US Foods Holding Corp. (NYSE:USFD) Q1 2023 Earnings Call Transcript May 11, 2023

US Foods Holding Corp. beats earnings expectations. Reported EPS is $0.5, expectations were $0.42.

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the US Foods Q1 2023 Quarterly Earnings Call. [Operator Instructions]. Adam Dabrowski, Director of Investor Relations, you may begin your conference.

Adam Dabrowski: Thank you, operator. Good morning, everyone, and welcome to US Foods First Quarter Fiscal 2023 Earnings Call. Speaking on the call today, we have Dave Flitman, Chief Executive Officer; and Dirk Locascio, Chief Financial Officer. [Operator Instructions]. 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, unless otherwise stated, we are comparing our first quarter results to the same period in fiscal year 2022. In addition to historical information, certain statements made during today’s call are considered forward-looking statements. Please review the risk factors in our 2022 Form 10-K for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in those statements.

Lastly, during today’s call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website, except that we 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.

David Flitman: Thanks, Adam. Good morning, everyone, and thank you for joining us today. I’ve been at US Foods now for about 4 months, and I continue to get more excited about our future each day. I’ll start by sharing a few highlights from the quarter followed by my vision for the evolution of our company and then we will go deeper into our Q1 financial results. After a year of strong market share growth and margin expansion, I’m pleased to report that US Foods remains intensely focused on executing our long-range plan, and it showed in our financial results again this quarter. We increased adjusted EBITDA by 40%, expanded adjusted EBITDA margin by 80 basis points and drove case growth of 6%, including 8% independent case growth.

We delivered these strong results by profitably growing share, further optimizing gross margins and improving operational efficiencies. We made progress on key initiatives within our long-range plan while taking actions to execute more effectively on fewer but more impactful initiatives. Finally, we prudently allocated capital and continue to invest in the business as we further reduce debt and opportunistically repurchase shares. We have made significant progress against our long-range plan and have strong momentum, thus are reaffirming our full year 2023 guidance. My clear expectation is that we will maintain that momentum throughout 2023 and beyond. While we continue to produce strong quarterly results, we’ve also made meaningful strides to enhance our organizational structure, our strategy and culture of our company.

Over the last few months, I’ve continued to spend time on the road, meeting more of our associates in getting deeper into our operations. During my travels, I’ve also met with many customers, investors and analysts to hear their feedback about US Foods. As a result, I firmly believe that US Foods long-range plan in the areas within it are broadly the right areas of focus to ensure success. I also have seen, however, that improved and focused execution remains a key opportunity for us to accelerate financial and operational results and ultimately provide an even better customer experience. To enable and drive this improvement, I made 2 important changes to the executive leadership team in early April to better connect the field to our process excellence teams.

First, Andrew Iacobucci has been promoted to Senior Executive Vice President of Field Operations and Chief Commercial Officer. While this realignment necessitated the exit of a senior executive team member, it underscores the confidence I have in Andrew’s leadership. In Andrew’s new role, he leads our field operations, merchandising and commercial excellence teams to drive better connectivity of our go-to-market strategy with the P&L owners. The second change is that our 4 regional presidents, the P&L owners, are now part of my executive leadership team. They now participate directly in all executive team strategy and operating review discussions. This new structure eliminates any potential miscommunication between our field and functional leaders, increases our speed of decision-making and improves our execution through alignment on fewer initiatives that will drive greater business impact.

In addition to our structural changes, we have taken steps to further strengthen our culture and provide excellent service to our customers while remaining intensely focused on profitably increasing market share and improving margins. This shows up in a simplified summary of our strategy on Slide 5. These adjustments are more an evolution than a revolution, but it is important to me that our strategy is simple and absolutely clear for all of our associates, so we can be more action and outcome-oriented across the company. I have also asked our leaders to assess how they are spending their time against these 4 pillars. Our Great Food Made Easy strategy defines what we collectively drive to win in the marketplace. As we’ve said before, we work to exceed expectations and give our customers the competitive edge they need.

With our unrivaled portfolio of exclusive brands, our omnichannel offerings and team-based selling approach, we are well positioned to meet our customers’ unique needs. And we will lead with fresh and reliable as we see significant growth and wins coming from these areas. It’s intentional that our first pillar is culture because our culture and our people fuel our strategy. This pillar includes safety, which is a key area of focus for us that I will speak about in a moment. Fostering an inclusive culture and being a responsible company are also drivers of business performance and important to our associates, communities and the planet. We recently put these words into action at a meeting with our top leaders where we gave back to the community.

Together, we assembled 1,000 gardening kits for underserved students in Chicago, who live in food deserts where access to fresh produce is scarce. Our second pillar is service. Our research tells us that the most important services to customers are on time, correct orders and high-quality fresh products. No single food distribution company is a clear leader in all of these areas, which means there is a great opportunity for us to win on service. Our service pillar focuses on reliability, being efficient across our operations from routing to logistics to replenishment and providing the best experiences to customers through our technology and omnichannel offerings. Our third pillar is growth. We are focused on gaining profitable market share by targeting the right customers that want to win with us, capitalizing on what differentiates us in driving fresh and produce and center of plate.

Last, but certainly not least, is profit. This strategic pillar highlights initiatives that will expand our margins, drive continuous improvement in productivity and optimize how we spend our resources. Turning to Slide 6. I’ll provide a little more detail on how we are evolving our culture as a company. When I joined US Foods, I was struck by its tremendous culture. It’s palpable everywhere I go. While this is a unique strength to build upon, we have evolved our cultural beliefs at US Foods to reinforce the behaviors, including safety, continuous improvement and productivity that will accelerate our ability to deliver on our long-range plan to date and in the future. Our beliefs are important because they inform the actions we take and our actions drive our results.

Specifically, I have focused on 3 key areas where we can improve our business by building an even stronger culture of safety, execution and urgency. In late April, I brought together our top 200 leaders to align them around a shared vision. We have underscored safety as a top priority and have implemented measures to increase focus on safe operations and hold every one of us accountable to work safely each day. The safety of our 29,000 associates is extremely important to me and is core to the success of any great distribution company. While we began to drive this step-up focus on safety only a few months ago, we are starting to see early signs of significant improvement. Second, we have refocused our supply chain team on the basics of distribution excellence through standardization of best practices and leadership accountability for service and cost.

Two examples of how we are putting this into action are standardized labor planning and market-led routing. Third, we are ingraining a renewed sense of urgency for delivering results throughout the organization. This includes being more decisive and moving more swiftly to put plans into action, while still being thoughtful about implementing initiatives that will most effectively drive success. I expect each of these areas of focus to be key building blocks as we work together as 1 team at US Foods to improve our execution and increase our effectiveness to generate even stronger and more sustainable outcomes. Together with the executive leadership team, I will continue to review the business and the additional opportunities within it. We expect to pursue other actions as we complete this work through 2023 to achieve further progress against our current long-range plan and beyond.

With that, let’s turn to our recent business results. Turning to Slide 7. I’ll walk through some of our first quarter highlights. We delivered strong financial results again this quarter, continuing to build on the excellent results we delivered throughout fiscal 2022. Net sales for the first quarter grew 10% compared to the same period in 2022. Year-over-year total case volume growth was 6% and strengthened from Q4 to Q1 based on a combination of the Omicron comparison in January and year-over-year market share gains in target customer types. Case growth was led by 8% growth in independent restaurants, 6% growth in health care and 19% growth in hospitality, while chain cases were down 1%. We grew adjusted EBITDA dollars 40% despite essentially 0 sequential inflation in the first quarter of 2023.

Our adjusted EBITDA margins also increased 80 basis points from the prior year as we gained further operating leverage in the quarter. We remain on track for the 2023 full year guidance we outlined in February, including adjusted EBITDA of $1.45 billion to $1.51 billion. Turning to our customer experience. We again gained year-over-year market share in target customer types via our customer focus and differentiation strategy. We are seeing continued increases in the adoption of MOXe, our digital customer platform, among local customers and are on track to launch MOXe for national customers later this year. Finally, Pronto, our small truck delivery service focused on customers within targeted dense geographies, continues to grow organically in both existing and recently added markets.

We have established a presence in 29 markets and expect to add 5 to 7 additional markets throughout the remainder of 2023. We continue to make progress in our supply chain operations as well during the quarter. The positive turnover and productivity trends we drove in the third and fourth quarter of 2022 continued in the first quarter with driver turnover further improving. turnover and productivity is now essentially in line with pre-COVID levels, and our warehouse turnover maintained the improvement we experienced in the second half of last year. There is still more work to be done, but I am very encouraged by the progress and strong evidence we are seeing that the actions we are taking are yielding results. We are actively piloting our flexible employee scheduling and 7-day delivery in 2 additional markets.

While it’s too early to quantify results, qualitative feedback has been very positive. At the same time, we are planning to expand the flexible scheduling portion of this work to additional markets during the remainder of the year, which we expect to result in further improvement in employee retention and productivity. Lastly, on supply chain. We further improved our customer service levels in the quarter. Our service level to our customers is nearly where it was prior to COVID. While vendor service levels to US Foods are not yet back to pre-COVID levels, they continue to improve, which is very encouraging. Finally, we continue to improve our capital structure, and we’re diligent about prudently allocating capital this quarter. Through a combination of earnings growth and debt reduction, we meaningfully reduced our net leverage from year-end to 3.2x at the end of the first quarter.

Each of the actions we’ve taken reinforces our commitment to being responsible stewards of shareholder value, which Dirk will talk about shortly. Now let’s turn to Slide 8, where you can see the progress we’re making on our long-range plan. Starting with profitable market share growth, we drove strong Q1 volume growth, especially in our target customer types. We are on track to exceed our 1.5x goal for restaurant volume growth for the full year led by strong independent case growth. We had year-over-year share gains in each of our target customer types and expect to build on that further throughout the year, including through a strong health care and hospitality new business pipeline. We improved our profitability, as we continue to grow faster in the targeted more profitable customer types of independent restaurants, health care and hospitality.

Moving to margin optimization. Our team effectively managed through a more volatile commodity pricing environment to maintain solid gross profit per case. This was accomplished through the established process we have to specifically focus on volatile commodity categories. We continue to make progress on our COGS improvement by working jointly with additional vendors and remain on track to address a total of 60% of COGS by the end of fiscal 2023. Lastly, as vendor supply improves, we renewed our strong focus on growing private label penetration. This remains a significant opportunity and one where we bring added value to our customers through quality and innovative products at a better price. Lastly, we continue to advance our efforts to drive operational efficiencies.

Our routing optimization work continues with further gains via reduced mileage. Turnover, while improving, as I discussed on the prior slide, remains a challenge and one we continue to focus on. Finally, we began work during the quarter to identify and action savings on indirect or non-COGS spend which is an exciting area of largely untapped opportunity. This work is just beginning, and I expect savings to begin to accrue later this year, ramping up more significantly throughout 2024. US Foods is advancing the initiatives that drive our long-range plan. I am proud of and grateful for the great work of our associates who are key to achieving this important progress. With that, I’ll hand it over to Dirk to go over our financial performance and guidance in further detail.

Dirk Locascio: Thanks, Dave, and good morning, everyone. Let’s turn to Slide 10. We’re very pleased with what we accomplished during the first quarter and the strong momentum we continue to have in our business. This clearly showed in the first quarter results. Net sales were $8.5 billion in Q1, an increase of 9.5% over the prior year. Total case volume increased nearly 6% from the prior year and food cost inflation was approximately 3.5%. As Dave mentioned earlier, case growth was led by 8% growth in independents, 6% growth in health care and 19% growth in hospitality, while chain cases were down 1%. In the first quarter, adjusted EBITDA grew $96 million or 40% from the prior year to $337 million. It was a very strong quarter, especially given the current year had essentially no sequential inflation while the prior year had more significant sequential inflation.

In addition to strong EBITDA dollars, our adjusted EBITDA margin increased 80 basis points from the prior year as our gross profit grew significantly more than OpEx. We continued our strong gross profit growth through the first quarter, which we are quite pleased with, as again, in this quarter, there was essentially no sequential inflation. Our adjusted gross profit dollars increased 14% from the prior year. OpEx remained elevated. However, we saw continued improvement, and thus in Q1, the year-over-year cost increase was much lower than it was all of 2022. The improved turnover and impacts from our other initiatives drove increased productivity and are showing up in our results. We will continue to take actions to build upon this progress and still see significant opportunity for improvement in our supply chain operations.

We made further progress against all 3 areas of our plan in 2022 and to date in 2023, and we are excited about what we can achieve this year and beyond. Moving to Slide 11. We further strengthened our capital structure and reduced leverage in the first quarter. We meaningfully reduced our net leverage compared to both the first and fourth quarter 2022 through a combination of net debt reduction and earnings growth. Our net leverage ratio was 3.2x at the end of the first quarter, which was a 1.1 turn reduction from a year ago and a 0.3 turn reduction from the end of 2022. We remain committed to reducing our leverage and remain on track to reduce net leverage to below 3x by the end of this year. We also repurchased $34 million of shares during the first quarter bringing us to $48 million to date against our $500 million share repurchase program.

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. We are reiterating the fiscal 2023 guidance that we released in February 2023 and are pleased with the progress to date. We will continue to focus on controlling the controllables to ensure we are well positioned to deliver against this guidance. I will wrap up my comments today with a few thoughts on Slide 12. We are generating momentum in our business and executing all 3 areas of our long-range plan. We are driving share gains and improved customer mix as we remain focused on the customer experience and further improving our operations to increase service levels and drive efficiencies.

None of us know exactly what lies ahead in the macro environment. However, US Foods is well positioned to win as a U.S.-focused business with a resilient demand base across a diverse set of customers and with a focus on helping our customers make it. Finally, we will continue to be prudent with capital through a balanced deployment approach and are very focused on delivering compounded shareholder value. With that, I’ll pass it back to Dave for his closing remarks.

David Flitman: Thanks, Dirk. I will close where I started. Four months into my role, I am more excited about US Foods in our future than I was the day I joined. During one of my recent site visits, I met Christopher Moore, our night warehouse manager, in Austin. In just 5 months with the company, Christopher quickly led his team to becoming one of our most productive night selection crews and has gained the trust of his associates. Struck by his leadership, I asked him about his background. I soon learned that in addition to his 12 years of experience in food distribution, he had spent 23 years in the Army supply chain, supporting operation Iraqi Freedom and Korean Defense where he received 2 bronze stars. Associates like Christopher are one of the many reasons I appreciate being part of US Foods.

As we head into Memorial Day later in the month, I want to thank Christopher, the 120 members of our those who serve Employee Resource Group in all of our military service members across this great country. Additionally, as I have spent more time with our team, I have gained a better understanding of our momentum and areas of opportunity. While macroeconomic factors will inevitably impact results, I believe we are on track for 2024 adjusted EBITDA at or near $1.7 billion. We are focused on building upon the company’s many strengths while finding ways to more effectively execute our strategy and accelerate our rate of improvement. I am highly confident this combination will lead to a very bright future for US Foods and all of our stakeholders.

Finally, I would like to thank our 29,000 associates for their unwavering commitment and the work they do each day to serve our customers. It’s clear that our strategy is working, and we are continuing to make progress against our long-range plan, which is in very large part due to the talented team we have here at US Foods. With that, Cheryl, please open up the line for questions.

Q&A Session

Operator: [Operator Instructions]. Your first question is from Kelly Bania of BMO Capital Markets.

Operator: Your next question is from Alex Slagle of Jefferies.

Operator: Your next question is from Lauren Silberman of Credit Suisse.

Operator: Your next question is from Jeffrey Bernstein of Barclays.

Operator: Your next question is from Mark Carden of UBS.

Operator: Your next question is from Edward Kelly of Wells Fargo.

Operator: Your next question is from Jake Bartlett of Truist Securities.

Operator: Your next question is from John Heinbockel of Guggenheim Partners.

Operator: Your next question is from Brian Harbour of Morgan Stanley.

Operator: Your next question is from John Ivankoe of JPMorgan.

Operator: Your next question is from Andrew Wolf of CL King.

Operator: There are no further questions at this time. I will now turn the call over to Dave Flitman for closing remarks.

David Flitman: Well, thank you all for joining us today. We hope you have a great rest of the week. The company is strong. We have great momentum and a very bright future. Have a great day.

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