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.

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.