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

Good morning, everyone. I'm Kelly Bania, Food Retail Analyst at BMO Capital. Happy to have this opportunity to have a fireside chat here with US Foods, second largest food service distributor in the U.S. We're just going to dive right in and given the short meeting here. But thanks to ICR for hosting another great conference. And thanks for taking the time to meet with everybody. So just, obviously, to my left, CEO, Dave Flitman, and CFO, Dirk Locascio. I have a million questions as usual. But -- maybe we can start with some opening prepared remarks if that makes sense.

Just a couple of things I wanted to say for maybe those that aren't as familiar with the story, but good morning, Kelly, and thanks for doing this. Look, from a competitive standpoint, we have distinct competitive advantages in our industry. I just wanted to highlight those quickly. So all in our space, we're the only pure-play U.S.-only focused distributor. And I think that matters. Our story is a bit simpler than others, but importantly, inside the company, it allows us to focus in a really deep way on the things that are going to matter in broadline distribution. Secondly, we're the only ones that are focused on the 3 fastest growing and more profitable customer types in the space, that being independent restaurants, health care and hospitality. And importantly, we've been at those 3 targeted customer types for a very long time. and have a long track record of taking profitable market share, and we expect that will continue. Third, we have been and continue to be the industry leader in digital technology. That's an area we pride ourselves on at the heart of why we drive digital is to make it easier for our customers to do business for us, and we also believe there's incremental sales force productivity and uplift because of that digital technology. Excitingly, we -- ours is very much a self-help story. We've talked a lot about our initiatives in both gross profit, operating expenses, and we expect that work to continue into our new long-range plan. Excited about our new long-range plan. We're excited about the one we're just wrapping up here in 2024. But we laid out in June, the fastest growth algorithm in the industry, and we've got a lot of confidence in being able to hit that. And importantly, that growth algorithm is underpinned by $4 billion of cash flow that we expect to generate over the next 3 years with about half of that being deployed to share repurchases. So we've got a great model. We've been winning. We're excited about the future, and we've got good momentum going into '25.

Great. Maybe just to follow on that, Dave, it's been 2 years really since almost exactly since you've been with the company. So -- just maybe start with a reflection on the progress that you've been able to make in those 2 years, the receptivity to the changes you're making, just kind of a look back at those first 2 years.

Yes. I think we've had a great first 2 years with the organization. I mean, it was everything I hoped when I was contemplating the change 2.5 years ago coming in here. We've got an organization that's highly focused on the customer. and that's really important. It matters a lot in distribution. I just reflect back on the Long Range Plan that we're finishing up here, and we'll talk more about that in a couple of weeks when we have our earnings release. But I had the opportunity to change that and modify that when we came in. And I know there were a lot of questions about whether we could do what the company had said before I joined, we were going to do. And I was pretty thoughtful about that over the first 6 months, and I did not change it. And the reason I didn't change it, there are a couple of reasons. One is we were largely -- the organization was focused in the right areas. So I didn't see a lot of voids and things that the organization should be doing that they weren't. But importantly, I brought an element of focus and a strong bent towards execution since I've gotten here. And to your last question, I think the organization has been really receptive to all that.

Okay. Maybe to just follow on that. So the 3-year outlook you outlined a very detailed plan this summer. I guess as you think about that plan, where do you see the most upside to that? Where do you see the most risk to achieving that? And I think the particular focus maybe on the top line target of that 5% to 8% kind of top line over that 3-year period?

So we were very thoughtful obviously, before we put those targets out there. And as I said earlier, it was the fastest growth algorithm in the industry, and we've got a lot of confidence in being able to hit those targets. A couple of things I would say, importantly is, first of all, we've got really good momentum in all areas of the P&L, and we have for quite some time. That obviously informed the targets that we put out there. Secondly, to your concern around case growth. Ours is very much a self-help story, first of all. And I think the third quarter, our most recently reported quarter just underpins in the quarter that's been the lowest foot traffic in the restaurant space since the COVID recovery. We actually hit the new growth algorithm. And I think that's an important point for people maybe who aren't as confident in our ability to do that. We've done it without any macro tailwind. I think that's an important point, and I want to just emphasize that point. In terms of upside to the plan, I think we're still in the early innings, Kelly, of the self-help work that we've been working on here for the past couple of years, and I think that's going to carry the day when you think about gross profit, the things we're doing to drive private label penetration with our customers. Importantly, that saves them a bunch of money and it's -- those cases are twice as profitable for us as a manufacturer brand. The work we've been doing for a long time now around strategic vendor management. And I'd just point out that we do that very much in a partnership with our suppliers. It's not a punitive thing. And importantly, those suppliers, those manufacturers looking for growth. So our ability to continue to outpace the market growth in those 3 customer types that we're driving -- is a really important key to the success that we're having with that work. And then the last point I would make around the case growth, '24 was some noise in it, given the macro and all that low foot traffic. But importantly, if you go back to 2023, we hit that 5% to 8% in every quarter in 2023. That also informs our confidence to put those targets out there. So we feel good about the momentum, and we feel good about the targets.

That's a good point. I want to follow up on the restaurant traffic because that gets a lot of attention. Everyone sees the numbers, others are talking about it, but you have been able to hit your targets despite what is happening at restaurant traffic. So I guess question is...

And importantly, we're not doing anything crazy. We're doing that in a sustainable way for the business.

Do you think there's too much focus on that by investors? And what how could that -- how positive could that be if restaurant traffic did start to improve? Would that be kind of an upside? It seems like maybe your plan assumes a very conservative assumption for restaurant traffic -- is the point I'm trying to get at.

Yes. Obviously, I understand the focus that investors have on it. It's kind of the life-blood of the industry and the growth. But I'd point out to since 1970, all but a handful of years, food away from home has outpaced food at home. We expect. We don't see anything on the horizon that would change that trend over the long term. But just like in other areas, things ebb and flow. Obviously, I'd like to have a stronger macro, we'd benefit from that. The other point I made in the third quarter, and Dirk and I talk a lot about this, our ability to continue to take market share is extremely important. And we did that in a relatively soft macro environment in the third quarter. And if you recall, we actually accelerated our market share gains from Q2 to Q3. Okay, when the macro comes back, we're going to be in an even stronger position with our customers. So we're running our playbook. It's working, and we've got a lot of confidence in our execution.

One more kind of on this topic, and then I want to switch gears, but what do you think is the hindrance for better restaurant traffic? And you've seen some of the kind of the value players get maybe a little bit more aggressive? Do you think the restaurants need to do more of that. What other pain points are you hearing from your restaurant customers today?

Well, I think, obviously, there's been a lot of pain for the consumer I think that's the driver. But as you look at the operator, just think about pre-COVID and the cost that they've absorbed since then in terms of inflation, labor cost inflation, interest rates haven't been their friend -- in terms of lease cost and the things. So there's been a lot of cost pressure. And that's why it's so important that our playbook gets run effectively for our customers because a lot of what we do, including our private label brands, helps reduce their cost to operate. The work that we do with MOXe makes it a more efficient and seamless engagement with us. They don't spend the time dealing with that. We talk a lot about our products and the time that it saves them in the kitchen. Our private label brands oftentimes are precooked, prepackaged, and we're saving them 30 to 60 minutes per case. That matters in a high labor environment. So I think those challenges just play to our model verywell.

That makes sense. I guess question -- a couple of questions on market share. So you mentioned the focus areas that the company has been focused on for many years. You have a 10% total market share, but then you have a higher share with independents and health care and hospitality. I think those numbers outlined at the Analyst Day were 18%. So I guess the question is that we often get is just about the competitive cycles within those different segments, whether it be independents, which is usually the big focus, health care and hospitality and then other chains. So how would you rate the competition in each one of those segments? And how does your market share position kind of influence how that plays out?

I'll start and ask Dirk to give a little historical color on that. The way I couch our industry in those segments and just broadly with food-service distribution, it's a very fragmented industry. It's highly competitive just by nature. We saw that change a little bit during COVID. I think, I would couch this as a very normalized competitive environment, which is always highly, highly competitive.

That's me. Just getting excited about that.

But I don't see anything in the industry. It's highly competitive just by nature. We saw that change a little bit during COVID. I think I would couch this as a very normalized competitive environment, which is always highly competitive.

That's me. Just getting excited about that.

But I don't see anything more or less competitive than we have historically. Dirk's got a lot more time with the organization. I don't know if you want to weigh in there.

I think that's exactly right. And then the other thing with our focus in those 3 areas is so they are the -- typically the most profitable, the biggest profit pool in the industry. And the area where we think we can differentiate them. And so whether it's the technology, the service models, and that's what we've continued to double down on and serving those customers more effectively and differentiating. And so from a share perspective, that's why we over-index and why you'll expect us to continue to talk about gaining share a focus on those three types. Other customer types, such as chains, like we've said, all chains are good and are bad. We're going to continue to optimize that and serve where it makes sense. But back to the point of the differentiation that focus on those 3 customer types is what we're going to continue to double down on. And that market share gain, that's an important part of our self-help story that Dave talked about. It's about self-help on the top line, it's self-help in gross profit and self-help and productivity, all driving that fastest industry algorithm.

One of the questions I often get that I thought would be good to address was -- just with all the advantages that the three have -- scale, you are definitely kind of positioned as a lead of some of the technology front. But even private label. The question I often get is why not -- why are the Big 3 not gaining more share? What are those smaller kind of competitors? What do they do well? And what can you learn from them to kind of incorporate into kind of your strategy as well?

I think the smaller players have been around a long time. They're typically local or the best regional compete in two areas, I think, really well. One is relationship, local relationship and second is service. You've heard me say a lot that I don't think that anyone has been consistently excellent in service in this industry. We aim to turn that into a competitive weapon through time. That's why we're so excited about the momentum we have on improving our service levels. Just a quick aside on -- that. When we -- went into COVID, we started to measure service to our customers differently. We measured it a success if we're able to satisfy the customer order with substituted products. Going into '24, we changed that went back to measuring it the way the customer feels it. They want what they order on time and full every time. And when I -- when you hear me come and say that we're reaching historically high service levels in the company, it's that measurement. It's on time in full with exactly what the customer ordered. We've got a lot of work to do, but I feel really good about the momentum we've gotten over the last couple of years in that area.

So in these venues, we talk a lot about all the things we have on self-help within the P&L. And so to Dave's point, we've also got a similar series of activities going on service, quality, safety, that are really around that customer experience since research has shown us over the years that no one is really that differentiated. So improving our experience that, we provide to the customers is an important part and another set of things that we're doing to continue to improve.

Okay. And I guess the key focus for -- key KPI, I guess, is always the independent case growth, given the margin structure there. I think you've talked about a 30% to 50% leverage on the growth of the sales force and how that results in case growth. So I guess, has anything changed over time with that formula, whether it's MOXe or different tools that you're giving to your sellers? Or is that kind of a formula that we should think about going forward once that sales rep gets to maturity?