US Foods Holding Corp. (NYSE:USFD) Q4 2022 Earnings Call Transcript

US Foods Holding Corp. (NYSE:USFD) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the US Foods Q4 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. Thank you. Adam Dabrowski, Director of Investor Relations. You may begin your conference.

Adam Dabrowski: Thank you, Cheryl. Good morning everyone and welcome to US Foods fourth quarter and full year fiscal 2022 earnings call. Speaking on the call today, we have Dave Flitman, Chief Executive Officer; Andrew Iacobucci, Chief Transition Officer; and Dirk Locascio Chief Financial Officer. We will take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. Our earnings release issued earlier this morning and today’s presentation slides can be accessed on the Investor Relations page of our website. During today’s call and unless otherwise stated, we’re comparing our fourth quarter and full year results to the same period in fiscal year 2021. In addition to historical information, certain statements made during today’s call are considered forward-looking statements.

Please review the risk factors in our 2022 Form 10-K that will be filed later today for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in those statements. Lastly, during today’s call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices of this presentation slides posted on our website that we are not providing reconciliations to forward-looking non-GAAP financial measures as indicated therein. Thank you for your interest in US Foods, and I’ll now turn over the call to Dave.

Dave Flitman: Thanks Adam. Good morning, everyone, and thank you for joining us today. I am thrilled to be here as the new CEO of US Foods. I joined this great company because of its strong reputation, significant future growth opportunity, strong culture and talented team of 29,000 associates. I look forward to working with our team to build upon our accomplishments from last year in executing our long-range plan. Since I joined in early January, I’ve spent much of my first month touring our distribution centers in six of our larger markets across the country, listening to customers and associates and diving deep to understand the US Foods business more thoroughly. While on the road, I met some talented and dedicated associates, many of them long-term veterans at US Foods.

In Oklahoma City, for example, I met Randy Koller who’s been a delivery driver for our company for more than 29 years. Randy expects excellence and teams up to lead our safety backing courses and is a popular driver trainer. He’s so good that he’s been named a local driver of the year four times. His customers constantly rave about his professionalism and the extra mile with, which he goes to serve them, which I was able to witness firsthand while riding with him on a seven-hour delivery route. Associates like Randy are one of the many reasons I am proud to be part of this great company. I also look forward to meeting many of our investors and analysts soon. I plan to spend my first three months, formulating my views about our strengths and opportunities in further detail, after which I expect to begin sharing more specific thoughts.

That said I’m certainly starting to form some early opinions and perspectives at the six-week point. One early and important conclusion I’ve drawn is that US Foods long-range plan and the pillars within it are broadly the right areas of focus to ensure success. I would expect that any changes I will have in the near-term would be adjustments aimed at accelerating execution versus any wholesale overhaul of the plan. Earnings growth from a combination of margin expansion and profitable volume growth outlined in our long-range plan is a good mix. The team has made great progress this past year. However, much opportunity remains especially in supply chain. I expect that my more than 35 years of experience in distribution businesses across multiple industries will position me very well for the incredible opportunity to lead US Foods and to help build upon and accelerate the tremendous progress the company has made this past year.

Let me share some key highlights of that progress on page 4. First our team has been intensely focused on executing the US Foods long-range plan and it is shown in our results each quarter. Throughout 2022, we grew profitable share, further optimized gross margins and improved operational efficiencies. We drove market share gains in each of our target customer types. We expanded gross margins with significant and durable gains in gross profit per case, while managing through a very challenging operating environment where US Foods and the broader industry face supply chain staffing and turnover challenges. While the progress we made against our operating efficiency pillar is somewhat masked by a challenging macro environment, we have advanced critical initiatives in a number of areas which Andrew and Dirk will highlight shortly.

Second, we drove continued growth throughout the year, thanks to the great work of our associates. Our fourth quarter results clearly demonstrate strong execution with adjusted EBITDA increasing 34%, attributable to a combination of accelerating year-over-year case growth and continued margin expansion. Our progress in 2022 gives me immense confidence, in our trajectory. Lastly, we remain focused on creating value for shareholders and allocating our capital prudently by continuing to invest in the business, reducing leverage to our target range, returning capital to shareholders through our share repurchase program and opportunistically pursuing accretive tuck-in acquisitions. Andrew will walk through some of these progress points in more detail.

Before I turn the call over to him, I want to thank him for stepping in as Interim CEO last year for his leadership to get the business on a strong trajectory heading into 2023, and for the support he’s providing me, as I onboard. A mark of a great company is its ability to deliver on its commitments. Essentially doing what you say you’re going to do. US Foods did exactly that in the first year of our long-range plan. We finished 2022 with a strong fourth quarter, building on our achievements in the first three quarters and exceeding the high-end of our adjusted EBITDA guidance, for 2022. My expectation is that we will continue to build upon that momentum, in 2023. With that, let me turn the call over to Andrew to share a bit more, on our progress.

Andrew Iacobucci: Thanks Dave. And let me say how terrific it is to have Dave on board. My colleagues on the executive leadership team and I, look forward to working with him, as we continue to build on our strong results in 2022. Now, turning to page 5, I’ll walk through our fourth quarter highlights. We delivered strong financial results again this quarter, capping off the year with strong market share growth and margin expansion and in-turn significant earnings growth in a challenging macro environment. Net sales for the fourth quarter grew 11%, compared to the same period in 2021. Year-over-year volume growth strengthened from Q3 to Q4, which we see as a positive for US Foods and our customers as their recovery continues.

Adjusted EBITDA grew 34% for the quarter representing an, acceleration from our Q3 growth rate despite essentially zero sequential inflation in the fourth quarter. Our adjusted EBITDA margins also increased 70 basis points from the prior year, as we gained further operating leverage. I cannot thank our associates enough, for their incredible work to drive progress against our long-range plan. A year ago we set out to deliver $1.3 billion in adjusted EBITDA in 2022 and we exceeded the high-end of our guidance, thanks to their dedication. Turning to our customer experience, we continue to gain share in target customer types via our differentiation strategy and customer focus. We further leveraged our omnichannel capabilities for profitable growth by CHEF’STORE, Pronto and US Foods Direct in addition, to continuing to strengthen our core digital customer platform by expanding customer usage of MOXÄ“.

We also made progress on our supply chain operations in the fourth quarter. The positive trends we saw in Q3 turnover continued in Q4, with driver turnover nearing pre-COVID levels and warehouse turnover showing sustained improvement. We aren’t yet where we want to be, but we are encouraged by the continued progress and strong evidence that the actions we are taking are yielding results. As mentioned on our Q3 call we piloted flexible employee scheduling and seven-day delivery in one of our key markets. The results to-date have exceeded our expectations with significant reductions in turnover, positive employee feedback and improved safety results. We are continuing the pilot at that location and are adding two additional locations in Q1. Assuming we replicate these outcomes in these additional markets, we expect to significantly expand the flexible scheduling portion of this initiative in 2023.

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As we have done in the past few quarters, we continue to strengthen our inbound logistics capabilities, resulting in further improved financial results and third-party partner collaboration. This work is well ahead of plan and a significant contributor to our strong results in 2022. We continue to improve our capital structure and prudently allocate capital during the fourth quarter. Each of these actions reinforce our commitment to being responsible stewards of shareholder value, which Dirk will discuss in more detail shortly. Turning to page six, we are pleased with the significant progress we have made against all three pillars of our long-range plan. Starting with our first pillar, profitable market share growth. We exceeded our volume goals relative to the market for the full year 2022.

In fact, we outperformed the market by nearly 150 basis points as our restaurant volumes, excluding our targeted exits, increased by approximately 1%, while the latest survey from our third-party provider showed a market decline of roughly 0.5%. Specifically within restaurants, our independent case growth was 4.3%, while the third-party estimates that the market declined by 1.2%. Our focus on growing with the right customers is yielding sizable benefits by allowing us to serve those customers more effectively and create longer-term relationships. This focus on our target customer types grows EBITDA dollars and expands our margins. We opened six CHEF’STORES in 2022 and are working to increase the number of openings to at least eight in 2023, which means we will have a robust network of nearly 100 CHEF’STORES by the end of the year.

We are quite pleased with our market share gains in 2022 and expect further share gains in 2023 as we leverage our differentiated sales support strategy our industry-leading MOXÄ“ platform and our omnichannel options, as well as other sales growth initiatives. Moving to the margin optimization pillar, we implemented a number of initiatives to improve gross profit per case regardless of market conditions. Those achieved excellent results in 2022. Our three key focus areas are the same I talked about last quarter and have been significant contributors to our results on the year. First, our team very effectively managed significant inflation earlier in the year and some commodity deflation later in the year through our established pricing and procurement processes.

We also optimized margins with a number of customers to better reflect the increasingly challenging cost environment facing our industry. Second, we achieved our stretch goal of collaborating with vendors representing approximately 40% of our spend to improve our cost of goods and anticipate an additional 20% of spend to be addressed in 2023. And third, our inbound logistics team focused intensively all year on working with vendors to ensure improved process and economics aligned with the market. We also achieved $70 million of total synergies in 2022 related to our Food Group acquisition, which is above our previously stated $65 million target. These initiatives along with a number of others together delivered the strong gross profit per case we saw in 2022 and we expect to build further on that performance in 2023.

We made progress on operational efficiencies despite a very challenging macro environment. Our routing optimization resulted in significant miles reduction and drove cases per mile well above 2019 levels, despite case volume being lower than 2019. Our work on retention and employee engagement also yielded benefits as we saw continued improvement in turnover and consequently productivity in the second half. We further improved productivity through a combination of network-wide initiatives and targeted optimization efforts in select markets with the greatest opportunities. US Foods is advancing critical initiatives that drive our long-range plan and we’ll execute against all three pillars with a goal of further enhancing the customer experience and our operational foundation as well as continuing to build on our progress into 2023 and beyond.

We’ve made significant progress throughout 2022. And while we are pleased with our progress, it’s important to acknowledge that much opportunity remains here and we expect to build on our second half momentum in 2023. Now, I’d like to hand it over to Dirk to go over our financial performance in more detail.

Dirk Locascio: Thanks Andrew and good morning everyone. Let’s turn to page eight. We are extremely pleased with what we accomplished during the fourth quarter and in fiscal 2022 and how that is translating into our financial results. In the fourth quarter, adjusted EBITDA grew 34% from the prior year to $350 million. In addition to strong EBITDA dollars, our adjusted EBITDA per case remained strong and was consistent with Q4 of 2019. Adjusted diluted EPS increased 45% over the prior year fourth quarter to $0.55. Net sales were $8.5 billion in the fourth quarter, an increase of 11% over the prior year. Total case volume increased 2.6% from the prior year and food cost inflation was approximately 8%. Independent case growth was nearly 6% over the prior year.

We continued our strong gross profit growth from the fourth quarter — through the fourth quarter, which we’re quite pleased with as there was essentially no sequential inflation in the quarter. Our adjusted gross profit dollars increased 16% from the prior year and as a result, we generated strong adjusted gross profit per case. OpEx remained elevated. However, we saw continued improvement in turnover during the quarter signifying further improvement from Q3 results. The improved turnover and impacts from our other initiatives drove increased productivity in the fourth quarter. We still see significant opportunity in our supply chain operations. For the full year 2022, net sales were $34 billion. This is an increase of 15% with a volume increase of 2% and cost inflation of 13%.

Adjusted EBITDA was $1.3 billion, an increase of more than $250 million, a 24% increase over the prior year and above our full year guidance due to a strong fourth quarter. Adjusted EBITDA margin also expanded 20 basis points over the prior year and our adjusted EBITDA per case was above 2019. Adjusted diluted EPS was $2.14 per share, an increase of 38%. We made good progress against all pillars of our plan in 2022 and we are excited about what we can achieve in 2023. Let’s look at volume on Page 9. Independent cases increased 6% over the prior year in Q4, which is an acceleration from the 3% we reported last quarter. Hospitality grew 19% and healthcare grew 6%, offset by 6% lower chain volume. Our chain decline was largely driven this quarter by the strategic exit of a small number of less profitable and more complex customers, consistent with what we shared in Q3.

So far in 2023, we are continuing to see volume improvement over the prior year and have not seen signs of softening demand. Year-over-year case growth across almost all customer types was stronger in Q4 than Q3. Additionally, we delivered share gains in target customer types again this quarter. Our keen focus on profitably growing these customer types and opportunistically growing other customer types is resulting in profitable growth, strong gross profit and EBITDA margin expansion. For the full year, we exceeded our goal of growing case volume excluding strategic exits by 1.5x the market for restaurants and 1x for all other. I will focus for a moment on growth relative to 2019. Fourth quarter independent case growth was nearly 5% above 2019.

We still have embedded COVID recovery tailwinds, as health care cases were 4% below Q4 of 2019 and hospitality was 11% below 2019. For all other, the decline was related primarily to the strategic exits discussed. As we move into 2023, we will no longer compare results against 2019. Moving to Page 10. We made continued progress in the fourth quarter to further strengthen our capital structure and reduce leverage. We reduced our net leverage compared to both the end of fiscal 2021 and third quarter 2022. Our net leverage ratio was 3.5x at the end of the fourth quarter in line with our guidance, which was a 1.1 turn reduction from a year ago and a two turns reduction from Q3 of this year. During the fourth quarter, we prepaid an additional $200 million of term loan, which means in fiscal 2022, we reduced net debt by approximately $220 million.

Leverage reduction remains a focus area of our capital allocation strategy. I am happy with the progress we’ve made this past year to further strengthen our capital structure and deliver on our priority of leverage reduction. At the same time, we announced US Foods’ first share repurchase program for $500 million and repurchased $31 million of shares in the fourth quarter of 2022 and January 2023. Turning now to our guidance for 2023. We expect continued increases in volume and earnings through the execution of the three pillars of our long-range plan, to grow market share, expand margins and improve operational efficiencies. We expect to grow volume at 1.5 times the market for restaurants and grow at market for the remaining customer types.

We also expect to deliver $1.45 billion to $1.51 billion of adjusted EBITDA and $2.45 to $2.65 adjusted diluted earnings per share in fiscal 2023. The higher end of the EBITDA range assumes continued solid macro demand improvement, while the lower end assumes a mild volume slowdown in the second half. We also expect continued EBITDA margin expansion in 2023 as we increased gross profit per case above 2022 and achieve more OpEx efficiency through improved turnover and initiatives. We’re also providing guidance on interest expense and total CapEx. As we continue to significantly increase earnings and reduce total debt in 2023, we expect net debt to be below three times leverage by year-end, inclusive of any share repurchases. In summary US Foods made very strong progress, against our long-range plan during 2022 in terms of advancing capabilities, achieving record adjusted EBITDA and strengthening our capital structure and capital allocation.

Every one of us at US Foods is squarely focused on building on the momentum we created in 2022, and our progress to date is in large part thanks to these efforts. 2022 was just the beginning. We are focused on creating a best-in-class experience for our customers and associates and generating significant value creation for our shareholders. With that, I’ll pass it back to Dave for his closing remarks.

Dave Flitman: Thanks, Dirk. In closing, I couldn’t be more excited to be here, and I look forward to significantly building on the progress our team has made against the company’s long-range plan. Our strategy is working and we will remain focused on driving profitable share gains expanding gross margins and improving operational efficiencies to accelerate our progress in the year ahead. We are winning. I am proud of the work our associates have done to accomplish the results we achieved in 2022, and expect we will continue to build on that great work in 2023 to serve our customers better and position the company to deliver compounded shareholder value over the long term. With that, Cheryl, please open up the call for questions.

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Q&A Session

Operator: The first question is from John Heinbockel of Guggenheim Securities. Please go ahead. Your line is open.

John Heinbockel: So let me start guys with maybe more strategic question. I think the independent case growth this quarter was the best since 2018, right? So if I think about that maybe address capacity in the warehouses, how much you’re running up against capacity in certain places capacity with the sales force, right? I think is there a need to invest in either one right to grow at the rate that you want to grow at the next couple of years?

Dirk Locascio: Good morning, John, this is Dirk. I’ll start and then Andrew may add in. But I think, just to start with, your question on the capacity one of the things and the reason our focus really a reason our focus is on independent health care and hospitality is actually from a capacity, we can get much more capacity out of our buildings, because you have customers that are largely using the same SKUs you already have in your warehouse. And so from that perspective, we don’t see any issues there. Now that’s part of with other customer types why we continue to opportunistically grow. We want to make sure that we’re putting the right customers in our warehouses. And then when the right time is there, we will continue to add capacity.

We opened sort of a facility this year in Sacramento California, and in New Orleans. But again, we’re going to be really smart with that capital. And I think, as far as sales, we have continued and will continue to add sellers. Andrew, do you want to?

Andrew Iacobucci: Yeah. A couple of things on that, John. On the sales front, we absolutely plan to continue to expand our sales force. They are an incredibly important part of the relationship with the customer. We will really be focusing on areas of particularly strong growth as opportunities to perhaps even double down on that expansion. But I should also mention, one of the things that we’ve been very happy with was the way in which we’ve been able to leverage team-based selling and those — the specialists of rocks food-fanatic chefs that are present in every market have been an important part of our growth trajectory and we will continue to both leverage those and expand those as appropriate.

Dave Flitman: Yes. And this is Dave. I’ll just piggyback on to what Andrew said. I’ve had the opportunity to witness that team-based selling approach in several of our markets with our food-fanatic chefs and our restaurant operations consultants. I believe that is a real differentiator for us as Andrew said, and we’ll continue to invest in that.

John Heinbockel: And then maybe as a follow-up for Dirk, right? I know you talked about the 1.5 times the market. But maybe some color on when you think about top line maybe more granularly, right? And case growth versus where you exited the fourth quarter inflation thoughts for 2023, right? Do you think inflation and case growth are equal contributors in 2023? Just sort of some color trying to bridge the top line to the EBITDA guide.

Dirk Locascio: Sure. So we think that more comes — so you have the wrap of inflation. But I think we expect more continued growth to come from case volume and we expect pretty healthy case volume across our target customer types and then again opportunistically from some of the other types. We think as Andrew touched upon, the momentum we have coming out of 2022, we think sets us up really well for good growth with the right customer types and continuing to gain share as we did last year. So we feel good about that. I think from an inflation perspective, as you saw this quarter sort of on a year-over-year, it continues to work its way down. In the fourth quarter, we actually saw some sequential deflation. We’re seeing a center of the plate have some deflation.

Grocery still showing some modest inflation sequentially quarter-to-quarter and that’s remaining quite sticky. So I think that’s — we’re not counting on a lot of inflation over the course of next year and really, I’ll kind of come back to what I’ve talked a lot about this past year is, we’re really focusing on what we can control, which is taking share and really the other initiatives that are driving our overall top line in the right customers.

John Heinbockel: Okay. Thank you.

Operator: Your next question is from Jeffrey Bernstein of Barclays. Please go ahead. Your line is open.

Jeffrey Bernstein: Great. Thank you very much. And congrats to Dave on the new position, and Andrew, great job during the transition.

Dave Flitman: Thanks a lot.

Andrew Iacobucci: Thanks, Jeff.

Jeffrey Bernstein: Sure. I had one question and then one follow-up. The question, Dave, I guess is on the market share gain opportunity. We hear a lot about opportunities to further penetrate existing accounts, adding new accounts. And as you mentioned, maybe further tuck-in M&A. Just wondering from your seat and your perspective and background like how would you prioritize the focus going forward among those three opportunities, or do you see even further opportunities beyond that in terms of specifically gaining market share relative to large and small peers? And then I had one follow-up.

Dave Flitman: Sure. And I would just highlight that the team sequentially through the back half of last year continued to gain market share. As we said in our prepared remarks, we have really good momentum. Our team is focused in, particularly in those three customer segments that we spoke about, the independent restaurants, hospitality and healthcare. And I’ve seen laser focus, as I’ve visited in the field, really good momentum. I think we have — and I would just highlight that’s profitable volume growth. And I think we have the right focus in those segments. So I think there’s tremendous opportunity for organic case growth. To your question around M&A this is still a very highly fragmented industry. And we will through the course of time look opportunistically for tuck-ins that will either give us a continued advantage in certain geographies or perhaps add product or something to our portfolio but we’ll be opportunistic about that going forward.

But I’m incredibly excited about our ability to continue to grow organically.

Jeffrey Bernstein: Understood. And then just to follow-up. I think you mentioned in your commentary around 2023 guidance. EBITDA margins continue to expand, which I think has been a key area of focus for investors, as Dave, I’m sure you’ve already probably heard. And I know US Foods is often compared to your largest peers. I’m just wondering what do you think is a realistic target whether it’s short or long-term in terms of specifically EBITDA margins where they could go to healthy levels versus what would you say is just unrealistic? Just trying to get a gauge just because it’s been such a popular topic of conversation over the past number of years? Thank you.

Dave Flitman: Yes I appreciate the question. It’s early days for me. I’m six weeks in. I’ve got a good sense of the focus that we have. I think it’s in the right areas. I’ll tell you 100%. Our team is focused on this and focused on accelerating the results in our business. There’s a lot of differences between us and our competitors in terms of the P&L and how that’s constructed and all that, but our focus is continuing to expand those margins in a way that makes sense for us and provides the efficiency that we need for our customers. And as excited as I am about the momentum, you also heard me say that there’s tremendous upside opportunity in this business everywhere I look, we talked about growth already, productivity and efficiency. We’ve got good momentum but there’s tremendous upside to go and our team is laser-focused on it. I would expect continued expansion of profitability through the course of time.

Jeffrey Bernstein: Great. Thank you.

Dave Flitman: Thank you.

Operator: Your next question is from Mark Carden of UBS. Please go ahead. Your line is open.

Mark Carden: Good morning. Thanks a lot for taking my questions. And Dave congrats on the new position. So to start and I know it’s still early. But joining on to US Foods, it’s an organization that’s structured in a bit of a more centralized fashion relative to performance. So I’d love to get your take on some of the opportunities and challenges you see with building and implementing strategies just given the difference in backdrop.

Dave Flitman: Yes. I mean you’re right to point that out in the difference. But I’m not really hung up on any particular organization structure. I think ultimately our success comes down to people and having the right processes in place and executing extremely well. Our team is clearly focused on that. Obviously, I’m making assessments on things like people and organization structure and all that sort of stuff and I’ll have more to say about that in time. But as I highlighted, I don’t expect any wholesale changes. I think we’ve got the right focus and really good momentum. You start playing around with organization structure, you tend to do a lot of internal navel-gazing and lose a lot of efficiencies and get distracted. I don’t sense any need to do that here. We’ve got great momentum. We’re going to continue to build on that.

Mark Carden: That’s great. And then on the solid independent case growth during the quarter, just curious about some of the cadence. One of your largest competitors saw some labor disruptions early in the quarter for service some underground noise just in terms of the consistency did you see bumps in some months relative to others? Your overall take that would be great.

Andrew Iacobucci: Yes. Thanks for the question Mark. It’s Andrew. I think we were pretty much in line with what we expected the quarter played out pretty much exactly as we had anticipated with continued momentum, particularly in independent restaurants. We saw a little bit of bumpiness in terms of the way the holidays fell this past year. But other than that I wouldn’t say there was anything there that was of any concern. And indeed, we’ve continued to see really strong momentum coming into the New Year, where we’re at or slightly above our forecast in January. So we really feel good about the stability of that. We’ve been paying very close attention obviously to that case line to just look for signs of softness. And so far we’ve really not seen that.

Mark Carden: Great. Thanks so much. Good luck, guys.

Dave Flitman: Thank you, Mark.

Operator: Your next question is from Alex Slagle of Jefferies. Please go ahead. Your line is open.

Alex Slagle: Hey, thanks. Welcome, Dave. And congrats, Andrew, Dirk and team for all the success in recent quarters, moving things forward. I just wanted to ask about CHEF’STORE and you added new locations in 2022 and accelerating it in 2023. I just wondered if you could offer some additional perspective on how that’s performing. Just kind of curious with the same-store sales look like relative to 2019? And if you’re still seeing the synergistic customer gains as it rolls out to additional markets and allowing you to really leverage the power of combining those two channels and where you see that heading over the future.

Andrew Iacobucci: Yes. Thanks for the question, Alex. It’s Andrew. We feel very good about CHEF’STORE’s progress, as we’ve continued to integrate. The acquisition system integration is basically nearing completion now which will really put us in a great position to drive the growth of that part of our business. In terms of new store openings and how they’ve sort of played out in terms of our model of driving that top line synergy between broadline and the stores, they’re playing out exactly as we had anticipated. We have a great team in place that is busily working through a way to significantly accelerate our rate of store builds. And they’ve also made some really good progress around time to break even in those new store openings both of which will stand us in very good stead as we look to roll those out more quickly across the business.

So generally, I think we’re feeling quite good about delivering the synergies that we had planned to, and also feeling good about the continued rollout as we talked about this year, trying to accelerate from six last year to eight or even more this year.

Alex Slagle: I just want to follow up on the inbound freight income. It’s been a really nice tailwind in recent quarters, and it’s all the work you’ve done optimizing the vendor allowances and carriers. Kind of curious, how much this benefit in the fourth quarter and kind of what relative to what you’ve seen in previous quarters and to the degree, you think there’s still room here to go and most of the low-hanging fruits maybe then picked at this point?

Dirk Locascio: Sure. Good morning, this is Dirk. Benefit in Q4 was pretty similar to what we saw in Q3, so not a whole lot different than I would call out. I think that the one thing in addition to, the strong vendor collaboration, that team has done a really nice job is staying very close to the market and making sure that as market rates are going up and down that we’re adjusting our sort of third-party cost, being active at that, they’re ahead of or in line with. The team continues to do that this year. So I would expect that, a lot of the bigger gain is there and it’s already embedded in our P&L. But with that said, there remains opportunity to continue to convert some cases to us managing them, whether it’s our own trucks picking them up or ranging there. So a lot of the benefit there, but still some opportunity ahead and expect a lot of those gains to be pretty durable.

Alex Slagle: Great. Thank you

Dirk Locascio: Thanks.

Operator: Your next question is from John Ivankoe of JPMorgan. Please go ahead. Your line is open.

John Ivankoe: Hi. Thank you very much. There are comments made just about significant supply chain opportunities. And obviously supply chain is kind of what drives your entire company, so that’s a very big category. A lot of the conversation has been around inbound freight and your ability to manage that much better. But I was wondering, if we could just get a little bit more insight whether it’s at the warehouse level or the driver level, your SKU assortment whatever that may be I mean, what major buckets that you see Dave, as you come into the company of opportunities of making it a more efficient business. Thanks.

Dave Flitman: Yes, absolutely, John. I appreciate that. Look, we — as you’ve heard on the call, we made a lot of progress in supply chain. But as I highlighted in my comments, I see that as a huge opportunity to continue to drive efficiency and productivity for the company. As I think about excellence in supply chain, we need to have predictable on-time performance at the lowest possible cost and that’s clearly, what the company is aimed at driving. We owe that to ourselves, we owe it to our customers and we certainly owe it to our shareholders, to be as efficient as we possibly can be. And as I think about the work that’s going on I guess, I would put it in four kind of key buckets. You’ve heard a lot about most of that this morning.

This pilot that we’ve had in the Southeast, the seven-day delivery and flexible scheduling, has tremendous potential to help us continue to drive efficiency and reduce turnover across the company. In fact, I’ll just give you one little anecdotal story, when I was visiting that market. I had the opportunity to have some town — not town halls, but little roundtables with drivers and selectors. In the selector roundtable I had, I just started asking them what they thought about the flex scheduling that we had. And we had an 11-year warehouse veteran, has been working days, who opted to take a weekend schedule. And so I said, well, why would you do that? You’re one of the more senior folks in the warehouse. He said, “Look my wife, has a catering business, she needs help during the week and this gives me the chance to lean in and help her and do what we need to do and balance my career and help my wife out on the personal front”.

So, I think we are scratching the surface, as something here that will also help our employees and associates as well as drive efficiency for the company. The second one, we’ve talked about it here is inbound logistics. We still have a lot of opportunity in that area great momentum strong focus in the company. And then, there’s really two others, I think in supply chain that will pay dividends long term. One is, process optimization, standardizing our approach being consistent across the company and how we think about anything from onboarding to training warehouse associates, and how we do our work through the course of the evening. Then the final one, I’ll point to is some future opportunities in supply chain, not the least of which is — and you’ve heard about this the routing software going to a leading platform that will execute throughout the course of this year, will also pay some long-term benefits.

So, I think there’s some near-term things. There are certainly some long-term opportunities for the company. I’m excited about the momentum, but tremendous upside here on —

John Ivankoe: Thank you.

Dave Flitman: Sure. Thank you.

Operator: Your next question is from Kelly Bania of BMO Capital Markets. Please go ahead. Your line is open.

Kelly Bania: Hi, good morning. Thanks for taking our questions.

Dave Flitman: Good morning.

Kelly Bania: Good morning. I just want to go back to the guidance and the outlook for the year. I appreciate the color on the expected growth relative to the market. But I guess I was just curious if you’re willing to comment at all on a specific case growth range embedded in the guidance. We were kind of thinking low single-digit, but if you can just help us maybe think about the broad strokes in terms of the different customer types between independent health care hospitality and all other, as well as I think there was a comment that the low end of the guidance assumes a slowdown in the second half. Can you help us understand the magnitude of what you might be embedding in terms of the potential softness there in the second half?

Dirk Locascio: Sure. Hi Kelly, this is Dirk. I think when we think about the guidance for the year similar to last year we always will look internally how we compare to the market. But just since there still is some macro uncertainty out there that’s really why we focused on this growth relative to the market. I think when we focus on the external data that our third-party is calling for it’s low single-digits of growth and we would expect to be sort of again above that. And I think what you should expect to see is that stronger case growth come from the good momentum we’ve built in our target customer types and then just remembering that we continue to have tailwinds in the health care and hospitality space. So, that’s not exactly an answer but that’s really where we expect to see continued growth.

And I think the — to your second part about the second half yes we do — did embed some sort of modest or mild slowdown so think of it as in past recessions you’re talking about call it a few point reduction in sort of overall growth rates. So, we looked at a few ranges and how we thought about that. But — so it’s very modest out there and I think the important part is we have the team internally focusing on what we can control and that’s the part that if the environment stays stable, we are focusing on delivering sort of at the high end of that range.

Andrew Iacobucci: Yes. And just to piggyback on that I think and Dirk has said this a couple of times we are 100% focused on the things that we can control and regardless of the macro, I have a lot of confidence we will continue to take share in those targeted segments just like we did last year.

Kelly Bania: Thank you. And maybe just a follow-up — and I may have missed this are you able to share any figures or metrics on where you are in terms of staffing, turnover over time, any figures you can share with us to kind of measure that progress? And maybe just broadly when you expect that to get back to normalized levels?

Dirk Locascio: Sure. So, Kelly, this is Dirk again. From a staffing perspective we’ve been sort of largely staffed for a number of quarters. So, that really isn’t the challenge. There’s always going to be a market or two here and there where you have sort of a staffing challenge. But we’ve been in good shape there. If I compare — although we haven’t shared specific numbers when we think about sort of delivery driver turnover that is call it up about one and a half times to where it was sort of in 2019 at its worse. And we’ve gotten much closer as Andrew said now to 2019. So, significant progress there. On the warehouse, we were at almost 2x and we’ve closed almost half of that gap. So, good progress. We continue to make progress there.

And I think some of the things that you’ve heard Dave and Andrew talk about give us continued confidence that we’ll get there. I think that the part that we can’t control as much as the macro still remains a relatively tight labor environment. But I use flexible spending that Dave talked about we think is a key unlock where it’s a help for our associates and a help for the business. And those are the things we love when it really either helps both the customer and the business or the associate on the business.

Kelly Bania: Thank you.

Operator: Your next question is from Brian Harbour of Morgan Stanley. Please go ahead, your line is open.

Brian Harbour: Yes, thank you. Good morning guys and welcome Dave. Maybe just to ask on — you called out kind of the drag from exiting some customers. And I know that’s always a constant process. But do you think that you’re kind of past most of the drag from that, or do you think there’s still more work to do just on kind of the customer optimization side?

Dirk Locascio: So, good morning Brian, this is Dirk. We’ve said that we expect to lap sort of the remaining exits in Q1. With that said I think that the thing that we’ve been pretty consistent is we’re going to continue to sort of have good hygiene. In any business you would want us to be continuing to look at our base. So, what wouldn’t expect is any significant, sort of, cleansing et cetera as opposed to it’s really about continuing to make sure we’re growing and focus on the right customers. And hopefully what you see is by us doing that that’s showing up in our gross profit and showing up in our market share and it’s actually — and it’s clearly showing up in our results.

Brian Harbour: Okay. Great. Thanks. Maybe just on the debt side. You obviously have EBITDA growth that helps leverage. Do you expect to pay down debt at a similar or perhaps higher rates what you did in 2022? And is that kind of factored into the interest expense outlook?

Dirk Locascio: We do expect to continue to pay down debt. We haven’t been specific. So we would expect to continue to pay down debt and also opportunistically repurchase shares. And those will be depending on the market conditions, but the continued reduction in leverage and being opportunistic with what we think is an undervalued share price are two things we’ll continue to focus on. And, yes, we’ve contemplated a level of that in our EPS outlook.

Brian Harbour: Okay. Thank you.

Operator: Your next question is from Edward Kelly of Wells Fargo. Please go ahead. Your line is open.

Edward Kelly: Hi, guys. Good morning and David, welcome.

Dave Flitman: Thanks, Ed.

Edward Kelly: Question is really for you Dave. I mean obviously you support the plan that has been in place here and that’s very good to hear. But as an outsider with your own, sort of, perspective there’s probably also things that you see as additional opportunity. And I think you alluded to that when you said about accelerating the execution of the plan. Could you just maybe talk a bit more about what you mean by that? And then how does that, sort of, roll into the goal that the company has had about the $1.7 billion in EBITDA in 2024?

Dave Flitman: Yes. Let me take the second part of that question first Ed and then I’ll come back to the first part. I haven’t said anything about the 2024 target, but that’s purely an issue of process and timing for me. I’ve been spending my time learning the business and digging in and understanding the outlook for this year. I haven’t seen anything that gives me reason to believe we’re off track for 2024. It’s just early days. In fact it’s just the opposite. You’ve heard about my confidence in the momentum in the company. And so back to your first part of your question, for me I like to work with teams to execute, execute well and accelerate momentum. We have so much going on in the company all rightfully aimed at improving the results.

If there’s one thing, I think, I can help the team do is really focus on the critical view and get them done and do them well and then move on to the next pieces of it. So that’s purely what I meant. I’m working closely with the team around that now. Let’s work on the needle movers, the right ones as you heard Dirk say that help our business as well as our associates and keep moving ahead.

Edward Kelly: Okay. And then Dirk just a follow-up for you. Your guidance implies gross profit per case improving in 2023 versus 2024, but you also mentioned sequentially a little bit of deflation. I think, there’s been questions amongst investors about things like procurement gains and lapping those. So I think this is an important issue as we’re seeing this inflation. Can you maybe just talk a bit more about your confidence in growing gross profit per case next year and the drivers of that despite that backdrop?

Dirk Locascio: Sure. Good morning, Ed. So we do feel good about gross profit per case continuing to improve in 2023 above 2022. And I think that it comes back to what we’ve talked about is that the lion’s share of our gross profit per case improvement has been our own four-wall initiatives and the good work that our team has done and really making sure that we’re passing those through and reflecting even with customers where we’ve optimized some pricing reflecting the higher cost operating environment that we’re operating in. So we expect it to be pretty durable. Yes, early in the year we’ll have some portions of onetime kind of procurement gains that we’ll be lapping. But our team through all the good work last year that we’ve done we feel very good about continuing to have strong gross profit and we think it will be a good durable gross profit as we look ahead.

Edward Kelly: Great. Thanks, guys.

Dirk Locascio: Thanks, Ed.

Dave Flitman: Thanks, Ed.

Operator: Your next question is from Lauren Silberman of Credit Suisse. Please go ahead. Your line is open.

Lauren Silberman: Thank you very much and I also echo my congrats, Dave. And this is a little bit of a follow-up to a prior question on 2024. But I know it’s still early days. How are you thinking about the level of incremental investments that might be necessary as you look to execute the plan and then add your own, kind of, spin on the plan?

Dave Flitman: Yes, you’re right Lauren. It would be premature for me to really think about those investments. Now I think the company is making the right investments. You heard us talk about the things that we’re doing in supply chain most of which requires some level of investment. The excitement we have around the sales team and making the appropriate targeted investments there opening of the CHEF’STORES I think we’ll continue on the plan that we’ve had. And then I’ll be assessing here over the next few months what I think it’s going to take beyond 2023 into 2024 and beyond.

Lauren Silberman: Thank you for that. And then just on near-term, are you guys willing to provide any additional color on what you’re seeing quarter-to-date? I know broadly the industry is seeing some improvement — some of it’s Omicron just trying to understand the underlying trends? Thank you.

Dirk Locascio: Sure. Good morning, Lauren. This is Dirk. So overall Andrew commented and I commented on in the prepared comments that we’ve seen demand hold up quite well here through the early part of the quarter and really haven’t seen signs of softening. I think overall the momentum that we expected to enter the year with we are seeing that. So really not a whole lot to share beyond that other than builds on our optimism as we continue to enter the year and what we expect to deliver through the year.

Lauren Silberman: Thank you. Congrats.

Dave Flitman: Thank you.

Andrew Iacobucci: Thanks, Lauren.

Operator: Your next question is from Jake Bartlett of Truist Securities. Please go ahead. Your line is open.

Jake Bartlett: Great. Thanks for taking the question. Mine was a follow-up on the 2023 guidance. It was maintained for EBITDA and EPS, but you did hit the higher end on the 2022 you’re talking about accelerating momentum. So I’m wondering whether there’s some offset. It seems like you started a better spot. Are you building in more macro pressure? Just trying to understand maybe how conservative that 2023 guidance might be?

Dirk Locascio: Sure. Good morning, Jake. This is Dirk. I will — I think when you think of we’re very pleased with the way 2022 ended again a little bit above our guidance, which we’re pleased with and shows the good momentum in the business. I think when you pivot that to 2023 I think in the order of magnitude just knowing the macro uncertainty out there we’ve tried to do is really reflect a range that illustrates more strength with a considered continued macro recovery potentially still very good progress, but not quite as quick if the economy slows down. But I think the message you should take out of there is very good momentum. We feel good about where we’re entering it. And then as the year plays out and we see how things play out we’ll continue to update as you would expect us to do.

Jake Bartlett: Great. And then I had a question about the — really the drivers of the independent case growth that you’re putting up. We’ve heard from others that it’s really been driven by new account, whereas, traffic individual accounts might be down just because of the high pricing that for instance restaurants are having to take. Is that the case with US Foods that the case growth — independent case growth is really being exclusively driven by new account growth? And then if that is the case, I’m wondering about the ability to build on that new account growth. It seems like the larger players are all accomplishing that. My expectation was that the market would get — would be — get a little more difficult to penetrate new accounts as supply chains eased and other smaller competitors were able to service those accounts better.

Maybe just firstly the answer of what is driving the case growth? And second just the competitive dynamics and whether you think that the larger players are still really in the catbird seat here?

Andrew Iacobucci: Thanks Jake, it’s Andrew. Yeah. So I think as we talked about last quarter as well, we’re very pleased with the balance in our I&D growth. We’re seeing a good mix of driving new account acquisitions, as well as focusing on penetrating those new accounts. And that’s really been part of a sort of a systematic approach we’ve been taking at a market level to focus — concentrate on the menu types that are seeing the greatest growth to target those in a very focused way. And then once on boarded, we spent a great deal of energy looking for opportunities to expand our share of wallet with those customers. So, both are important and both, I would say, will continue. As far as what we’re seeing within our customers themselves, as I mentioned in my remarks, we are seeing good recovery in those customers for the most part.

And that’s something that again, we pay very close attention to, because it typically will be an early sign of a potential looming slowdown. And as I said previously, we really have not seen any sign of that at this point.

Dave Flitman: And I’ll just say, the other thing, I’m excited about is our exclusive brands, and we’ve been able to penetrate the independent portion of that north of 50%, but I’m excited about our continued momentum there and the team’s focus on accelerating that brand penetration. Our customers love it. They’re really good, and it makes sense for them as well as the company.

Jake Bartlett: Great. I appreciate it.

Operator: Your next question is from Peter Saleh of BTIG. Please go ahead. Your line is open.

Peter Saleh: Great. Thanks for taking the question, and I want to echo my congrats to the team as well. I just wanted to ask about the seven-day delivery pilot and the flexible scheduling. Can you just elaborate a little bit on the cost benefit of this initiative? And just if it does prove out in the pilot, how quickly do you think you can roll this out to the rest of the system?

Andrew Iacobucci: Yes. Pete, thanks for the question. It’s Andrew. We’ve actually — we’ve learned a couple of different things from the pilot, which actually had both elements to a seven-day delivery and a flexible scheduling. And what we’ve learned along the way is the flexible scheduling is something we can do quite quickly pretty much everywhere that it will be a benefit. In other words, it does — you don’t need to go to seven days in order to be able to get a large measure of the benefits from a flexible scheduling. Just given that choice that it gives our selectors and the impact that has on their willingness to stay with us. Seven day delivery takes a little more work to shift deliveries onto the weekend. That has played out in a very promising way in the pilot market, and we are looking to see that replicated in the two additional markets that we’re testing as we speak.

And depending on how that plays out, we will look to do that in markets, where that will deliver meaningful benefit, particularly ones where capacity might be a little more constrained because those extra two days that it gives those markets, takes a great deal of pressure off their ability to serve customers. So, both are being looked at in combination or separately as the case may be, and we see a real opportunity this year to roll out the flex scheduling portion to a significant number of our markets and likely be more selective with seven-day delivery elsewhere.

Dirk Locascio: And what we really like about the flexible scheduling part of it is, that it really, as Dave commented earlier, it gives employees that opportunity to find schedules that work for them, which when you have lower turnover, lower hiring costs, that reduces your cost and increase productivity. We’ve seen, again, the positive employee relations, positive employee feedback and also improved safety results. So, all those things are sort of good reasons to do it, because they help the associate and they benefit the company.

Peter Saleh: Great. Thanks. And then just lastly, Dave, any other low-hanging fruit that you see — that you’re focused on for 2023 strategically?

Dave Flitman: No. I see a lot of low-hanging fruit and continuing to execute well and keeping the team focused on the things that matter in moving the needle. Like I said earlier, there might be an opportunity here to help with that focus and accelerate results, but outside of that I’ll have more to say through the course of time, if I see other opportunities.

Peter Saleh: Great. Thank you very much.

Dave Flitman: Thank you.

Operator: Your next question is from Andrew Wolf of CL King. Please go ahead. Your line is open.

Andrew Wolf: Hi. Good morning and welcome, Dave.

Dave Flitman: Good morning.

Andrew Wolf: Question for you on strategic acquisitions. I think the company has kind of been in the timeout period both during the CEO transition phase and launching a plan into 2024. But historically, one of the highlights of this industry is creating value through acquisitions for shareholders. Just can you give us a sense sort of where you stand on that? Is that something either in your interview conversations with the Board or just how you feel about it where the company will could eventually — is likely to eventually get back to acquisitions, or is it just straight ahead with the plan for 2024?

Dave Flitman: Look I think we have the right capital allocation plan. And in order of priority, we’ll invest in the company. We’ll pay down debt. We’ll return capital to shareholders. And finally, we’ll be opportunistic on M&A. We’re not going to do M&A for M&A’s sake. There’s going to be value that we need to create either in geographies or portfolio reasons for that. But as you know I mean this is still a highly fragmented industry with Big three maybe having 35% of the market, still highly fragmented, still opportunities for growth through inorganic acquisitions and we’ll be opportunistic on that and do the things that make sense where we’ve got the right valuation.

Andrew Wolf: Okay. Thank you for that. Andrew, I wanted to ask you about the sales force acceleration. Would you — is there any way you can quantify like either the rate of additions or anything like that? And also where you would be sourcing them from? Are they from other food service distribution competitors and they’re kind of bringing a book of business, or is it folks outside the industry who are either good at sales or chefs who want to do this type of work little color on that would be great.

Andrew Iacobucci: Yeah. Thanks for the question. Yeah, Andrew. I think the way we’re thinking about this is we will be targeting to be at or slightly above 2019 levels by the end of the year. And we will be as I say doubling down in markets with particular growth opportunities in doing so. So we are still very much in hiring mode and will continue to be so. And in terms of where talent is coming from, the mix hasn’t changed dramatically. We typically look for people with a culinary background as well as folks that have worked in our industry. And that mix if anything is probably tilted a little bit more toward sourcing from people with industry experience. Of late, we’ve been having we think quite good success attracting really high-quality sales reps from our competition, and we think that’s something that is really standing us in good stead, particularly in those markets with big growth opportunities.

Dave Flitman: I think Andrew is just — it’s an important thing to remember. So as Andrew said earlier, we’ve been — the ads have been and will continue to be sort of outsized in those markets and more growth opportunity is headcount and adding seller hasn’t been and will not be an inhibitor to our growth, but we are continuing to do that where there’s the need.

Andrew Wolf: Great. Thanks for that color. Appreciate it.

Operator: We have completed the allotted time for questions. I will now turn the call over to Dave Flitman for closing remarks.

Dave Flitman: Thank you all for joining us today. I’m incredibly excited to be here and the momentum that the company has. I appreciate your time. We’ll talk to you all soon. Take care.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.