you.
We'll take our next question from Mark Carden with UBS.
Good morning, Thanks, so much for taking the questions. So chef store was a bit of a headwind in <unk> slightly greater extent than it was in <unk> is this simply being driven by residual effects from the system conversion issue and the need to win back some of these customers and then how should we think about the impact here over the course of the next few quarters.
Yes, I think youre hitting it.
Right in the center of the target there Mark.
As we've said now the systems changes largely behind us, but we've had some lingering effects in terms of loss business through the course of that which started in the third quarter of last year Encouragingly, we're seeing month over month sequential improvement and more recently week over week improvements I'm encouraged by the ramp up as you heard <unk> say, we expect to be in a position.
Flat to growth by the end of this year exiting the year with.
The goal of driving strong top line growth next year and I think largely we're on track to do that so I'm very encouraged by what I see we continue to invest in the business. We have opened one new location already in the fourth quarter in Virginia, and we've got a couple more plants in the Carolinas here before the end of the fourth quarter. So progress continues and I expect that that.
Ramp rate will continue here as we exit 2023.
Okay, Great and then on Ramsey I know, it's still early but how is the integration fared relative to your expectations and then in context do you think you may have capacity to acquire at a faster pace.
Also of course understanding that you don't necessarily need to lean on M&A.
Yes, I think Randy has gone even better than I could have imagined and so it has gone extremely well on the integration front, we put a very strong leader in place. There we've had a great cultural fit importantly, we haven't lost any key talent and it's been very transparent and a non event for the customers in the market. So we love it.
There is not enough. Good I can say about how Ramsey is gone is all very very positive.
The second part of your question again.
Just the second part basically.
Your new acquisition do you guys think that you might have the capacity to acquire at a faster pace again understanding that you don't necessarily have to acquire.
Yes, I think as I said it filled a geographic void for us, particularly on the independent side, there, where we were serving that market, yes, it's kind of hard to get to the central Valley from San Francisco or la very efficiently. So it solves that problem for us and importantly, we have plenty of chain business in that part of the country.
Half of that business that we're acquiring that was changed related will help us serve that segment of the customer base also more effectively so we're excited about it from all those angles. It just makes sense at the right time and importantly, as I've said a number of times. This morning, a great multiple that we paid for it.
Great. Thanks, so much good luck.
Thank you.
As a reminder, everyone that is star one to ask a question we will take our next question from Andrew Wolf with CL King.
Thanks, Good morning.
Like to follow up on some of the good morning, the questioning on the labor productivity and.
Experiencing accelerating case growth in the quarter and sort of for the year as well.
Youre in a tight labor market so.
And you had good results so that's pretty.
But to what extent can you you have can you measure or just anecdotally talk about to what extent <unk>.
Hiring more fresh people.
Obviously come in relatively low in terms of productivity.
As you are growing.
How much of that impact.
The labor productivity metrics that we're able to.
Discerned.
Okay.
So I think attracting talent.
It is important and I would say the inflow of applicants for our jobs has increased to the point, where I would say it's relatively the same as it was pre COVID-19. It has always been the challenge to retain those folks through the course of time and Thats why we will lean in so hard around this flex scheduling pilot and while initially as you start those pilots you need to add.
A little bit of head count it actually hurts your productivity, what we're seeing is double digit improvements in turnover, obviously that leads to reduced overtime and improve productivity in the long run and we're seeing that everywhere. We've taken that model. So I think we've got a unique approach.
That makes a lot of sense for us and will help us retain people, which is the key to driving productivity over the long haul and as Dirk said, we're pleased with our driver results. Both in terms of turnover and productivity being back to pre pandemic levels and will continue to drive.
Drive it.
<unk> from there.
Okay.
Okay and just.
Regarding the guidance I think.
As you mentioned solid you know this is going to close late in the year.
Alright.
Very insignificant amounts for the fourth quarter. So at this point it really demonstrates the.
A core strength of the overall business.
Okay.
Thank you that's it for me.
Thank you.
We will take our next question from John <unk> with J P. Morgan.
Hi, Hi. Thank you. The question is actually on current price competition, if youre seeing any.
The current slow restaurant case volume environment, Cogs, which obviously has moderated the labor market cost of distribution, which has moderated I mean, it would seem that if there was going to be a time for price competition, we would probably already be seeing it. So just wanted to get your comments anything that youre hearing on a specific market level to maybe.
There's been a change in recent times. Thank you.
Yes, I would say that theres been a change since the pandemic.
Getting back to pre pandemic competitiveness and as I said, it's always competitive I wouldnt point to any market or geographic area of the country, where it's more or less competitive than it was pre pandemic is always competitive. It's a thing we all have to deal with every day and that's why we worked so hard to sell the value of the U S foods brings to our customers.
Sure.
Sure.
Thank you.
Thank you.
And there are no further questions at this time I would like to turn the call back over to Dave Hoffmann for any additional or closing remarks.
Well. Thank you all for joining US today, we are excited about the momentum in the business and importantly, the exciting future that we have we look forward to talking to you again and importantly, our Investor day on June five have a great day.
Thank you and that does conclude todays presentation. Thank you for your participation today and please disconnect.
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Okay.
Yes.
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