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

Good afternoon, John Heinbockel from Guggenheim. Very pleased to be hosting the fireside chat for US Foods today. Have with me Dave Flitman, the company is still relatively new CEO, Dirk Locascio, Chief Financial Officer; and Michael Neese and Adam Dobrowski here in the front row. And I think before we start, Dave has a couple of comments, and then we'll get right into it.

Thanks, John, for the introduction and great to be with you. And thanks to ICR for the invitation to be here today. I just hit my 1-year mark with the company last Friday, in fact, and I'm more excited about our future than the day I got here. This morning, you might have seen we issued a press release reaffirming our guidance for 2023. And we also posted a new investor presentation to our website. So I encourage you to take a look at that throughout the course of the day as you have time. We've got a differentiated model. We've got national scale. I'm excited about the focus that we have in 3 specific customer types of independent restaurants hospitality and health care. We've been executing very well, driving outpaced market share gains in each one of those. Importantly, ours is very much a self-help story. We've continued to drive our gross profit expansion. We're driving productivity aggressively, and you've seen us get that to the bottom line. I believe that's fully sustainable, and we'll continue to drive that well into the future. I also like our sales model, and I'd like to talk about our sales model and the differentiation that we have there. We couple our outside territory managers with chefs and restaurant operations consultants and product specialists as we go to market. It's important to penetrate the customers with those relationships. I think it differentiates us. And I think having that support around our TMs, along with our MOXe, our digital capability, enables RTMs to be maybe more productive than others in the industry, and we're seeing that play out as well. And then finally, I just want to be very clear, we'll give guidance around 2024 next month. And then we're excited to host our next Investor Day on June 5, and we'll lay out the next 3 years and what that means for the future of the company. You've heard me talk about being at or near $1.7 billion in 2024. We'll talk about our guidance next month, but I want to be very clear, and I said this on our third quarter earnings call, that is not the limit for this company, and that's why I'm so excited about talking about the future on June 5. So with that, John, I'll turn it over to you.

Terrific. So we have about 22 minutes. What I thought might be productive is to dive down on to 3 topics all of which are important drivers of the P&L. So first, top line related sales force initiatives. So maybe talk about the expansion. You referenced the differentiated sales force. But how do you think about expanding that group, what roles where you want to get them from? Obviously, you can get experienced people with noncompetes or less experience without noncompetes. How do you think about analytically going about growing that sales.

Right. Great question. And this is -- we talked about this on the third quarter call, but that wasn't a start to something. That was just reaffirming what we've been doing. So I believe adding sales headcount regularly is routine part of our algorithm and an important part of our growth trajectory going forward. You heard me talk about the productivity of our sales reps. I do believe we are more productive than average in our industry. But importantly, you get route sizes to a certain size. It's important to split off a portion of your faster-growing more experienced sellers. Have them growth build that and then see some new sales reps, give them something to start from so that they can hit the ground running and then become productive much faster. What I said on the third quarter call is we'll continue to add sales reps in the low to mid-single-digit range. Likely when the dust settles in 2023, we'll be closer to that mid-single-digit range. We're also, as you would expect, adding support around those TMs as time goes on, have to add district managers as districts get so big. So we'll continue to add the support to those sales reps to make sure they're successful going forward.

And to stay on that topic, right? So the other thing you've done is to restructure or alter, right? The org structure it for sales. Maybe talk a little bit about that in terms of the benefit that you derive from that, whether it's mentoring, whether it's speed to market, decision-making, what's that doing for the business?

Right. It's wrapped in a very fundamental core belief I have, and that's putting your sales organization that's close to the customer as possible. And that was really the essence of the change I made. There was a lot inside the company that was centralized including the reporting relationships for our local sellers. I just didn't feel like that was going to afford us the right opportunity to have those folks focused on the customer all the time. And it was really that simple. And so moving that reporting relationship back in the field, I think, drives further alignment. It sends the message inside the company that we're very, very focused on growing profitably and supporting our sales reps. It was really that simple for me. I just made all sorts of sense. And so it's gone very well since we made that change, John, and I expect it to continue to do well.

Third item as it relates to Sales force, so comp, right? So I think it's -- you got to be careful how you change somebody's comp -- but on the other hand, it gives you an opportunity to incentivize behavior right? So your thought process on what you want to do with comp directionally.

Right? And I said pretty thoughtfully and clearly that this is more an evolution than a revolution. I think the basic structure of our sales compensation process is the right one. In fact, there weren't really any key elements. But again, I always want to make sure they're aligned around driving profitable growth in the right areas. There's a fixed and a variable component shifting more of that to variable pay, I think in sense that hunger for growth inside the organization and making sure you're incenting things like our exclusive brands, as we've always done properly. Importantly, the other portion of change is we're being very thoughtful going into 2024, around tying the specifics of our business plan, our growth plan at the company level down to specific targets through the districts at the TM level and making sure that all that adds up, and there's enough support to achieve the outcome we intend for the company.

And I think we may have addressed this back on the third quarter call, but again, when you think about that leverage on the local -- the sales force on local cases, right? So I think the -- historically, right, I think the way it's worked out is you should be able to grow your local cases maybe 1.5x the growth in the sales force. So your thought on that? Or can it be better given -- I don't know if you've under invested in certain geographies -- but you think about the leverage factor on.

Yes, I think you're right. I think that 30% to 50% leverage is probably the right number. It depends on the experience level of the sales rep to your point, whether they come with industry experience or not -- we're having a good success of hiring reps that do have either direct food service distribution experience or they come from a manufacturer, so they understand the industry, and they've been in sales. That's the kind of talent that we're looking for versus someone who has come from outside the industry with no sales experience. We've had good success. I told the story a lot. I get the opportunity to talk to our incoming sales reps every month. We're hiring 30 to 40 on a routine basis. Increasingly, we've been getting competitive reps in that mix, but importantly, more and more that have industry experience. And so that gives me a lot of confidence that, that growth will continue.

So transitioning to another part of the P&L, which might be almost equally important, right? So COGS was a really big part of the path to [ $1.7 ] billion right? It's a big bucket, but I want to focus most on procurement. I know there are other pieces of that. But -- so maybe the idea is to be 60% of the way through categories by the end of this year. When does the other 40% get addressed? And then I would think, right, that there are likely to be multiple waves. So you get through the 100%, then you go back and attack the first 60 again. So thought on that? And where are we in that journey?

I think you're thinking about it exactly right. So the 30% -- or the 40% that's remaining, some portion of that is very, very small suppliers and what we call the tail supplier base and we're being thoughtful about how we address that portion that maybe historically might not have been addressed as aggressively as it could have been. So I do expect some effort to drive some outcomes there. And then to your point, every 3 or 4 years, there's another wave of this. So this work, I think about this is continuous improvement, much like I think about safety. The journey is never over with this work. We've got great relationships with our suppliers. And I just want to be clear. This is driving win-win outcomes. Being thoughtful about, yes, sure, there's a pricing element to it but being thoughtful about where we can drive outpaced growth, and that's why our growth is so important to our suppliers. And we get a lot of positive feedback to be able to continue to take profitable market share because they're looking for that next element of growth, and we're providing market access they can't get for themselves. Right? So it's a self-fulfilling prophecy here, having that strong relationship and continue to drive that growth algorithm together.

So when you look at -- maybe give us a sense of the process, right, when you're looking at SKUs, category SKUs and vendors. What's the -- what sort of analytics are you going through, right, to think of -- I mean, you can certainly go by volume, but some items are important to important customers. So they maybe get special treatment -- but what's...

There's always going to be some element of that. But I think in general, the SKUs that we bring in and we give our sales folks a lot of latitude that there's a need for the customer. But then there's a process behind it. Those SKUs have to be productive. You've got to have a certain threshold of case movement. We look at it on a weekly basis. And if the cases aren't moving to the extent they were supposed to, we start asking questions about that, and are we going to get there? And if not, you have to make a different decision. And so we're constantly looking at making sure that we have the right mix to support our customers, balanced with the productivity that we need in our distribution centers to make sure that we're not tying up a lot of capacity with [indiscernible].

Well, so you're going to bring in how many on average or how many new SKUs a year? And is it -- is the idea to run

Thousands.

Is the idea to run flat right? Thousand and thousand out or?

I think the company has done a good job of trying to clean that up. And so the process has been, if you bring in a new one, you need to take a couple out. That's kind of the way we've looked at it to try to clean it up. Whether that will be the future look or not, but we've had some cleanup work that we've done in the organization. So that's where we've been for the last couple of years.

And how do you think about regionalization, right, of distribution? Right, slow move, fast move. So now you're consolidating SKUs in certain regional warehouses. Is that -- is that feasible? Or is that...

It's more a local play in the distribution centers. And so we give -- as I said earlier, we give our sales folks in the organization of a lot of autonomy. We're not going to dictate. If you need a product for a customer, you need it and you've got the latitude to bring that in. But we do expect you to go sell that product then and make it a productive SKU. So there is a -- the way I'd like to describe it is there's a standardized business process and [indiscernible] that looks across, but we're not going to dictate those outcomes.

What's your -- I don't know if I've asked you this, your take on Scoop and the importance of Scoop and any way in which you would change it from how it was originally designed.

I think we're 12 -- 11 or 12 years in the Scoop at that point. I think it's been successful. The majority of those products we watch are still being sold. So I think that speaks for itself. Really, it's the hallmark of our innovation process. And so that's what we use Scoop. We typically do a spring in a fall launch on Scoop and those -- there's a lot of built-up demand for that. There's a lot of buzz around what's coming in Scoop. And we're thoughtful about that. I mean we scan the globe on food trends. And so we're not just doing this in a vacuum in Chicago. We engage our customers all over the United States in terms of what problems they need to solve. How can we help them be more productive in the kitchen? How can we help them with the menu productivity, in addition to having great products. So I like Scoop. I like the process of it. I like that is our innovation machine.

So now I think we'll transition to the SG&A side of the business. And the two things that matter there. I mean, there's a lot of different items, including products not for resale, but labor productivity. So let's think about inside the warehouse, a, what do you look at as the KPIs, was it just sales per labor hour or other things are important as well. And then where are we versus '19.

Specifically to the warehouse we haven't gotten back to 2019 levels. We have been pretty forthright with that. The warehouse has been more challenging to delivery, where we said we have gotten back to those levels of turnover and productivity for our drivers. We are not quite there with the warehouse. Look these are very difficult jobs. Demanding hours. And so that's why things like automation as we think about and we announced a replacement for our Bensenville operation in Chicago, that's going to be in Aurora and start-up in 2025. That will be a semi-automated facility and we're thinking about exactly this issue. It is not about wages and benefits exclusively for those jobs. That's not what you need to attract. It is more about work life balance and that's why flex scheduling and that work is so important. We are having a great success. That's also what can we do to make that work a bit easier for the selectors because these are very difficult jobs. So I think that will all play into it, but looking at productivity through cases per man hour, it is kind of how we think about it. And being thoughtful and creative about how we get after that work life balance issue I think is going to pay great dividends going forward.