US Foods Holding Corp. (NYSE:USFD) Q1 2024 Earnings Call Transcript

US Foods Holding Corp. (NYSE:USFD) Q1 2024 Earnings Call Transcript May 9, 2024

US Foods Holding Corp. misses on earnings expectations. Reported EPS is $0.3306 EPS, expectations were $0.53. US Foods Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods First Quarter 2024 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. [Operator Instructions]. Thank you. I will now turn the conference over to Mike Neese, Senior Vice President of Investor Relations. Mike, you may begin.

Michael Neese: Thank you, Krista. Good morning, everyone, and welcome to the US Foods first quarter fiscal 2024 earnings call. On today’s call, we have Dave Flitman, our CEO; and Dirk Locascio, our CFO. We will take your questions after our prepared remarks conclude. [Operator Instructions]. Our earnings release issued earlier this morning in today’s presentation can be found on the Investor Relations page of our website at ir.usfoods.com. During today’s call, unless otherwise stated, we’re comparing our first quarter 2024 to the same period in our first quarter fiscal year 2023. In addition to historical information, certain statements made during today’s call are considered forward-looking statements. Please review the risk factors in our Form 10-K for a detailed discussion of the potential factors that could cause our actual results to differ materially from those anticipated in those statements.

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. We are not providing reconciliations to forward-looking non-GAAP financial measures. Finally, we’re excited to host our Investor Day on June 5 at our headquarters in Rosemont. If you’re interested in attending, please reach out to us in Investor Relations. Thank you. And I’d like to turn the call over to Dave.

Dave Flitman: Thanks, Mike. Good morning, everyone, and thank you for joining us. Let’s turn to today’s agenda. I will start by sharing the progress we made executing our strategy and several key achievements from the first quarter which set us up for a strong year ahead. I will then hand it over to Dirk to review our first quarter financial results and our fiscal 2024 guidance. Following a slower start to the year due to adverse weather and labor disruptions, our first quarter earnings came in as expected. The continued execution of our strategy and long-range plan resulted in adjusted EBITDA of $356 million, representing approximately 6% growth. As we highlighted in February, adjusted EBITDA was negatively impacted by approximately $20 million from increased cost to serve our customers and volume headwinds from labor disruption and weather-related issues in January.

Of the $20 million impact, approximately $15 million was incremental operating expense to support the business during the labor disruption. Excluding this negative impact, our underlying adjusted EBITDA growth was approximately 12%, and we remain confident in achieving our full year guidance. This performance demonstrates the strength of our business model, the commitment of our 30,000 hard-working associates and our ability to win in any environment. Total case growth was 4.2% for the quarter, with share gains continuing in target customer types, and our independent case volume grew 4.6%. In fact, for independent restaurants, our share gains accelerated from the fourth quarter to the first quarter as we grew share for the 12th consecutive quarter.

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Q&A Session

In early April, we closed on our previously announced acquisition of IWC Foodservice, and we are excited to have them on our team. As a result of deploying capital towards our tuck-in M&A strategy, we did not purchase a significant number of shares in the first quarter. However, we do plan to lean in on share repurchases more aggressively through the balance of this year. Despite a slight year-over-year decrease in restaurant foot traffic, broadliners increased their volume within the overall food service distribution channel as measured by Sircana, underscoring the resilience of our industry. Our team captured profitable market share with our target customer types and improve profitability as we remain focused on controlling the outcomes that we can control.

Furthermore, we continue to identify cost savings, including streamlining administrative processes and costs. More specifically, cost actions we have taken to date are expected to generate more than $55 million in expense savings for 2024 and $75 million on an annualized run rate. We are pursuing additional operating expense and cost of goods actions to drive further savings in 2025 and beyond. I have confidence in our ability to drive growth and profitability well into the future. We are controlling what we can control to generate long-term shareholder value. Turning to Slide 4. As a reminder, our team’s work is guided by 4 strategic pillars, and I will discuss our progress on each of them over the next few slides. Moving to Slide 5. Our first pillar is culture.

Keeping our associates safe is a key part of our culture. And during the first quarter, our injury and accident rates were 30% better than the prior year. And importantly, these results were our best since 2020. Despite our recent success, there is still significant room for improvement to reach our goal of 0 injuries. We are excited about our spring Scoop, where we launched 26 new products to help our customers offer high-quality innovative and labor-saving products on our menus. As part of this scoop, we introduced Serve View, including 20 new products within a portfolio of more than 3,000 products of delicious, plant forward, gluten-free and clean labels, such as our ChefsLine organic Purple-Rice and Kinablend. Importantly, since the introduction of our popular SCOOP program 12 years ago, nearly 75% of the products that have been launched are still sold today.

Finally, we are increasing our commitment to three strategic community giving areas: hunger relief, culinary education and disaster relief. Our increased investment of $2 million in 2024 is part of our healthy communities make it program, which provides nourishment and opportunity to the communities we serve and builds on our 2023 investment of more than $12 million. Turning to Slide 6, our second pillar, service. Providing best-in-class delivery and a high-quality service experience to our customers is essential to our growth and our overall success. The investments we are making in operational rigor and modernizing our technology platforms continue to pay off. We exited the first quarter quite pleased with the progress that we made on both on-time delivery and service levels to customers, which continued to show year-over-year and sequential improvement.

We also recently completed an 18-month initiative in our replenishment organization. This program is standardized and improved the processes and technology we use as we strive to deliver best-in-class service levels to our customers. This work resulted in our delivered as ordered Net Promoter Score improving by seven percentage points, while yielding $15 million in annualized operating expense savings and $120 million in working capital reduction. We continue to build on the routing efficiency gains that we delivered in 2023, and we remain focused on driving further improvement in on-time deliveries. In fact, our cases per mile were a company record in February and March. Furthermore, our routing initiative delivered a 4% improvement in cases per mile during the quarter compared to the first quarter of 2023 in a two-year stack improvement of 12%.

Our team’s focus on this important work is making a difference for our customers and for US Foods. Taking this work a step further. We extended our routing deployment to four additional markets during the first quarter, building upon the two markets we piloted late last year that are now fully deployed. In the market where [indiscernible] is live, we are compounding further is in our routing effectiveness. For example, in deployed markets, we are already seeing this technology produce an incremental 2% improvement in cases per mile which we expect will continue to accelerate. We are confident that we have the right plan in place to successfully implement this technology across the company by mid-2025. And we continue to further transform our customer experience through our differentiated MOXe digital solutions platform.

MOXe has been fully embedded with our independent restaurant business. As customers move to MOXe, they buy 10% more are more profitable and stick with us longer. We have migrated over 65% of our national chain business with full deployment anticipated in the second half of 2024. MOXe also has a new Spanish translation feature, further enhancing the user experience. We are excited to share the MOXe road map and growth plans for this digital platform during our upcoming Investor Day. Let’s now turn to our growth pillar on Slide 7. We remain focused on accelerating profitable growth and gaining market share with our target customer types. We are on track to achieve our 1.5x market growth goal for restaurants for the full year, driven by faster growth with independents.

Our 4.6% independent case growth resulted in an acceleration of share gains from the fourth quarter, again, marking our 12th consecutive quarter of market share gains. Our Pronto small truck delivery service is a true competitive differentiator and continues to gain traction with our customers. Through this platform, we are able to offer our customers significant benefits including flexibility of delivery, which allows us to compete with local and specialty competitors. At the end of the first quarter, we were live in 36 markets and expect to add 5 additional markets in 2024. Pronto is on track to deliver approximately $600 million of annualized sales this year with plenty of runway ahead. We also recently launched what we are calling Pronto penetration in two markets.

which, for the first time, extends the Pronto service to existing independent customers who will be able to order on nonrabic dates. Once fully implemented, this new offering is expected to further increase our share of wallet with our existing customer base. Last quarter, I provided you with an update on our sales compensation plan. As you’ll recall, the variable components of our plan are now more meaningful for our sellers. While it’s only been 1 quarter, our plan is working as designed. Many of our sellers are exceeding their targets and receiving higher compensation for that profitable growth. For example, One of our sellers in South Carolina grew cases 50% faster than the fourth quarter, exceeded its target and earned a 10% compensation increase.

And for those who are not growing as fast with our new targets, we believe they will rebound in the quarters ahead. Turning to Slide 8, our profit pillar. Adjusted gross profit grew nearly 7% in the first quarter to $1.5 billion. We drove further progress on initiatives such as cost of goods sold by collaborating with additional vendors. In total, we have addressed 60% of our COGS, which has translated into approximately $120 million in savings over the past 12 months. We have initiated the work to address the remaining 40% of our spend this year. We’re also continuing to make progress on growing our independent restaurant private label brands, which increased 90 basis points year-over-year to over 52%. We Increasing private label penetration remains a significant opportunity for US Foods.

We believe we can [indiscernible] our customer value through our innovative and high-quality products at a competitive price while also improving our margins. Finally, our delivery productivity improved 4% over the prior year, and we continue to improve our overall supply chain productivity through turnover reduction, flexible scheduling and process standardization. The 4% delivery productivity is in line with our goal of 3% to 5% annual gains to offset wage inflation. This productivity improvement is additive to the operating expense reduction I spoke about earlier. Before I hand it over to Dirk, I would like to acknowledge two recent winners of our first-ever CEO awards. Mark Schuster, Warehouse Manager; and Timothy Gephart, Dave Warehouse Supervisor at our culinary equipment and supply business in Allentown, Pennsylvania.

This distribution center celebrated 11 years of injury-free operations last year. During that time, they nearly doubled the cases shift while improving productivity by approximately 50%. Mark and Tim make safety a top priority for regular training programs and team huddles to ensure that the entire team took personal accountability for safety. Thanks, Mark and Tim, for your outstanding leadership. As we approach Memorial Day, I want to thank all of our veterans for their service, including our associates who have served our great country. On this Memorial Day, we pay tribute to those who have served our country and made the ultimate sacrifice. Each day, we have the privilege to enjoy our freedom because of their fearless service. As you spend time with your loved ones on this holiday, please join me in remembering the heroes who courageously gave their lives for our country, and for our freedom.

Let me now turn the call over to Dirk to discuss our first quarter results and our 2024 guidance.

Dirk Locascio: Thank you, Dave, and good morning, everyone. Our performance for the first quarter was consistent with our expectations as we executed well despite the challenging start to the year, highlighting our strong financial discipline and staying focused on what we can control. Starting on Slide 10. First quarter net sales increased 4.8% to $8.9 billion, driven by total case volume growth of 4.2% and food cost inflation of 1.5%. Mix was a headwind of nearly 90 basis points. Independent restaurant volume increased 4.6% overall and 2.9% organic. Health care and hospitality grew 6.4% and 0.9%, respectively. Health care growth remains strong while hospitality growth was less than we expected due to softer same-store sales and a tougher compare versus a strong prior year.

We expect hospitality to accelerate through the second quarter and the second half of this year as we onboard new customers. Adjusted EBITDA grew 5.6% from the prior year to $356 million. This was slightly above the high end of our guidance, driven by a combination of profitable volume growth, strong gross profit gains and solid expense management. Adjusted EBITDA margin remained largely unchanged at 4% despite the headwind of incremental costs to serve our customers during the January labor disruption. Absent these costs, plus the volume headwinds from labor and weather, which altogether totaled approximately $20 million, we estimate that our adjusted EBITDA growth rate over the prior year would have been approximately 12% and adjusted EBITDA margin would have increased approximately 20 basis points.

Turning to Slide 11. We increased adjusted EBITDA per case again this quarter despite incurring higher incremental costs related to the labor disruption. Adjusted gross profit per case growth continued at a strong $0.17 improvement over prior year, driven by our cost of goods sold initiative and disciplined pricing. On an annualized basis, this improvement would result in more than $100 million in incremental gross profit. Adjusted operating expense per case increased $0.15 with more than $0.07 related to incremental expenses from the labor disruption. Adjusted EBITDA per case was $1.75, up $0.02 from the prior year. Excluding the incremental costs, adjusted EBITDA per case would have been a $0.09 improvement over prior year. We are focused on driving further operating leverage improvement and growing adjusted EBITDA per case by continuing to execute on initiatives that are within our control.

We are making steady progress with our cost of goods sold optimization work, improving supply chain productivity and streamlining administrative processes and head count, as Dave noted, as well as increased indirect spend management savings as more initiatives in this area are deployed. Moving on to Slide 12. We continue to generate strong operating cash flow driven by earnings and effective working capital management. Operating cash flow for the quarter was $139 million, which was driven by strong profitability. However, this was lower than prior year as we had more working capital benefit in the first quarter of 2023 from extending payables with certain suppliers. Absent the working capital impact, operating cash flow was modestly above prior year.