US Foods Holding Corp. (USFD) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I want to welcome all to day 1 of Barclays Eighth Annual Eat, Sleep, Play Conference. The event is in person for the first time since 2019, and we are excited to have 11 restaurant and foodservice distribution companies attending the conference, including fireside chats with US Foods, Shake Shack, Dutch Bros, and Texas Roadhouse on day 1 followed by First Watch, Brinker, Tim Hortons China and Wendy's on day 2. And we've got a few companies doing meetings only such as Dine Brands, Arcos Dorados and Alsea over the 2-day period. And I'm excited to also be joined by our new gaming, leisure and lodging analyst, Brandt Montour, who's to my left, your right, who joined us exactly 1 year ago and launched coverage earlier this year as well as our Latin America consumer analyst, Antonio Hernandez, who's sitting over here, who is here from Mexico City, who covers Arcos and Alsea. We hope you find the next 2 days to be a great use of time. We hope to get a chance to chat in the hold between meetings with any of you, and we do welcome those that are on the webcast with us this morning. At this point, with the introductions over, I'd like to introduce our first presenting company. With me is US Foods. So with that, I will move over here.

Good morning. Thanks for having us, Jeff.

Good morning. So with us this morning from US Foods, all the way from Illinois, we have Dirk Locascio, their CFO. And in the audience, we have Adam Dabrowski from Investor Relations and Finance Manager. And I had the pool [indiscernible] yesterday. And I guess, start with a little congratulations. For those not aware, US Foods announced yesterday that Dave Flitman will be joining the company as CEO starting in January of '23 following what has been an extensive search. More on that in a moment. By way of background, for those not familiar, US Foods is a leader in U.S. foodservice distribution, supplying 300,000 restaurants and foodservice operators from 70-plus broadline locations and another 85 or so cash and carry stores. So Dirk, thank you very much for joining us this morning.

Happy to be here. Thank you.

Figured I'd start with just the CEO news from yesterday. Congrats on the new hire. We put out a note yesterday titled New CEO, all good things. Public company CEO with foodservice experience. It seemed like it checked a lot of the boxes that you guys spoke about over the past few quarters. I was wondering whether there's anything you'd like to share or any color you'd like to give on the new hire?

Just happy to have Dave join us. Look forward to the experience he's going to bring, and excited to have that in place. I think the combination of the experience he brings from our industry and outside our industry across distribution will be very helpful and productive. So I look forward to working with them and onboarding him.

That's great. I have a handful of questions on the broader landscape looking to next year. And I can definitely fill the full 35 minutes of questions, but I will stop with 10 minutes or so and see if there's any questions from the audience. If not, I will plow through. But I think I'd start big picture with the state of the consumer looking into next year. You guys definitely have an interesting perspective because unlike covering individual restaurants, which we do, you guys service 300,000 of them. So you're really touching half of the restaurants in America. Nobody has a better view of the restaurant industry than you guys and obviously, within your industry as well, foodservice distribution. But based on the macro data, it would seem like the U.S. is heading in the direction of a recession, whether or not that actually plays out. But I'm just wondering how do you think the foodservice distribution segment is positioned, and maybe leverage you have to pull if we were to go into a recession kind of how you see yourselves impacted?

Sure. I think the part about the recession, whether or not it happens, that part we can't control. The part we can control is us continuing to grow faster than the market. I think when you think you start here -- where you pointed out is we serve a very diverse customer base. So I think no matter what happens with the economy, we're well positioned, whether it be restaurants, health care, hospitality, et cetera across that diverse customer base. We also have some pretty meaningful tailwinds still in our business and our industry. When you think of health care, hospitality, still not fully recovered. They're continuing to show good momentum, but still not fully recovered. And even with independent restaurants in certain parts of the country, for example, in the western parts of the northwest, that haven't fully recovered. So we think that's on a positive tailwind that is sort of helps us again despite any kind of environment there. The other thing that's more focused on us is the share gains we've been continuing to make across whether it's independents, health care and hospitality, those are our key customer types. We've seen good progress there. And so we think despite whatever the macro environment is, we expect to continue to make share gains. And in fact, the tougher environment is where some of our differentiation really shows up more. If you think just over the last couple of years, as an example of when you had COVID hitting, our service model of really working with our customers to help them maneuver their way through getting the different PPP loans and how to make sure they maximize them, our teams worked closely with them. And then more recently, with the inflation, our teams have a very robust inflation playbook of working with restaurants in order to help them manage that through there. So we think that we're very well positioned to continue to gain share despite the environment -- no matter the environment.

And I know that a lot of the restaurants we cover will talk about, oh, well, if times got tough, we have sales levers, we would pull [indiscernible] seems like it's a little different from your perspective, I get the feeling you don't have -- I mean, you have different ways you work with your customers and your private label. But in your industry, are there specific levers that you would pull to help to drive incremental sales? Or is that not really an opportunity in foodservice distribution, like it might be in the restaurant industry where they get more aggressive on discounting or something like that? Is that -- like what do you guys think about when you think of times are tough, what levers we should be pulling?

Yes. So it is -- you're right, it's -- so I think we do have some levers that is definitely different than retail. But as you pointed out, I think that's where our main lever is, that's where our differentiation, as I mentioned before, really can come to light, and it helps those operators. Also at times, as operators continue to shift share, sometimes that can drive better economics for them with us because it improves our overall economics. Those are things that we can do. The other thing that we use as a lever is depending on the environment we're in, some of our scoop with differentiated products, we will bring to market that helps them. So for example, when -- as labor has been a challenge in the back of the house, then those are products that we can focus on that help them save labor. And so they have less work to do back of house, they come more prepared, et cetera. With the inflation recently, our product, our recent Scoop focused more on things that are sides that can be more profitable for them. So that -- those are some of the levers that we can pull in addition to, of course, bringing some of the value to new customers as we would go out and continue to do that.

Yes. And I'd be remiss if I didn't mention COVID, which is hopefully now in the rearview mirror, the fact that we're sitting this closely together. Hopefully, that's all okay. But what has been the greatest structural change you think to your business or the broader industry, both positive and negative? Just wondering whether those changes will hold? Or you think ultimately revert to where they were prior? Kind of what's been the biggest positive and negative to come out of COVID for your business or your industry?

Sure. When I think of our business, probably the two words that come to mind our agility and collaboration. So we've always got a lot of collaboration. You can't do a business of our size without that. But just the consistently evolving environment, whether it was from the COVID upfront to almost the shutdown of the economy and the supply chain issues, the labor staffing issues is we've had to be more agile than ever, and making sure that we have the staff, that we support our staff, that we focus on having the right product. The vendor supply challenges to us and the industry have been quite big, quite challenging. They've gotten better, but they're still performing to us much less than historical. And so we've been able to cushion our customers from much of that. So that agility has been something we've improved upon a lot. And then goes hand-in-hand with that is the collaboration. So like I said, our teams have to work together. But whether I think of our sales and credit teams at the very beginning, and the collections work that was done there to make sure we're working with our customers, the sales and merchandising or the operations and sales as we're focusing on staffing and supporting customers, just that level of collaboration has really elevated to a level higher than I've ever seen in my 13 years here, which I think is outstanding. I think when I think of the broader industry, probably the main thing, in addition to some of those same things that I talked about in our business. The other thing that I did -- would have to mention would be just with the level of labor challenges and inflation that we've seen. So the cost environment the industry operates in is different than it was in the past. And so I think as a result, we've had to really make sure, and the industry has had to make sure that we're addressing those costs through sort of profit recovery and gross profits, through managing through the right customers, et cetera. And for us as a business, it's made us much stronger than we entered COVID.

No, that's great. And I think of this environment now, people who look at the foodservice distribution industry, it tends to be lot of discussions around market share. I think investors look at the industry as somewhat of a roll-up story, or a roll-up opportunity over time. And then I think that was accentuated through COVID. So we cover the biggest three publicly traded foodservice distributors. Correct me if I'm wrong, but I believe between the three of you, you only have maybe 35% share depending on how you define it. But that would imply 65% is being run by players #4 through 1,000. So I'm just wondering where do you expect your share to trend over the next 5 to 10 years? Just seems like coming out of an environment like this, when you talk about the challenges that you might have had, I can only imagine how severe the challenges were for player #50, who couldn't get the inventory, didn't have the labor, didn't have the tools that you might have. So it would seem like this would be an opportunity where we could look back and say this is the biggest market share gains we've ever had in the period post COVID. I'm just wondering whether you guys see it the same way, whether there's maybe M&A optionality that you see as a result of that? Or how do you kind of think of the market share opportunity over the next number of years?

Sure. So you're right, we still have collectively among the three of us, a relatively low share compared to a lot of industries, and that's what -- when that question often comes up of how are you each talking about gaining share? To your point, we still have a pretty small share gain -- share opportunity that is in place today. But we see continued share gains across our key customer types. So for us, in any case, is not a good case as opposed to it's got to be the right case. And so our focus is really about growing outsize with independent, with health care and hospitality and then being more opportunistic with the right customers and other customer types. And across there, we've had very good progress. We've continued to take share since the beginning of COVID, and we expect that to continue. I think that's where the combination of our differentiation as well as you've heard me mention a number of times the NPD share data that we use within our business that we really sort of become available, and we've begun to use over the last few years, that is -- we've embedded that into our core operating processes. And as a result, all the way from our sellers, up through our merchants throughout the organization, it's really helped us to be much smarter about understanding how we're doing relative to the market as well as where we're winning and losing. So we don't know who the share is coming from. But what we know is we know by facility, by category, et cetera, where we're winning and losing. So that's really helped us. And when you think of the change management that goes through it, the fact that our sellers know that it's helping them win, that change adoption has become increasingly positive. And so sort of the differentiation and the use of data right into our processes again, we think we have a lot of share opportunity to go organically. And then when you think of M&A, so our business, we've done a number of tuck-in M&A acquisitions over the last 10 years or so, and we continue to look at those opportunities. Those are good opportunities to increase density, and we continue to look at those. And if the right ones come up, we'll continue to pursue those over time.

It's interesting because we try and do our best to talk to players 4 through 1,000 periodically. And they'll say, well, we listen to the big three conference calls and they all talked about gaining market share. We're gaining market share, too. So it's like -- it's hard to try and size up the entire category because it's not like great industry data to say who's winning or losing, but it's amazing that players 10 and 20 think they're taking share. So I'm assuming I just don't know how big it is before you get to player 50 or 100, but it seems like somewhere, somebody is losing share. I would think the smaller the player, the more challenge they've been for the past couple of years, but just doesn't seem to pan out when we talk to some of these players. So it's -- at this point, it seems like everyone is winning. So we'll see in coming years. I thought we would have maybe seen more bankruptcies or things like that, where people would go out of business. I'm not sure if that's something you saw at all, or it just doesn't seem like it was as severe as maybe some people thought in terms of some smaller players going out of business.

It was surprisingly limited. Those businesses were resilient. Now they also have been privately owned. They have some more levers where they were able to manage sort of, again, absorb more of the, whether it's earning impacts, et cetera, through there. But it's continuing, I believe, to get more challenging as a smaller distributor when you think of the supply challenges that persist, when you think of the expectations that customers have for using technology in the business, I mean those things are going to continue to be more challenging, I think, over time. I think the other thing is, again, when you're talking about we and the other still having a relatively small amount of share and you're gaining share in small bits, but consistently, it may not show up individually to someone knowing that you still have some level of recovery and growth in the broader industry. So like I said, our data point that we use is from NPD. So it's not us coming up with the numbers. And we're continuing to focus and excited about the progress we're making.

You mentioned the customer opportunity. I think most investors we talk to think about growth in terms of, well, did they add a new account, or did they pursue M&A. I would think the greater opportunity is growing share with existing. So I'm just wondering from your perspective, how do you think about your current penetration, whether it's with chains or independents and the opportunity to grow that mix? It would seem like that's the most profitable opportunity since you're already making a stop there. But are there any metrics that you look at to say, this is our average penetration with a chain or an independent, or this is how high it could go? Like how do you think about further penetrating existing accounts as the opportunity to grow share?

So you're exactly right that increasing penetration is a great growth opportunity. What we focus on, and we do look at metrics that focus on both of a combination of we're seeking out the right new customers as well as increasing penetration. So when you think of chain restaurants, and to a lesser extent, but some on independents in health care and hospitality, the share to begin with is quite high. So you're talking a very big portion of the basket that we already own. There still are opportunities there where there might be a category or two that we don't have, and those are opportunities to increase penetration. Some of the independents, probably most of the independents are the opportunity where that share sort of increase is there. As we and some of our competitors have talked about, many independents will have 30-ish percent of their overall spend. And those are opportunities that we'll focus on with the categories you don't have. And so when we look at it internally, we will focus on how much of our growth is coming from new and how much of it is coming from existing. And from even within existing, we're focusing on, are we getting more categories? Or just is their business growing? So it helps us to understand where we're making progress there. But yes, we continue to look for opportunities to grow share with those customers, and that's where some of our differentiation comes in. The technology, for example, as we've seen over the years, the more people that use our digital or e-commerce to order, their overall retention is better with us and their basket size is better with us because it's easier, just like as retail consumers, we can do more, did you forget or have you thought about this kind of offerings to those customers.

I think you mentioned 30-ish percent share of maybe independents on average. I'm assuming that's a fairly wide range. Is that with chains? How does that compare to independents? You typically have a greater percentage penetration? Or do the chains tend to spread out amongst even more distributors? What's the ultimate opportunity for a chain and an independent? I don't know whether you can get to 50% on either? Or whether that's just not the way the industry operates?

Sure. So chains, if I put aside alcohol, so kind of within the food space, chains and a lot of health care and hospitality, we will tend to be 80-plus percent of their business. And you have some independents that are in that space. And what you're making a trade-off is some level of sort of pricing economics for the delivery benefits that you get from, again, large drop sizes, a concentration, and so we're always looking at those. And again, even in those, whether it's a chain or health care and hospitality, we're already at a high level. Again, there still can be some categories. Because we don't serve it today, doesn't mean we couldn't serve it tomorrow. So there is an opportunity to get a quite high percentage, which helps with overall distribution economics.

It feels like 5 and 10 years ago, yourself and your peers would talk about chain restaurants. You kind of need to service some of them because they fill a lot of trucks, and they take you into different territories, but they're not as profitable. It feels like more recently, whether you guys in your industry are getting a little bit more on the upper hand, it seems like we're hearing more about, you know what, we're not going to cover that chain business if it's not at a certain level of profitability. And if the big players will all kind of come across with the same message, it would seem like you're getting a little bit more leverage. And it seems like everyone's talking about we're actually more profitable now than we ever have been before with chains. Is that a fair directional comment that chains are no longer a big headwind to the overall margin?

Sure. So chains generally are still lower than the others, but yes, they've definitely improved quite a bit. And it's -- this is one of the things I tried to make clear is we're not seeking to get out of the chain business, in serving chains. There are -- it's about finding the right customer, the right partners. In fact, there's one chain customer that I can think of that is relatively new within the last few years that they are very focused on being a partner of choice. And so what that does is it means we're going back and forth on what's the right way that we can be an excellent supplier to them, and they can be a good customer. And those are the kind of partnerships we're looking for. And the economics they find themselves, so they are different than they were 6, 7 years ago because to your point, it doesn't appear as though people really are looking to just fill up warehouses for the sake of filling up as opposed to the right customers. And I think because of the environment we're in, we're able to have those dialogues with customers where it's less, as it may have been 5 years ago about, Jeff, I want to charge you more. No Dirk, I don't want to pay more. It's really more about, we all understand the environment we're in. So how do we get to a better outcome for both parties involved to be successful.

Yes. And as you look down from a sales perspective to the profitability, it seems like a lot of distributors and restaurants have been talking about over the past couple of years, we have to do more with less from an efficiency and technology perspective, which you've alluded to already. And it seems like your sales are now pretty much back to full strength relative to a few years ago. So I'm just wondering how do you think about the margins relative to a few years ago? I know that's kind of a big topic for US Foods is closing the margin gap. Just wondering what's changed through the pandemic? And maybe where you see that biggest margin opportunity coming from?

Sure. So we still see a lot of opportunity with margin improvements as one of the things, though, that we do like about our current long-range plan is we think, especially in this period of recovery, it's important to have that balance of just the dollar growth, so profitable volume growth, along with rate expansion. And we think that margins do get back and expand from where they were historically on a percentage. On a per case basis, they're largely in line with where they were prior to COVID. So we're quite pleased with the progress that we've made. And I think our three pillars that we've talked a lot about of our long-range plan of profitable volume growth, gross margin expansion and operating efficiencies, really all contribute to that. So you've got the part of profitable volume growth that comes from just adding more cases from existing or new. But there's a part of that, that also helps with margin expansion. As you grow with the right more profitable customers, so I use independents as an example, that's very accretive to your margins as well. So it helps from a mix. And then, of course, you have the benefit that comes from the gross margin initiatives, whether it be cost of goods improvement, inbound logistics, the pricing work that we've done and then the operating efficiency work across improving retention, across routing, those kinds of things. So we -- 3 quarters in with our long-range plan, we're quite pleased with the progress, and we think that, that will continue to yield benefits both from a strong EBITDA dollar growth as well as margin expansion.

I give you guys a lot of credit because over the past 9 months from the outside, it looks like it's been tumultuous and what not looking for a new CEO and with activist investors. And it seems like internally, you guys kept your focus, gave certain guidance, delivered quarter after quarter, ultimately coming in at the higher end of that. It seems like from the outside looking in, I give you guys a lot of credit, it doesn't seem like there was that much disruption internally that everyone thought that would be externally. So now with the new CEO coming in, it seems like an exciting time to potentially accelerate that growth going forward.

I think it will be an exciting time. And I think over this last 9 months, one of the benefits that we did have is we had done this work, and that you're leading up to that of doing a refreshed long-range plan. So although we accelerated a little bit the timing, which we talked about it, that ended up in retrospect being very positive. So that was a key enabler, I believe, in keeping us very focused as an organization. So we had the plan, we knew the pieces that build to the plan and still was about going execution. And Andrew has done an excellent job in keeping the organization very focused on that, and keeping us really narrowly focused on executing against this plan. And the team gets excited. But any time you have -- you see the fruits of the labor and people see that -- those wins, they continue to build on that. So internally, although it's great to have a permanent CEO named down. And like I said earlier, I think Dave will be a great add to the team and leading the organization. In the meantime, it still has been a lot of good progress that we're quite pleased with.

And I want to just give credit to Andrew who did a tremendous job through this whole period and it seemed like it was seamless. So I know he gets a lot of the credit along with yourself, and look forward to what Dave can bring. I'd be remiss if we didn't talk about the most inflationary topics of commodities and labor. From a commodity standpoint, it does seem like the government data, or spot prices, or restaurant commentary, or yourselves, it does seem like year-over-year levels of inflation have maybe peaked, part of it due to the sequential easing of some spot prices, part of it just due to the math of lapping tremendous inflation from last year at this time. I was wondering how you think about the next 6 to 12 months when you think about the inflationary basket? Some people say less inflation. Some people say we're going towards a period of deflation. Like what would be your opinion since you touch so many of these products? What's your outlook going into next year from a commodity inflation standpoint?

Well, I learned about a year ago, that my crystal ball isn't very good at inflation because as soon as we had seen it slow in the middle of 2021, it picked back up. But with jokes aside, it was -- I think the third quarter, and into the early fourth quarter, as I talked about in our earnings call, the fact that the third quarter was the slowest sequential inflation quarter that we had seen since the beginning of 2021, we think is positive. And as that -- and that came from some actually deflation in some of the center-of-the-plate categories. So in many ways, it's hard to know exactly what plays out in the future. The important thing for us is making sure that we run our plays to manage our way through it. But I think the slowing of the center of the plate is we think is a positive, and it's a positive on a few fronts. One is -- those tend to be fixed markup cases for us. So meaning if we have a $5 or $10 markup, or a certain amount per pound, when it inflates or deflates, we're still going to make that $5. So it's actually less earnings accretive or dilutive to us. But what's really valuable is from our customers to the operators and then the end customers, those tend to be quite expensive cases. So when they're thinking about managing their own costs and their businesses and how they think about their menus and such, it really has a positive impact from the overall cost of them doing business. So when you think of a consumer demand perspective, it's helpful on that front.

We often get the question to your point of how much of your business is a $5 markup, whether the underlying item is $10 or $20. Obviously, that changes what the margin percentage would be, but if you're making the same $5, that's what you should care about. Is there a rule of thumb that you think about in terms of your business, whether it's under plate versus elsewhere? Or whether it's a type of customer, like what percentage of your sales is of that variety where it's very set versus what percent is fluctuating meaningfully and you're just having to raise or lower prices in your dollar margins change? Like how do you think about that mix of your business?

Sure. So it's not exactly, but about 1/3 of our business is center of the plate or proteins. And almost all of that business is a fixed markup. And so you have a little bit again in some other parts, but that's a good way to think about sort of the part of our business that would be a fixed markup. So the other 2/3 of your business, it's either a percentage or it's more kind of spot priced with Street customers.

I know for a long period of time, it was the distributors I feel like I used to say, we love 3% inflation. We don't want tremendous inflation because it's hard to pass through. We don't want deflation because that's just not really good for anybody. So you kind of like that sweet spot. Having now been through periods of double-digit inflation as it's now easing, has that changed? Or would you love to just settle in at low single-digit percentage of inflation into perpetuity?

I -- and I think broadly, we still like 2% to 3% steady inflation because it is, to your point, it's manageable to pass through over time. I think for the near term, I'd be happy again with very limited level of inflation to make sure the consumer and the operator can catch up on things. But over time, 2% to 3% is a good level of inflation.

I mean I just can't believe that for years of hearing that to all of a sudden here, we were talking about 10% and 15%, and yet it was being passed through. It just -- it's incredible that your customers, and ultimately the end user, consumer, has been able to absorb that. We're hoping that, that eases before it becomes too hard to tackle, but...

Yes. I've always had an immense level of respect for operators. And because it's not an easy business. I saw it firsthand when I was growing up, working in a family restaurant, but I've seen it just over time. And there -- it's a resilient bunch that owns and operates restaurants in these last 2, going on 3 years have made that even tougher. And so you've seen those operators to continue, the stronger operators to be really thoughtful in how they manage their way through that.

And from a labor standpoint, I feel like 12 months ago, it was we're dealing with a lot of inflation on labor, but then there were just literal shortages, which sounds like the worst of everything. Is it fair to say shortage is no longer? And how do we think about just traditional labor inflation going into '23? If we're hearing less about shortages, just what's kind of the labor outlook in general?

Sure. I think from -- yes, so if you compared from a year ago where really, most of the economy thing was trying to staff up and now sort of you see some improvement across there. So we remain well staffed across our distribution centers. As I said in our third quarter call, there's always going to be a few that we're focusing on. But all in all, we're quite well staffed, and our focus really has shifted in the last several quarters to retention. So turnover is the bigger challenge that faces our business in the broader industry, and even broader than that. And in the third quarter, we saw some good progress. We saw some -- again, we're not declaring victory, but we saw some good trends of improvement for a few months there. So that really is the bigger focus for us as we move ahead, and pleased with the level of ability of our -- to attract associates. As far as wage inflation, as we looked back a year ago where we had higher levels of inflation, and we had done a lot of work in making sure we were benchmarked right from a wage perspective, so we had some higher levels. What we're seeing this year, we think we got it right. We're seeing, broadly speaking, there's always going to be, again, some markets here and there. You have to make different adjustments. But broadly speaking, we're seeing levels of wage inflation return closer to historical levels. And I think that is encouraging as we look ahead to 2023.

So you mentioned the turnover being the area of greater focus on retention now. Is there a metric that you look at for your average person pulling product off the shelf or driver? Or is there like a 100% turnover, a 50% level? Like where have you been historically or where you are today to kind of gauge that?

So we have -- yes, we do look at it. So we look at turnover by those work groups. We look at it by the different cohorts. So typically, we'll look at it what's the turnover in 0 to 90 days, 90 days to 1 year and a year plus. And because what we find is, so in the warehouse, which is the much higher level of turnover, the first 90 days is the bigger turnover time frame. If you get people engage for the 90 days, they tend to have a much higher percentage of staying. And a lot of times in the first 90 days, it's just -- it's a tough job. It's a tough job. And so we want to make sure that we're investing in training, engaging with leaders with those associates so they can be successful in those jobs. And as we look for that, that's again, we're seeing improvement as we go there. So that turnover has been sort of not at 100%, but it's been closer to and it's well over that sort of closer to double in the last 1.5 years or so. So what we've seen, we haven't given a specific number, and so when we think of that higher level, we've seen improvement in the last couple of quarters -- or last quarter, but we're still well above where we were historically, but we're encouraged by the trend. Drivers on the other hand are a much lower level of turnover to begin with historically. And with the improvement we've been seeing, we're much closer to historical levels of turnover there. So again, on both of them, we're encouraged. Not declaring victory, but we're going to continue to do the things we're doing as we think that they're making a difference.

But that's amazing from pulling product off shelves. So it was approaching 100% in a normal year, and then it's been more than close to double that and now you're just working to try and get back down to 100%, which already seems like a crazy level of turnover. But your ability to constantly be hiring and training and recruiting and whatnot, just seems like an endless task for somebody, especially in the first 90 days.

It is. But at the same time, this is another area where our HR and supply chain teams have demonstrated tremendous, in my opinion, agility. They've continued to -- because it's almost unprecedented. Again, when you think of that, the level of adapting they've done as far as how many people they start in starting classes, the way in which we train and onboard and hire. They've continued to -- when we find things that work, continue to do it. If we need to adjust and adapt, they've done that. And as a result of that, we think that we found some good successes. I think the other thing is we're not afraid to try some new things. I use the example that Andrew talked about on our third quarter call of testing a 7-day delivery week, which included within there, and we're piloting that in a location. And that is allowing for us to give associates options of 3-day, 4-day and 5-day work weeks. And so those are things that really can be a win from an associate perspective because it allows them to have flexibility and schedules that work for their lives. And at the same time, for us, hopefully, we expect the early results are we're seeing meaningful improvement in retention. So that's something that's early on, but the early read is relatively positive.

I want to stop and see if there was any questions from the audience in the last couple of minutes that we have. All quiet in the audience. I had one final question for you in terms of balance sheet. I think you said you target, the way you look at leverage, 2.5 to 3 turns, right? You said you're currently closer to 3.7 or closer to 4. But looking ahead, is that the top priority to reduce that leverage ratio? You think it's driven more by EBITDA growth or net debt reduction? Just wondering how you think about your leverage levels, especially with rising interest rates, how you think about maybe fixed versus floating, any outlook there?

Sure. So yes, to your point, we reduced our leverage down to 3.7x at the end of the third quarter, which is over a turn improvement from a year ago. We expect to finish the year at about 3.5x. And we see line of sight to achieve being our target range of 2.5 to 3x next year. That's very important to us. And as we think about our capital allocation, so we expect that reduction to come both in the form of improved EBITDA, or increased EBITDA as well as reducing debt. And I would expect most, if not all, that debt reduction to be in the form of reducing variable rate debt, which, again, helps with that fixed versus variable ratio. I think the 2.5x to 3x, we think, is a good level with good strength, and excited about the opportunity to get there next year.

And the fact that you initiated a share repurchase authorization, it seems like a very encouraging message that there is a line of sight into returning cash to shareholders once you get down to that level. So I think that investors took that quite favorably that announcement this past quarter?

Yes. Thank you. I think that -- so when we think about the capital structure, we think about it in the integrated way you would expect us to, and how do we reduce leverage again in this -- with our shares being what we feel pretty undervalued, being opportunistic in return. But the thing that we're really balancing is making sure we continue to invest in the business for growth, that we do delever and then we return shareholder value via repurchases in this example. So we're excited to move ahead with this next step in our capital allocation journey.

No, that's -- well, I guess we could end with where we started, which is congratulations on the new hire. And wanted to thank Dirk and Adam for joining us from US Foods. They're with us throughout the day. But thank you very much for joining us this morning.

Thank you. It's been a pleasure.

Thank you, everyone.

Thanks.