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

Thank you. We're going to kick off with US Foods. Very happy to have them in person this year. We actually were restricted at this time last year, which we'll probably get into the reasons why in just a few minutes. We have Dirk Locascio, who's the company's Chief Financial Officer and someone that I've worked with since the company's IPO some years ago.

So I want to ask Dirk as CFO and previously active in the finance function before that over the past 14 years or so. Does it talk about the US Foods of 2023, maybe the US Foods of 2019, just in terms of like how -- it's really -- it's a personal question, but also one I think that has professional applications, how you see the company kind of evolving, changing maybe some softer comments around just kind of energy attitude, excitement, worry, whatever the case may be in terms of the evolution that you've seen as actually quite tenured executive at this point.

Well, first of all, thanks, John, for having us here, and it's good to be back. And as you said, back in person. So it's good to do these things back here. So yes, as I reflect back on the last number of years, it really has been quite the set of experiences. And when I think back from even where we were before going public to the 2019, or early 2020 to now, a lot of change, a number of challenges. I think we've definitely come out the other side a stronger company than we were prior. A few things -- just one, when I think back even to right before the COVID timeframe in 2019 when I think from sort of a capabilities perspective. Ultimately, we have continued to advance our capabilities, some of that, that was on our road map, some of that, that COVID forced us to make sure we were agile and the teams were working together more effectively. Couple of specific things. And I think this really helped us to manage our way pretty effectively through what was a challenging few years, and we look forward to -- had a good solid year in 2022, and really look forward to building on in 2023 and beyond. And a couple of things that I would really point out. One is just the teams working together. So we've never really had a siloed approach in the organization, but the level of collaboration when I reflect on these last 3 years is even very different than it was before. A couple of examples and that I've used before, but one of them is as we were heading into COVID, and volume dropped off so quickly. And our sales and our collections or credit team had to work extremely closely together. When you think of north of $1 billion in receivables and not sure what was going to happen with customers. Our teams worked incredibly well together. I'm extremely proud of those teams and our losses were very, very insignificant. But not only was it the financial outcome, that sort of some process redesign and the collaboration between those teams helped us to get through there. But even today, our -- all of our receivable metrics remain stronger than they were pre-COVID. And that is because those teams are working closer than they ever had before. I'd say the second key one is our commercial, our sales teams and our operations teams. As we've acknowledged historically, our operations team didn't have as strong of a seat at the table as it probably should have, much more sales driven. And that was really a combination of in sort of 2020, '21, that we knew that needed to change. And then secondarily, COVID also helped necessitate that change and affect that change with the teams working together well. And so the company has much more of a focus on a balance of sales and operations. And I think as we brought in some good new talent the last 3 years, we're well positioned. And I think nothing illustrates that better than the routing initiative we've talked a lot about where when you're going to change customers, deliveries and routes, et cetera, the supply chain team can't be effective without having the sales team working side by side. And so that level of collaboration and partnership is very different. And I believe that is going to continue to be a bigger and bigger unlock as we look ahead.

You actually saw -- and this is not forward-looking, not even -- I'm not even alluding to that, but you actually saw an acceleration in your local case growth in the fourth quarter of '22 relative to the third quarter and relative to the second and first. And that was not at least in the restaurant industry that I covered. That wasn't typical. So that was a trend against the industry in a very positive way. So yes, did some of those changes that you were discussing kind of allowed that acceleration? Well, firstly, correct me, if you view the numbers differently, please correct me on stage. But talk about that acceleration that we saw in the local case volumes '22 versus '19. And what initiatives that you did that drove that and whether there is legs in that, if you will, about performance as we go into '23?

Sure. You're exactly right. We did see acceleration, and we're pleased with the way we exited the year and the momentum that we entered '23 with. And I think it's a few things. One is just we've had the benefit of really bringing the value proposition we bring to customer, whether it be the technology and the re-platform and really stepping up significantly the performance and enhancing our leadership in the industry using our MOXe digital platform. It's the team-based selling and some of the value proposition that comes from there. some of the other tools and resources that we offer operators to help them, whether it was at the beginning of COVID, managed through -- the PPP process and then a little over the course of last year through inflation. So I think all of that came together. And that was -- those were all enablers of as we get better and better at that, really accelerating our growth. The other key thing that you heard Dave and Andrew talk about on our last call was using the data that we get from a third party more ingrained in our business, our process. Just a few years ago, our industry really had none of that. We had one third-party number that was -- it was a big number, and there really wasn't anything actionable underneath it. And as that data has become available, our combination of my team, our commercial team has really worked with our IT team. We've made it very visible to our -- from our sales leaders to our sellers of what it tells us, where we're winning, where we're losing, where the biggest share opportunities are in different markets, and made it easy from a tool and training perspective. And that's really allowed our sellers to feel like it's not being done to them versus it's a tool to help them win.

Can I ask a little more -- is that things like Knapp Track and Black Box? I mean is it NPD data? Just like what exactly like -- it just -- that you can use today that you couldn't use 3 or 4 years ago?

Yes. It is NPD data, Technomic was the historical that we all had, which is a helpful benchmark, but that's really the benchmark. That's just -- it's been a real enabler for us. And it's not just the data, as you can imagine, anything like that, that has immense amount of data can be overwhelming. And it's really the collaboration of making it easy to use and understandable and actionable that's been the unlock.

So that's interesting. So it probably shows like your opportunities maybe in certain category grow, say, hey, listen, I mean just going to make this up, your Mexican business is flat for the Mexican categories growing 5 or whatever. So you can just know how to allocate maybe -- am I getting that right? I mean some timing resources as specific categories. But are you also using it in terms of kind of going to the Salesforce, say, okay, listen, you're doing a great job. We're going to give you more, but also managing out maybe some people that aren't participating with some category growth?

It's all of the above.

So is it helping you as well in terms of the more efficient?...

It is. It's really all of the above. And historically, because our industry didn't have that, it would be if you were growing at 5% and I was growing at 4%, we'd say, well, John, you're performing better than I am. But if you're in Austin and I'm in Detroit or Illinois of course, you better be growing faster because your market is growing a lot faster. So that's a way now to really calibrate.

It's even funny that you would say that. I mean [indiscernible] Yeah. I mean your population is growing [indiscernible] strength [indiscernible]

Yes. It's absolutely a help. And I think that then what we've done is, just to use that to understand. You're right if in your market, if -- in fact, if within your ZIP Code, if Farm Grill is your biggest case opportunity, how do we make sure that we're sorted properly, let's understand what categories we're winning or losing. So it really is quite actionable and quite granular, and we have more opportunity to continue to use it more effectively, but very good work done to date.

So that is very sales focused. But it was like, listen, I mean, I'll probably touch on this a couple of different times. [ Stokematic ], your active investor and people like US Foods needs more of a supply chain background. And for whatever reason, that was the seed that was -- that had the most turnover within US Foods, I think you just kind of admitted operations wasn't treated as the same maybe equal partners sales was pre-COVID. So that's -- so talk about, kind of the back-end operations, it's probably a lot less, kind of sexy and interesting to talk about on stage. But what are those supply chain opportunities to maybe go with what you just described, I think, is a sales customer-facing opportunity.

Sure. And I think that you're right, it's not the sexy but it's the thing as a distribution company, you need to do extremely well. Typically, when you do those operational things well and it's collaborative with the sales team, usually results in a better customer experience, which then is going to have a better impact on your sales. So maybe a couple of things very specifically. If I think about even using some of this ZIP code data -- it helps us with because we think about density that helps the supply chain. So if you already have trucks going to certain areas and you're growing there, the best thing the way to grow is if you have existing customers buy more, but the second best is when you have sort of things that can ride along the same route. So that's a great way that the teams have worked together more. I'd say the routing initiative that we've talked a lot about, same thing, another one where -- it's been -- teams working together, and it's by taking miles out of the system, customers typically get increased on-time delivery, and it's allowed us to be more effective from a sales perspective. So it's really that equal voice and that kind of push and pull back and forth. That's been very helpful. And even -- when I think of some changes that we made a couple of years ago, and I talked about around our operating model and some of the pieces around helping -- having these small teams of some experts that do 2 things. They do standardization of process and taking best practices, but then they also go in and help some of our sort of underperforming markets. And those teams, the commercial and the operations team do a lot of this together. So it's not my team and your team as opposed to together. And we think that's still a lot of runway for us, but a lot of process improvement over the last 3 years as result of that.

And what about the process improvement to go? So as, again, a supply chain -- I mean, again, we're not going to spend too much time talking about Dave, your new CEO, but obviously, he has a supply chain background. How can we expect to see the supply chain change over the next couple of years? I mean, what are the -- what are the near and supply chain opportunities that you're working on? I mean we understand route density, route management, but what else might there be that could be significant?

So I think step one was really what I talked about of acknowledging that supply chain needed that strong focus, and we're well I think beyond that, and we're continuing to build upon it. I think you're right, Dave's strong operational background, I think, will be extremely beneficial for our company. So he knows our industry, but he also knows other distribution businesses. I mean that's basically the business he's been in for the last 30-plus years. And I think that will be very positive for us. I think the other thing that goes with that is a lot of operations, as you noted, really is not all that sexy. So it's a lot of doing the basic block and tackling, doing it extremely well, doing it in a standardized way. And those are the things that we've had mixed progress on historically. And I think that's -- some of those things are the things we'll continue to do. While at the same time, doing some things like that I've talked about that we've invested in leadership training and engagement that really helps with employee retention. We've offered employees some flexible scheduling in one test market, that's now moving to 2 other markets. And those are each things that in this world of when employees have other options, really to make sure that we're doing right by our associates. And then when we do right by our associates, what we've seen in the test is that it's improved retention, which improves productivity. It also improves safety and just the qualitative feedback that's gone with that has been positive. So it's a combination of blocking and tackling. It's the things that are different than what our industry has tried, and I think we're going to do those and do them much more effectively than we've done in the past.

Okay. Interesting. So the question that I asked on the acceleration case volume in the fourth quarter. So one of the team-based selling, this is a company that, at least in my short tenure with it is kind of built on team-based selling. So that wasn't particularly new. And from what I understand like MOXe is more or less brand new in terms of what the customer are actually having it on their app platform and using it. So is there something else that kind of is happening behind the scenes? I mean, MOXe, for example, which we again -- correct me here, but is a much better customer-facing digital ordering tool, but I think is also for the sales force. So talk about like that program, in particular, of driving attach, driving orders and suggestive selling, how much of that is kind of personalized in the change of MOXe versus your old system in terms of how much of an improvement. I mean, are we talking about a 0.1 upgrade or like say something much more significant in terms of what actually gets in the customers' hands.

So we view it as a very significant upgrade. It was being the leader in the industry. It was one where we had continued to invest, but we knew that we needed to make a step change, and we did that and launched it back in the fall for our local customers are continuing to convert. Some work we continue to build on for our national customers that will be rolling out over the course of this year. But from a customer perspective, what we did is we got a lot of customer input upfront and through the design and through the testing process. And it does a few things. I mean, one, statistically, it's a lot faster. I think it's 30% or 40% faster. There's more data that's available, whether it's product data, ingredient data. Customers can do a few more things that are more easily to get to, whether it's inventory, invoices, and again, fewer clicks, fewer -- less sort of challenges within the system. So we think that's a big unlock. Also, the seller can do more within there and within the tools related to it. So it's a combination of both, but the customer really was at the center of that. And our goal is to continue to make it easier for customers to interact with us in the way they want to interact. And so therefore, sellers remain a critical part of that relationship. We have and we'll continue to add sellers, especially in those markets with outsized growth. But that overall team-based selling and the digital have to all go together because in many cases, that's how our customers want to interact with us, and we want to make sure we help them be successful.

Some years ago, you went -- I think it was from 4,000 marketing associates to 3,000, but maybe those were kind of whole numbers, and the change wasn't as significant. But where are we in terms of -- talk about where we are in terms of the selling headcount in terms of where you think that goes optimally, maybe you have an opportunity to add more to get more. And then let's segue into the distribution side of the head count. But first on the sales side.

Sure. So our head count sort of all in -- you're right, we look at it from the sellers. We also look at it from the all-in -- all the resources that go with it because our move on the seller is really not just the order taker as opposed to the value-added partner through there. So we look at it, whether it's new business managers, restaurant operations, consultants, specialists, et cetera. The last couple of years, and in '23, we expect to continue to add head count. And it's really continue to add -- as I've said a number of times before, we will not let head count get in the way of our growth. When it comes to sellers, especially those markets where we have outsized growth opportunity we have and we'll continue to add. And it's really about making sure that we're doing it in a way that sort of helps enable that growth versus just adding in. So I think that's the key to that.

Okay. And the important thing is add -- adding head count. So you still -- I mean that's obviously still a value-added -- that's still value-added system for you guys. So the efficiency is going to be adding more sales to get more volume as opposed to being more productive per salesperson.

Right both are a focus. But we will continue to add. We -- like I said, we truly value our sellers and our sellers and the related resources with them are a key part of that customer relationship and the things that we'll continue to look at in addition to the customer experience. How do we make that seller's job easier? So how can they spend less time on their own blocking and tackling and instead focusing on working with the customers and growing their business?

Okay. And warehouse labor, driver labor, I mean, this was a very difficult category from the second half of '21 all the way through '22. So just kind of give us the lay of the land, and comment on turnover, talk about productivity, talk about overtime. Like where are we -- how are we thinking about '23 versus '22?

Sure was, I mean, quite a year for us in sort of our broader industry and many others as far as labor, reflect back where we started the year when we entered the year. So as you pointed out, first part of the year, heavily focused on sort of getting staff to the right level, and we've been at that level for quite a while. And then it really shifted much more to retention and productivity, which are highly correlated. And when we -- sort of our turnover levels, sort of drivers, historically have had a lower turnover level. They did increase during COVID or post COVID, but not a whole lot. And we've seen that really get back much closer to where it was pre COVID. The increase that we saw, which was mostly in the warehouse. So warehouse was a higher turnover to begin with. We saw it roughly double, and we've closed about half of that gap. We saw in Q3 and Q4, we saw continued improvement there and are pleased with that. We expect to continue to build upon that. We think the things that we've done around the leadership engagement, some of the initiatives as we continue to deploy flexible scheduling. All of those things, we expect to continue to help. At the same time, we're not taking our associates. We're not taking their retention for granted, and we're continuing to work on a better environment. But, when you have a more stable workforce, even the productivity initiatives we do around making our associates' jobs easier, can be more sticky and more effective, and that's what we're going to continue to focus on.

Okay. US Foods is different than at least some of your major peers of you have one -- you have one type of warehouse, you typically deliver from one type of truck. So whether a chain restaurant, independent restaurant, it goes from the same type of facility, at least what from externally, looks to be the same type -- type of truck. That's a unique part of your business. And also the size of your cash and carry business is kind of something that's different. So as we -- you guys have I think kind of being a clean slate to kind of think about like what would this business be today if we were to redesign it today. Talk about maybe some interesting opportunities in terms of maybe rethinking the design of US Foods today versus how it was 10 years ago, for example. Is there an opportunity?

Sure. I think the thing that we learned years ago is sort of having separated warehouses or whether they're more concentrated in certain customer types can make sense in some circumstances, but not necessarily, widely. So we do have several distribution centers that are more concentrated on chains...

Okay. Is that exclusive too, or ...

Largely. They are very concentrated, but it's not a key focus. We do have some of those. I think the important thing that we've really focused on, going all the way back to the last 8 or 10 years is what's the right customer mix, where are the right locations, what's the right service for those customers? And then what are the right economics that we earn on those customers? And so all the way back, -- it is independents, health care and hospitality are going to continue to be our focus, and we're going to be thoughtful and opportunistic on the right chain business. So we've done a lot of works, some chain business is very good. And so this is by no means we're not going to disturb chain business. It's about the right partners and at the right economics. And I think we've done a lot of work over these last 3 years in chains. And we've talked about a small number of exits, but the lion's share, it's really been more about getting economics and service in line with the evolving environment that we've been operating in. So we think that works well. The sort of -- continue to look at customers that what I always refer to as hygiene, we would expect to continue. I think that's just a very good practice that any business should be doing. And then on the cash & carry, you're right, that's exciting when we think about omnichannel. So we have our -- we obviously have our broad line, which is through the seller and/or the digital -- we have -- in the broad line, you can get large trucks. We have small trucks that we call Pronto that serve mostly urban areas, that is in about 30 of our markets. That works quite well for us. We have our direct ship business where it's sort of more specialty type of things that are coming through our digital platform, but become straight for manufacturers. And all those then work together and then CHEF'STORE cash & carry is the last big piece. And that is one where we're approaching 100 stores this year. More concentrated in the West and Northwest. We continue to grow that business. We added 6 last year, and we expect to add at least 8 this year. We think that continues to be an opportunity for us. I think you heard Dave said he hasn't really spent a whole lot of time on that part of the business yet, which is understandable in 6 or 8 weeks into the business. But that is one that we are continuing to focus on really building the machine that is ready to open more stores. This was a business that really wasn't opening many stores prior to us buying them. And so working it from the 4 to the 6 and then 8 this year, and then focusing on accelerating the ramp to profitability are all key things. So we think when you put all that together, we think we offer the right services for the stores versus what we don't try to do is do everything for everyone because we find sometimes that can get to be a bit messy.

Absolutely. So if I already go back to '19, health care and hospitality together were about 1/3 of your business, which I think both of them were somewhere around half and half. So basically 6, and the 6 of that 1/3. Healthcare was still down 4% in the fourth quarter of '22 versus '19, hospitality down around 11%. So do you -- I mean, as you kind of see the current environment, do you expect by the end of '23, that to at least be back to par? I mean, hospitality, one, we think is use a growing business. Healthcare -- health care needs are going up, not down, it should be a growing business over time. Just talk about the spend a minute on those 2 subsegments.

Sure. We do think both recover. And I think the positive part is it's hard to know exactly when they get back to par to 2019. But for, I think it's 6 quarters in a row, they've each shown continued improvement in trajectory, and that's a big positive. In healthcare, to your point, all the aging demographics indicate that, that should fully recover. The hospital system or [ acute ] is largely was there by the end of the year. Senior living is the one that's trailing more, and that's a combination of some staffing in those facilities as well as bed occupancy is still below where it was pre-COVID. And I think as we get COVID further behind us, that's one where, again, back to the aging demographic we think we'll continue to grow that part of the business. So we feel good there. And then we, of course, have our net new business that we're continuing to bring on. On hospitality, I think the -- that is one where it started from such a low base, and we've seen very significant continued growth there. And really a key unlock there was in the last, call it, 4 or 6 months of last year, you started to see more things like this, large group events, whether it be conventions, weddings, trade shows, et cetera, begin to return. And we're in hospitality, we're more indexed to full-service lodging. And so places sort of that have a lot of options there are ones that as those things return we expect to continue to improve in our business. And I think those didn't really get, like I said, come back until later in the year. I think the only part that's more of a question mark in hospitality is does kind of core business travel fully recover, but that's a relatively small piece. So we think that through the combination of the recovery in our net new business, that we'll continue to grow. But I think the -- that's a good tailwind that we have coming into this year. We still have recovery coming. And no matter what environment is, we think there still is that good tailwind.

Did you -- were there any major accounts that were lost that we should consider? Because I know a number of like hospitality clients went into [ cheap ]. I mean it's beyond me but it went into GPOs, for example, that maybe then went out and like rebid the business. Did any of that happen to the point where you did -- where you just have a lower base to build from because you lost some business or has it been more static or offset by wins?

So there's always some wins and losses, but we've had good net win progress the last few years. So that's not a contributor to that. In fact, we've seen good share gains in both healthcare and hospitality. And we have good relationships with multiple larger GPOs across both health care and hospitality and that becomes an attractive value proposition to members because -- so it's a relatively attractive business to us. And at the same time, it helps them from a cost perspective. So we don't see any headwinds why we can't continue to improve and grow in those attractive parts of the business.

And that's, I think, group purchasing organization, right? .

Yes.

That was a was a new one for me. Okay. So the question -- the industry is kind of in an interesting place. A lot of people -- I'm not one of them kind of calling for like a real recession from the consumer. So pressure on restaurant sales volumes at the point where inflation potentially turns into deflation. Maybe by the end of the year -- and I want you to comment on this, do you see deflay -- a disinflation, yes. I know you'll say that, but do you actually believe in deflation. But that environment that I tell you, saw our consumer environment, match with deflation on a piece of paper said, gosh, it's not a good environment for a distributor. How important is that kind of theme that in terms of like what your focus is? And can you manage through that from a profitability perspective? Or is that just a bad year and what hopefully will be a series of good years to the extent of that environment comes?

So we think it's a good time to be an investor in a distribution company, especially USFD. With that said though, I think the -- if we look at the demand sort of if we did have a downturn or recession, people often times go to '08, '09 when the industry were down...

When employment was down 5%, by the way.

Right. So I think though that's where I was going to go, is if you actually look at -- we've done a lot of work in looking at 3 or 4 other inflation induced downturns. And you see it's more of 1 point or 2 of reduction in growth. And so when you think of that combined with the fact we have a tailwind still from healthcare and hospitality not being where they were, we would expect to continue to see growth. And I think that when you're talking about, again, 1 point or 2 of impact when you think of staffing and such, we run on the front lines with more overtime than that. So we feel very well positioned to work through that. And we found also is that if you look back over time, consumers spent a very consistent percentage of their income on dining out and entertainment. So we think we're well positioned there. And I think just as we look ahead, that resiliency, combined with the tailwinds are positive. I think you're right. We do -- we will likely see continued disinflation as we've seen slowing inflation. And we talked about in the fourth quarter that we saw slower inflation in sort of non-commodities, but we hadn't seen deflation, we still haven't seen deflation. It's really the commodities, especially center of the plate that -- which can be more volatile in any environment. And when you look at center of the plate, that tends to be where most of our product is marked up on a per case or fixed amount. So if you have inflation or deflation, you get a little noise in a period, but it doesn't really -- if you make $10 a case before, you're going to make $10 after. And so that's actually a positive place to see some deflation because it doesn't negatively impact the long-term earnings power of our business. And they're expensive cases, so it helps our customers and it helps the end customer there. So if we see some inflation or deflation debate on whether my crystal ball is all that accurate. But I would expect that we will not see deflation in grocery type of categories versus slowing inflation. And if we see inflation or deflation it's going to come more from if you have some of the proteins or commodities that move around a little bit. But I think that otherwise, it's going to be very stable because also a lot of the underlying inputs from manufacturers and that their own labor costs are up quite a bit. So I think that will make their price increases sticky.

So you have -- I think, is it 3 new Board members?

We have 3 that joined in the middle of the year related to the sort of state the matter. And then we had 2 that we appointed earlier in the years, with 5 new Board members in the last year or so.

That's -- and obviously, like you're engaged with them. And so there's kind of like your guide in '24 was $1.7 billion. I want to finally be correct on [indiscernible], I think, was arguing for $2 billion of EBITDA for '24. It's kind of interesting like just you can argue for anything when you're outside of the company and not to maybe understanding some of the details and complexities and what have you. But with so much new Board leadership and to some extent, I'm going to end with the question I kind of started with them, hey, new Board setting priorities, expectations, CEO, who, by the way, sounded fantastic on his first conference call 6 weeks in. Like where is their mind in terms of expectations? And -- is that $1.7 billion that you previously guided for '24, is that achievable, conservative? Is it something that you're reviewing, just kind of make if you can, just kind of the comments of hey, 5 new Board members is a lot for a company of your experience, how maybe some different perspectives and attitudes or beliefs may be influencing previously set targets?

Sure. So I think on the $1.7 billion, hopefully, what everyone took away from the call is, Dave was 6 weeks on the job. And so as he commented he was really focusing on the near end, and it was really more of a sort of continuing to develop his understanding of the business and then a perspective. And sort of as the year goes on, I would expect he'll have some additional comments in Q1, et cetera, on that. But he did comment that he believes that the pillars of the long-range plan that we have are the right pillars and then we're making good progress. I'm not going to comment on whether [indiscernible] thinks it's $2 billion or $1.7 billion. What I will tell you is -- our Board is very high functioning. And Scott, as he's joined the other members, you would not know that we had gone through because everyone is focused on winning, and they want us to succeed as a business. And I think everyone -- I think that was their -- sort of their premise going in is they wanted us to be successful. And so each of our Board members, they lean in in their different areas of expertise. They push management, as you would expect a good Board to do. But if you sat in on one of our Board meetings, you would not know that we went through. And I think what you would see is you would see a very low ego, very engaged Board that wants US Foods to continue to win and build on the strong momentum we've had this last year.

Sounds great. Thank you so much.

All right. Thank you, John. Good to see you again. .

Great to see you.

Thanks, everyone.