US Foods Holding Corp. (NYSE:USFD) Q2 2024 Earnings Call Transcript

US Foods Holding Corp. (NYSE:USFD) Q2 2024 Earnings Call Transcript August 8, 2024

Operator: Thank you for standing by. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be an question and answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Mike Neese, Senior Vice President of Investor Relations. Please go ahead.

Mike Neese: Thank you, Carrie. Good morning, everyone, and welcome to U.S. Foods second quarter fiscal year 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 and 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 second quarter fiscal year 2024 to the same period in our second 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 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. Thank you. I’ll turn the call over to Dave.

Dave Flitman: Thanks, Mike. Good morning, everyone, and thank you for joining us. Before we turn to our second quarter results, I would like to thank everyone who joined our Investor Day in June. It was a great event, and we were excited to share our story, future goals and our ambition to become the undisputed best in our industry, the safest, the fastest growing, the most profitable, leading digital and the best place to work. Importantly, we laid out our financial algorithm for 2025 through 2027, which includes growing sales at a 5% CAGR, increasing adjusted EBITDA at a 10% CAGR, expanding adjusted EBITDA margin by at least 20 basis points per year and growing adjusted diluted EPS 20% annually. We also expect to deploy more than $4 billion of capital over that same period and anticipate approximately half of that will be deployed towards share repurchases.

We remain excited about our path ahead. During today’s call, I will share several of our accomplishments from the second quarter and update you on key initiatives across each of our 4 strategic pillars. Then Dirk will review our second quarter financial results and our fiscal year 2024 guidance. Turning to Slide 4. In the second quarter, we delivered record EBITDA, driven by a combination of top line growth and margin expansion as our gross profit grew significantly faster than our operating expenses. Our team’s success this quarter further emphasizes the strength of our operating model and our ability to control the controllables. This balance of top line growth, gross profit expansion and cost productivity, led to significant adjusted EBITDA and EPS growth, along with a record adjusted EBITDA margin of 5%.

Importantly, these results are underpinned by our strong capital structure. We also continue our disciplined approach to capital deployment. As we announced at our Investor Day, our Board authorized a $1 billion share repurchase program in early June. Dirk will provide a status of our repurchases in more detail. We do expect to be more aggressive buying back our shares over the balance of this year. Let’s turn to broader industry trends and the health of our markets. Restaurant foot traffic remained pressured during the second quarter and was down approximately 3%. Despite the current headwinds facing our industry, our team captured profitable market share and target customer types, as we focused on executing our playbook. Specifically, our independent restaurant share increased for the 13th consecutive quarter, and our share gains improved sequentially each month throughout the second quarter.

Our strategy is exceeding as evidenced by our volume growth and share gains. Our team’s work remains guided by our 4 strategic pillars. And I will discuss our progress on each of them over the next few slides. Turning to Slide 6. Our first pillar is culture. Keeping our associates safe is paramount. During the second quarter, our injury and accident rates were 19% better than the prior year and were our best results since 2020. We remain focused on improving our safety performance as we strive to achieve zero injuries. We published our 2023 sustainability report in the second quarter, highlighting progress in our 3 key focus areas: products, people and planet. And none is more important than our people component as we seek to make a positive impact on the lives of our associates.

For example, in supply chain, we have our leadership, excellence and accelerated development program, which we refer to as Lead. Through this program, we about leadership fundamentals for our operations leaders. Since its inception, 970 associates have participated in the program. I would encourage you to read our sustainability report on our website to see the tremendous progress we have made on our journey and our exciting initiatives and future goals. Turning to Slide 7 and our second pillar service. We strive to provide the best delivery and service experience to our customers, and we made year-over-year progress during the second quarter on both on-time delivery and in full service levels. We also improved distribution productivity again this quarter.

Our new Descartes routing technology is now live in 8 markets. By year-end, we expect to roll out to an additional 18 markets and have approximately 50% of our routed miles on Descartes. This great work, combined with additional benefits from our market-led routing initiative delivered a 3.7% improvement in cases per mile during the quarter. Additionally, turnover reduction, flexible scheduling implementation and process standardization continue to help improve our overall productivity. Finally, as JT highlighted at our Investor Day, U.S. Foods holds a leadership position in digital commerce in the foodservice industry. While that’s exciting. I am even more enthusiastic about where we are taking MOXe and VITALS through our continued technology investments and use of artificial intelligence.

Driven by our ambition, we will continue to bring additional value and better user experiences to our customers through our digital platform. And to highlight one functionality enhancement, we recently optimized our delivery tracking function, utilizing artificial intelligence within the Where’s My Truck feature for MOXe customers to track their truck and delivery time. Over the past few months in our pilot markets, we’ve improved our delivery window accuracy by 40%. And we’ve seen a significant reduction in delivery-related customer service calls in those markets as a result of the better customer experience. This solution will be implemented in all markets by the end of the year. Let’s now turn to our growth pillar on Slide 8. We remain laser-focused on accelerating profitable growth and gaining market share with our target customer types.

Our 5.7% independent case growth was driven by a combination of new accountants and growth from our recent acquisitions. We remain highly confident that we will exceed our 1.5 times market growth goal for restaurants for the full year. Our Pronto small truck delivery service continues to gain traction and is live in 40 markets. Pronto caters to hard to service customers in high-density urban areas with later cutoff times and next-day delivery requirements. Our newly launched Pronto penetration service is a differentiator that fills in nonroutine delivery days for existing independent customers, which further expands our short wallet. Earlier this year, we successfully launched 2 pilot markets, and the early results are positive, with much stronger independent case growth.

We have 4 additional markets planned for later this year. And Pronto is now on track to generate nearly $700 million of annualized sales this year. Turning to Slide 9, our profit pillar. Our proven operational playbook, merchandising excellence work and team-based selling approach, increased adjusted gross profit by 8% in the second quarter to $1.7 billion. We also continue to make progress in growing our private label brands, which grew approximately 100 basis points year-over-year to more than 52% penetration with independent customers. Our continued focus on private label penetration represents a pathway to profitable growth for US Foods. These high-quality innovative products enable competitive pricing for our customers while also improving our margins.

Great companies are constantly adapting and looking for ways to become more efficient, continuously driving productivity and reinvesting a portion of those savings to fuel future growth. As we continue to identify ways to become more efficient and take steps to streamline our corporate and field interactions, we took additional cost actions this quarter. We now expect to achieve $80 million in expense savings in 2024 and $120 million on an annualized run rate. These changes underscore our commitment to achieving our 3% to 5% annual productivity target while more effectively serving our customers. Finally, as we announced during our Investor Day, given the lack of synergies, we believe CHE’STORE would benefit from focused investment under new ownership.

We are still in the process of exploring strategic alternatives and will provide updates as appropriate. Throughout the process, we remain fully committed to supporting the CHE’STORE business, our associates and our customers. Before I hand it over to Dirk, I would like to acknowledge one of our drivers, Jason Buck, who works in our Knoxville distribution center. One of our cultural beliefs that US Foods is deliver excellence and Jason embodies this belief every day. Jason joined US Foods in 2004 and has been named a Driver of the Year twice. He also runs our weekly driver skills course with all new drivers and plays a lead role on our local safety team. Importantly, Jason’s efforts contributed to the distribution center exceeding its on-time service metrics during the deployment of our card routing platform.

I thank Jason for all he does to deliver excellent service to our customers, and ensure a safe work environment for our Knoxville associates. As we approach Labor Day, I also want to thank all our associates for their hard work, their commitment to our safety culture their relentless focus on providing superior customer service and for making US Foods a great place to work. Let me now turn the call over to Dirk to discuss our second quarter results in more detail and our 2024 guidance.

Dirk Locascio: Thank you, Dave. Good morning, everyone. Turning to our results were largely consistent with our expectations with continued top line growth and further margin expansion, leading to record adjusted EBITDA and adjusted EBITDA margin. We delivered this record profitability through our balanced approach to drive top and bottom line growth despite the softer operating environment. Starting on Slide 11. Second quarter net sales increased 7.7% to $9.7 billion, driven by total case volume growth of 5.2% and food cost inflation of 2.9%, while mix was a headwind of 40 basis points. We drove case growth faster than the market and captured share gains in the second quarter, including our 13th consecutive quarter of market share gains with independent restaurants.

Our independent restaurant volume grew 5.7%, including 250 basis points from acquisitions. Healthcare growth remained strong at 6%, hospitality growth improved to 2.1% as we successfully onboarded new business. Adjusted EBITDA grew 13.2% from the prior year to a quarterly record $489 million from a combination of profitable volume growth, strong gross profit gains and disciplined expense management. In addition to strong EBITDA dollar growth, our adjusted EBITDA margin expanded by 25 basis points to an all-time high of 5% as adjusted gross profit dollars grew over 200 basis points faster than adjusted OpEx dollars. Finally, adjusted EPS increased 17.7% to $0.93. We continue to grow adjusted EPS at a faster rate than adjusted EBITDA and expect that trend to continue, while deploying more of our strong cash flow to our repurchases.

Turning to Slide 12. We once again expanded adjusted gross profit per case faster than adjusted operating expense per case, resulting in further adjusted EBITDA per case improvement. Adjusted gross profit per case grew by $0.22 or nearly 3% over prior year, primarily driven by our cost of goods sold initiatives and disciplined pricing. The COGS initiatives delivered $50 million for the first 6 months. And for the full year, we expect approximately $70 million in savings. We are well on track to achieve over $220 million in COGS savings from 2022 through the end of this year from our strategic vendor management work. Adjusted operating expense per case increased $0.04 or less than 1%, driven primarily by increased labor costs, partially offset by continued distribution productivity improvement from routing efficiency gains, turnover reduction and process standardization, as well as actions to streamline administrative processes and costs.

Growing our GP per case, 5.5 times faster than our OpEx per case led to a record adjusted EBITDA per case of $2.27, up $0.16 or 7.6% from the prior year. We continue to drive strong leverage throughout the P&L with a combination of profitable volume growth and continued progress on gross margin and operating expense initiatives. We expect continued adjusted EBITDA per case expansion as we execute our initiatives while also consistently meeting our customers’ needs. Moving on to Slide 13. We have generated strong cash flow year-to-date, including $621 million of operating cash flow and $467 million of free cash flow, driven by increased profitability and disciplined working capital management. However, this was lower than the prior year as we had more working capital benefit in the first half of 2023 due to the inventory reduction benefits from the replenishment optimization initiative that Bill Hancock discussed during our Investor Day.

Excluding the working capital impacts, operating cash flow was modestly above the prior year. Our durable stream of cash flow enables us to invest in the business and return capital to shareholders. We invested $156 million in cash CapEx for the first 6 months, mainly focused on products to support growth including information technology, property and equipment as well as maintenance of our distribution facilities. On June 1, 2024, the Board authorized a new $1 billion share repurchase program. Under this new authorization, we repurchased $21 million in June 2024. In the third quarter to date, through August 7, we have repurchased approximately $61 million. We have approximately $918 million remaining in the authorization. Since the inception of our buyback program in November 2022, we have repurchased 10 million shares for a total cost of $425 million.

Rounding out capital deployment. We have completed 3 acquisitions over the past 18 months and will continue to be opportunistic in selectively pursuing accretive tuck-in M&A. We are currently focused on integrating these acquisitions and we’ll lean in on more share repurchase for the remainder of 2024. Turning to Slide 14. We remain well within our 2 times to 3 times net leverage target with a strong balance sheet as we ended the quarter at 2.6 times levered, which is a 0.4 turn reduction from the same period last year. This includes paying $220 million for IWC and $41 million for share repurchases in the second quarter, which were both funded through operating cash flow. We’re also pleased to report 2 positive developments related to our credit ratings.

Our corporate credit rating was upgraded 1 notch by Moody’s to BA2 and S&P revised their outlook on US Foods to positive, each reflecting the continued execution of our long-range plan and expectation that the initiatives outlined at our Investor Day will drive further earnings growth and credit metric improvement. Now turning to guidance on Slide 15. Given our strong first half of the year and outlook for the remainder of 2024, we are reiterating our fiscal year 2024 net sales, adjusted EBITDA and adjusted diluted EPS guidance. Moving to modeling assumptions. For 2024, we continue to expect total case growth of 4% to 6%. We are updating our sales inflation assumption to a range of 1% to 2%. Despite the operating environment, we continue to grow top line gain share, expand our margins and deploy our strong free cash flow against our capital allocation priorities.

We are well positioned to deliver on our 2024 financial targets and remain committed to our new 3-year long-range plan. With that, I’ll now pass it back to Dave for his closing remarks.

Dave Flitman: Thanks, Dirk. We continue to execute our strategy, gain market share and improve profitability. We delivered double-digit adjusted EBITDA growth and record adjusted EBITDA margin of 5%, while gaining share in our highest margin customer types. Our strong business model serving independent restaurants, health care and hospitality, which are among the fastest growing and most profitable customer types in the foodservice industry, combined with the execution of our strategic initiatives, supports our ambition to be the undisputed best in our industry. And we have a long runway of profitable growth in front of us, including delivering our 2025 to 2027 growth algorithm, which includes a 10% adjusted EBITDA growth CAGR. We remain laser-focused on improving the business to generate profitable growth while executing our capital deployment priorities. And with that, Carrie, please open up the line for questions.

Q&A Session

Operator: [Operator Instructions] Your first question will come from Edward Kelly with Wells Fargo.

Edward Kelly: I was hoping — could you maybe just elaborate or talk a bit more about what you’re seeing from an end demand standpoint, maybe even by customer type. I’m just kind of curious how the quarter evolved? And then specifically what you saw in July? And then as part of the start, how are you feeling about the 2% to 4% organic case volume target for the year? I think you do need maybe a little bit of acceleration in the back half.

Dirk Locascio: Well, I’ll take that last part of that question, Ed. First, I think we’re confident in that 2% to 4% case growth and reiterated our full guidance for the year, as Dirk just outlined. So we’re confident in that. But as you point out, I think the macro is a little softer than we expected coming into the year. But what you’ve seen us do is control the controllables very well, which is what we always say we’re going to do. We can’t control the macro, but we can’t control our ability to drive growth on the top line, which we continue to do in the second quarter and also into July, to your point, despite what’s going on in the macro. And things around the macro will ebb and flow our ability to drive our initiatives and make this thing as strong as it can possibly be, is completely within our control.

And so we’ve seen lower foot traffic, as we pointed out, down 3% in the second quarter. I think the back half of the quarter was a little slower than the first half, and that trend kind of continued into July. Health care remains very strong. You saw a robust growth there. In hospitality, as we said last quarter, we were onboarding new business. You’ve seen us tick up in our case growth there. We expect that will continue into the third quarter and into the back half. So that’s kind of how we see it. And we’re not counting on the market helping us in the back half to achieve what we said we were going to achieve, and we’ll continue to execute our playbook.

Edward Kelly: Just as a follow-up, Dave, can I just ask you on any adjustments that you are making to the business in this backdrop? I know you’re controlling what you can control, but today, you talked about some cost action that was incremental. Curious on like the selling side, if there’s any fine tuning that you make there and a tick a backdrop. Just any additional color there?

Dave Flitman: Yes. I think we modified our TM compensation plan going into the year. We’re pleased with the progress we’re making there and how that’s playing out. As you recall, we variabilize more of that to incent our sellers to drive more aggressive growth and also incented them to grow our private label brands. As you heard, we were up 100 basis points year-over-year with independent restaurants with our brands. I think at the root of that is our continued ability to bring innovation and great products to the marketplace supplemented with those compensation plan changes. And to your point on the expense side, I said since the day I got here, we were going to drive 3% productivity and we’ve been ramping that up through the course of the last 18 months, and we’ve really been driving that aggressively in the first half of this year.

And I think that fits with what we said we’re going to do. It also fits with the operating environment that we’re in. So I’d point to those adjustments, and I think you can expect more of the same. And on the sales side, we’re continuing to be committed to growing our sales headcount in low to mid-single digits despite what’s going on in the macro.

Dirk Locascio: And Ed, what you really continue to see from our results is continued top line growth, especially in our target customer types, continued focus and execution on gross profit expansion and the cost management. So it’s really across all 3 of those and that balance is what makes us feel good about the results that we have and expect to continue to generate.

Operator: Your next question will come from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein: Great. Dave, I just wanted to follow up on your comments about the market share gains. I know you’ve talked about, I guess, 13 consecutive quarters and I think you actually said your share gains improved each month of the second quarter. Just wondering if you could if you could provide some color behind that data. Just wondering how you measure that. whether you think you’re at all vulnerable to maybe slowing independent sales growth? I know your largest peers are more aggressively hiring and compensating their salespeople. I’m just wondering how you think about that independent case growth market share gains going forward with, again, the competition getting a little bit more aggressive? And then I had 1 follow-up.

Dave Flitman: Yes. Well, as we’ve been stating for a while, the data that we use to judge our market share is the sarkanda formerly NPD data, third-party independent data that looks across the industry. So it’s not our data. So when I tell you that we’re on gaining share and through the accelerated in the quarter, that’s as supported by the sarkanda data. And I keep saying we’re going to control what we can control. We can’t control the macro. And even though that foot traffic was down sequentially each month in the quarter, you just heard us say that we ramped up our share gains throughout the quarter. I expect that will continue. Our team is laser focused on driving growth. And while penetration may be a challenge when foot traffic is down, our ability to generate new accounts has not inhibited at all by what’s going on in the macro.

And as you guys heard me say a lot, we still have a relatively small market share position with current restaurants. And I like our team all the time, 3 out of every 4 cases ours. So don’t worry about the macro, going on our place and drive that growth. And that’s what we continue to do. So regardless of what’s going on there, Jeff, we’ll be taking to run our place, and I’m confident that those share gains will continue.

Jeffrey Bernstein: And then just you mentioned about the private label being up 100 basis points now. I guess to independent customers now 52%. Do you see increased demand, I don’t know whether you’re pushing more of that or whether the customers are asking more of that, seemingly, it’s lower cost to them, higher margin to us. So I’m wondering how you incentivise that it would seem like that will be a big opportunity with some of your smaller independent competitors not really having a platform like that. So how do you accelerate that type of environment to benefit you and your customers?

Dave Flitman: A big combination of great products, and we pride ourselves on our Scoop process, but more broadly, the way we bring innovation to our product line with our exclusive brands, which we’ve been doing for the better part of a dozen years now. And so we believe we’re the leader in innovation. And what we do is we bring great quality products to market that help our customers be more efficient in their kitchens. And it’s a great time for that need given the inflation that’s been absorbed in some of the foot traffic challenges as they’re looking to have these great products at a bit lower cost position. You couple that with the changes that we made to the TM incentive plan this year to incent them to drive the brand growth more. And I think you’re starting to see that play out. And as I’ve said before, I don’t see any near-term ceiling to our ability to penetrate the market with our exclusive brands.

Dirk Locascio: Jeff, the last couple of quarters, you’ve heard us talk a lot about since vendor supply has stabilized, and we’ve increased the focus again with our sellers you’re not seeing that really come to fruition in the form of growth. And this has been now a couple of quarters where we’ve seen that growth. Like Dave said, we expect that to continue.

Operator: Your next question will come from Mark Carden with UBS.

Mark Carden: So to start, just another question on the sales force and essentially controlling the controllables. How trending, just given some of the softening in traffic, does this shift to more variable compensation active a double-edged sort in any sense? Or if not, what have you been able to do to weather the headwinds quite well?

Dave Flitman: Yes. I think we do a great job of onboarding new TMs. In fact, I had the opportunity to talk to our latest class on Tuesday this week, we had an income class of 50. We get asked a lot with what’s going on in the marketplace, what we have challenges finding great sales talent. We are not having problems finding great sales talent. That’s why I’m confident that we’ll continue to hit that low to mid-single-digit headcount growth as we’ve committed to for the full year. And it’s really about how we onboard our sales talent. How we give them a portion of business and this route splitting is very important. We outlined a couple of quarters ago. We take and see these new sellers with some business that they can grow from.

And we also have ongoing training throughout their first couple of years here. It’s not a won and done. It’s not that we put them through an intense training program and throw them on the street and let them go find their way. We continue to nurture them. And as we said before, it really depends on where that sales talent comes from. We hire operators, hire competitive reps. We hire our people from outside the industry with strong sales background. And it really depends on what their experience is, whether they bring a book of business or not in terms of how quickly they ramp up their productivity. But we know exactly who they are with all the various cohorts that come in what those classes look like and to make sure we give them the going support that they need, including some pretty intense product training, which our suppliers are helpful in helping us deliver in the local markets.

So we’ve got a great plan. Retention is not a challenge. And we’re continuing to ramp up our salesforce.

Mark Carden: Great. And then turning to hospitality for a second. How are you thinking about hospitality growth in the back half of the year? I know you guys have some new business that’s been onboarded in the process of being onboarded. But just when you think about the broader macro, how do you think the balance of those 2 dynamics?

Dirk Locascio: Mark, it’s Dirk. I think when you think of the broader macro to your point, it’s facing some of the same headwinds that restaurants are facing. However, back to the point of the control of the controllables, we bought the business we want in port and we continue to have a strong pipeline of net new business that we’re expecting and planning to onboard. So our expectation is the continued strengthening of the growth there with hospitality. We’ve got a lot of differentiation in health care and hospitality, and we think that, that growth rate, so we’ll be able to accelerate it.

Operator: Your next question will come from Lauren Silberman with Deutsche Bank.

Lauren Silberman: So I wanted to ask about the promotional environment. I think there are some concerns that we’re seeing an increase in promotional activity as sort of distributors site for case growth, new customer acquisition. Obviously, you guys are seeing strong market gains in your key segments, are you seeing any increase in promotional activity? And how does that usually play out in more challenging economic backdrops?

Dave Flitman: Yes. I think we have seen increased promotional activity, which is not uncommon at any point. given the various cycles that the different companies have in terms of when their year-end is and all that, but probably a little bit more intense given the macro backdrop. But again, Lauren, I would just point to our results. I don’t think that’s impacted our ability to drive growth. We have our own promotional activity that we bring to market from time to time. And — so we’re not immune to that, and we know how to navigate the market for those times. But it’s out there. I don’t see that intensity inhibiting our ability to execute what we need to get done in any way.

Lauren Silberman: And a follow-up and somewhat related gross profit growth per case, obviously, very strong. Can you unpack the drivers? How much of that is company specific versus benefits from inflation? And with the promotional activity kind of increasing, any thoughts on it being a risk or a headwind as you think through the back half of the year?

Dirk Locascio: So almost all of that is company specific from our initiatives. Inflation did tick up, but it’s still within that historical level that drives a very, very small gain. But again, we will still take it but a very small gain. Cost of goods, smart pricing, effective logistics management, each of those are things that all contributed to it. I think as we talked about, we $50 million in year of gains from our cost of goods work. So we continue that really continue to believe that’s why gross profit is so durable and why we expect to continue to grow gross profit per case and grow it faster than we grow OpEx per case. So we feel good about the durability and the strength of that.

Operator: Your next question will come from John Heinbockel with Guggenheim Securities.

John Heinbockel: Dave, I want to start with, can you address the cadence of rolling out — you did a little bit, but the rollout of Descartes and [Moxe]. And I know 50% day card by the end of this year, play out in ’25. Humos — where are we going to be in that journey? And does that get us — as you roll out a lot of this in ’25, when you think about that 3% to 5% productivity gains. We’d almost seem like there’s going to be a sweet spot here. We are closer to 5-ish for a period of time before settling back down. Is that fair?

Dave Flitman: We will have the card fully rolled out by about this time next year. I would say the 50% at the end of this year, to be late Q2, probably more likely the first part of Q3 next year. And that, combined with the great work that we’ve done historical routing process led to that 1% improvement per mile. We would expect that to continue as we ramp up the card and we’ll continue to find new ways with that new system fully implemented across the company to drive further gains. I’m confident that — and as in my prepared remarks, MOXe is part of the process standardization work that we’ve got going on across the company. We will have that broadly rolled out middle of next year to second half of next year, being thoughtful about that.

And in each rollout, we’re learning for so would make sense in that process standardization. So we’re being thoughtful about tweaking that process as we go forward. But you’re right to point out — it’s part of this 3% to 5% productivity improvement is not just taking cost out but it’s driving this process standardization and doing things more consistently, making sure that we’re doing it right the first time and not adding a burden in a system with those inefficiencies that drive cost up. So we’re excited about it. We believe we can pour destiny there and this 3% to 5% is fully in view.

John Heinbockel: And maybe as a follow-up. Just philosophically, what is your thought or maybe the Board’s thought on buyback timing front-loading, right? I think about front-loading within a year, buying maybe early funding that with the front-loading in front of CHE’STORE — buy before those proceeds are in or even right as your leverage ratio comes down in the low 2s, taking on some debt if you think these shares are incredibly undervalued. What is the thought on all of that? You like that idea or no?

Dave Flitman: We certainly believe our shares are undervalued. We are excited that the Board that $1 billion twice the size of the authorization back in late 2022. And as you heard Dirk say this morning, and I also supported — we’re leaning in more heavily on share repurchases. That’s why we gave a little bit of color on that accelerated ramp-up already in Q3, and you’ve started to see that. So we believe we’re undervalued. We’re going to buy our shares back appropriately or ramp that up through the course of time.

Operator: Your next question will come from Kelly Bania with BMO Capital Markets.

Kelly Bania: This is Kelly Bania from BMO. Just wondering if you could just unpack a little bit the drivers of the independent case growth, the contribution you’re seeing from new sales reps, penetration versus new account growth and any geographic differences. And I’d also like to tag on to that, just the investment that you’re seeing across the industry in terms of sales force headcount, we know obviously what that is with the public competitors and maybe that’s accelerating a little bit. But — what are you seeing across the private competitors on that front? And I appreciate it could widely vary, but what maybe have you seen historically? Are you seeing any difference? Any color there, I think, would be helpful.

Dave Flitman: Sure. So the first part of your question there, Kelly, was around kind of unpacking growth. Overwhelmingly, our growth is coming as it has been for quite some time now from new account generation and customer growth. We expect that to continue, especially in a slower foot traffic environment. And again, we believe that’s quickly within our control. As I referenced a little bit earlier, where you first see foot traffic challenges as in penetration. The customers are still buying the same number of lines, but they’re buying less cases on those lines as their volume is challenged. And so we’ve certainly seen that and felt it. But our ability to drive new account generation and hold on to our business to the fullest extent and drive that loss number now, that’s where we’re squarely focused.

Really haven’t seen anything play out geographically, where we’re having challenges or greater areas of strength. And to your question on the sales force, as I mentioned earlier, the productivity ramp of those new sellers varies greatly dependent upon their background. And we have targeted those headcount additions where we believe, one, there’s great market growth and penetration opportunity. And maybe we’re a little underrepresented. So any geographic change that we’ve seen there is really probably more driven by where we’ve added headcount versus where we haven’t. And then last part question here. I think I got them all on the private competitors. Really no change. I don’t think we’ve seen any impact on our ability to attract sellers or growth based on anything that’s going on with the private.

Kelly Bania: I was wondering if I could also just maybe follow up. We talked about restaurant traffic down 3%. That sounds consistent with what we’ve heard from others. But can you just talk a little bit more about what you’re seeing in restaurant cohorts or different types of restaurants as well as the pace of new restaurant openings and what you’re seeing in the growth there?

Dave Flitman: Yes. I wouldn’t say the foot traffic challenges, we see a lot — or hear a lot about the consumer challenges, particularly at the lower end. I think some of those that have reported this week have spoken to some of the challenges in QSR, fast casual, I think some of the challenges in foot traffic have been pretty broadly spread across most of the cohorts maybe the higher end is holding up a little bit higher or better than others, but even that’s been challenged a little bit. So I wouldn’t point to any really significant area of strength or more challenged based on what’s going on.

Operator: Your next question will come from Alex Slagle with Jefferies.

Alex Slagle: Couldn’t see the OpEx per case growth really flattening out, and you talked about the indirect spend reduction forecast, which was a pretty big jump, I think, from the last outlook, but I just wanted to dig into that a little more what changed in your views and where that’s coming from?

Dirk Locascio: Alex, this is Dirk. So I’m assuming you’re talking about the increase of the $80 million of savings. That’s a combination of people and non-people-related costs. And it really is not different than what you’ve heard us talk about the last few quarters, we’re continuing to through efficiencies, a combination of use of technology, simplifying the interactions between field and function. And if we’re not getting value in some of the functional resources redeploying or in some cases, reducing those. And so it really all fits into this balance that I highlighted earlier on one of the other questions about top line growth, GP expansion and then cost reduction to manage productivity. As far as interactions specifically, we continue to attack this $1 billion-plus spend pool and to reach the $60 million of saving by 2027.

We’re continuing to see more initiatives come online to generate savings, and we’ll give an update more concretely as we move further into here, but good progress continues there.

Alex Slagle: And a follow-up on the routing, I guess, process improvement. I mean, it seemed like you’re doing good work with the existing system in place and means I guess there are additional enhancements coming just in terms of what you’re doing with the process just in this initial — just in the existing systems kind of before you even get to see the separate benefits from the deployment of the new routing technology. Just trying to understand, like, is there more to come here of the benefit of all the process changes and that will come on top of that, we’ll have the new system rollout. Just a little more on that.

John Heinbockel: Yes. I think, Alex, the way to think about that is we’ve been delivering routing improvements here for the better part of the last couple of years. And in large part, until we initiated the card rollout, that was largely driven by what you’re pointing out, the process changes and improvements as we’ve gotten better at that. And now we’re overlaying new technology and a new system that we believe is going to take it to the next level. So I’m sure and I’m confident we’ll continue to optimize the process as we go through this and we learn more about the new technology — but I think this technology overlay is really going to be what fuels the future productivity improvements with routing once we get that fully deployed.

Dirk Locascio: I think, Alex, the other thing is on the routing to Dave’s point of it being a driver for the last few years, what we’ve been pleased with is it’s not a once and done. It is a standardized process. And you see markets each week and each month to continue to add additional opportunities on that get executed against. And then the piece on the technology on Descartes, as I think a couple of quarters ago, Dave talked about is when you put it in place, there’s some improvement. But as we get it in place, and we optimize it more what we expect further to come from that. So a long way of saying, we think there’s still plenty of opportunity for further savings, which, in this case, typically results in a better customer experience as well.

Operator: Your next question will come from Brian Harbour with Morgan Stanley.

Brian Harbour: Dirk, just on your inflation outlook, do you — you’re a little bit above that in 2Q. Do you expect it to therefore, kind of come down a bit in the second half, could you give more color on that? And just I don’t know if there are any product mix dynamics that kind of affect that. If you could talk about that.

Dirk Locascio: Sure. So when we think about the inflation, we also consider the impact of mix in there as well. And so that’s one thing to consider. We did see, as you’ve gotten into in the past the second quarter, you see a little more moderation — proteins were the biggest piece that turned more inflationary in the second quarter, but did haven’t seen that continue. So overall, what we’re not seeing is we’re not seeing any significant levels of inflation across the board. And I think that what we feel good about is whether it ends up at 1 or 2 or a little above results below that is very manageable, very modest is that we’ll be able to effectively hedge our way through that.

Brian Harbour: We’ve talked a bit about kind of your operating expenses. But was there anything you kind of pull forward, anything that you think was more impactful in the second quarter that drove the pretty good performance in operating expense.

Dirk Locascio: Nothing specific that I would call out. A good portion of it is the different cost actions that we’ve taken over this past 6 months or so, combined with significant supply chain productivity that we reference on the call today. So we do not — and I think when Dave talked earlier when we talked about this 3% to 5% productivity, it’s not just to be able to say that’s how we’re operating and how we’re holding the teams accountable or focusing on, all while doing it smartly while keeping an eye, we’re not damaging or hurting the business. So that continued growth and further margin expansion.

Operator: Your next question will come from Peter Saleh with BTIG.

Peter Saleh: And congrats on a nice quarter, guys. I wanted to ask about MOXe if you guys could give us maybe an undate on the adoption of that platform. And if you’re still seeing the incremental case count growth or the ticket growth from customers using MOXe, I think previously, it said 1.5 more cases per customer. And then just lastly on that, is MOXe helping to drive any of the private label penetration as you — as you do more suggestive sell in through the app?

Dave Flitman: And yes, we’re very excited about MOXe. As we previously mentioned, we’re 100% hold out across our independent restaurants. We’ve continued to ramp that up in our chain business. It’s now in 75% of our national chain business. We expect to ramp that up between now and the end of the year. And to your point, yes, and as we said in Investor Day, on average, customers are buying 10% more. And we have great algorithms within MOXe. One of those is our ability to sell our private label brands and make product recommendations. And so yes, we believe that, coupled with some of the things that I commented on earlier relative to the focus that we have in our brands and the way we incent our salesforce, all of that is working together that will support that growth that we talked about.

Peter Saleh: And then just, Dirk, I don’t know if I missed it, but did you guys provide the indirect cost figure that — or at least the run rate that you have for 2024 as you ramp up to the $60 million by 2027.

Dirk Locascio: No, I didn’t — I was more color commentary, and we’ll give some more specifics as we get further into the year. But we are continuing, as incentives to make progress with real concrete savings and well on our way toward our target.

Operator: Your next question will come from Andrew Wolf with CL King & Associates.

Andrew Wolf: On the outperformance in the market, particularly, I want to focus on with the independent restaurants. Are you gaining — are the sales team gaining any lines per stock or any additional penetration in that? Or is it all really just mainly almost all driven by new customer wins — net new customer wins?

Dave Flitman: It’s overwhelmingly, Andy, new customer wins, but penetration is an important part of our algorithm. And as I said, some of that is being overridden currently with the foot traffic. So kind of hard to get a handle on that exactly, but certainly, we’re working hard to drive penetration with our customers.

Andrew Wolf: And Dirk, I think you said the COGS savings year-to-date are $50 million. and $70 million for the year. So it’s like a $20 million back half. Is that just a timing thing on initiatives? Or like what is going on with that increment being a little less than the first half?

Dirk Locascio: It is. It doesn’t hit equally. But as you probably remember from our Investor Day, we talked about a $260-plus million for the new long-range plan. So we clearly have a lot of work going on and expect a lot of value to continue to come. And I think that the important thing is even in this environment that we are continuing to grow. We’re continuing to expand gross profit and we’re continuing to drive productivity, which is not something that a lot of companies are doing right now.

Andrew Wolf: And just one last thing. You mentioned the delivery window accuracy or on-time deliveries in these test markets for MOXe customers was up, I think you said 40%. Like what behavior is being changed here through the tracking? Is it just the drivers? Like what’s going on? Or are the drivers just not wanting to get filled out by the customers? Or is there some internal tracking that’s better? Like what is changing to make this — that’s quite a dramatic improvement. So just kind of curious what that is.

Dirk Locascio: Sure. So this hasn’t anything to do with the driver of the customer. This is our ability to predict when the route will get to the [Indiscernible] to the customer. And so we’ve applied some significantly enhanced capabilities using artificial intelligence, machine learning to be able to predict that and that those increased capabilities are allowing us to be more inaccurate in telling the customer when we think that truck will get to their stops. So this is really increase our capability. It’s just a good example of using it gets used a lot in a lot of places, but where we’re using it for real practical things to improve our results. And there’s plenty of those real concrete places that we continue to do work on that will be to the coming quarters.

Operator: [Operator Instructions] Your next question will come from Fred Wightman with Wolf Research.

Fred Wightman: I wanted to touch on Pronto. It looks like the expected contribution came up pretty meaningfully versus what you talked about before. So I’m wondering if you could just dig into that and maybe where you’re seeing the most opportunity?

Dave Flitman: We’re excited about Pronto. As we said at Investor Day, we’ve just recently started to roll that out with existing independent customers, which is largely a non-cap opportunity because at this point, we’ve only sought new business with Pronto. And so we’ve proven the model there. We’ve now started to roll that out more aggressively for new customers, but importantly, for our existing customers. And I think all of that is at the root of our acceleration on the top line here. So we’re excited about it. I don’t see any reason why over the midterm, that can’t be a $1 billion-plus business for us.

Fred Wightman: And then just thinking about the sales guidance came out a little bit in case changed and the total dollar sales number was unchanged. So I’m wondering maybe what the offset is. Dave, you did talk about a little bit of continued pressure into July. So is the case trajectory maybe towards the lower end of the prior range or how should we think about that?

Dirk Locascio: So foot traffic does play a little bit. The primary is if you look at that small of a change, it’s a couple of hundred million dollars in savings. So ultimately, when you think of the range that we have, it doesn’t really change the broad outlook that we have for sales for the year.

Operator: [Operator Instructions] Your final question will come from Jake Bartlett with Truist Securities.

Jake Bartlett: I wanted to ask again about the cadence throughout the quarter. You mentioned your market share gains improving but also restaurant traffic decelerating. So was your case growth, did it — how did it trend throughout the quarter? Also, when I look at the guidance, the 2% to 4% independent or organic case growth guidance. It doesn’t imply for you going to get towards the middle of that acceleration from the levels in the second quarter. So your question is the cadence and then maybe what hopefully you can comment on kind of recent trends and how that should give us confidence or not in acceleration towards the back half of the year.

Dave Flitman: Yes. So as we commented, foot traffic slowed, I would say our case growth generally follow up with what was happening with foot traffic, but we continue to drive growth in the quarter and importantly, drove outsized share gains. Those trends continued into July. And we have a lot of confidence in that case growth guidance. As Dirk highlighted here, and our ability to drive that outcome, both in terms of share gains and the work that we’ve got going on to generate new business should help us to continue to hit that guidance that we gave you for the full year.

Jake Bartlett: And then just another chunk that we haven’t talked much about on the call, at least is all other in terms of case growth. It was negative in the last 2 quarters. What does the pipeline look like there? Or what should we expect from that driver in the back half? And then I have 1 more follow-up.

Dave Flitman: So the all other is, as you’d expect, it’s a school, it can be some government retail, et cetera. So we’re simpler today and we’re thoughtful in the way we pursue that business. So that’s not a key area. We’ll be opportunistic in how we grow it. The main areas that we expect to drive our overall growth to be — will be coming from our independent health care and hospitality and again, opportunistic in those.

Jake Bartlett: And then last, just kind of a cleanup question. But M&A guidance, the impact, I think the prior that you talked about was impact on the year, you’re running ahead of that and you’ve made acquisitions since. So what should we expect from the acquisition impact on case growth in ’24?

Dirk Locascio: Sure. Our update in the back that we had, we estimate sort of 2% to 3% coming from the M&A overall. And as Dave said earlier, continue to expect overall cap growth to continue at 4% to 6%.

Operator: That concludes our Q&A session. I’ll now turn the conference back over to Mr. Dave Flitman for any opening — closing remarks.

Dave Flitman: Thank you very much. Thanks for joining the call this morning. We continue to control the outcomes we control. We’re confident in our future, and we’re also confident in our new long-term algorithm. Thanks a lot. Have a great day.

Operator: Thank you for your participation. This does conclude today’s conference.