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

All right. Let's kick things off. So good afternoon, everyone. I'm Mark Carden, I'm North American food retail and food distribution analyst from UBS. Thank you, everyone, for joining us this afternoon. Thanks to ICR for putting together another great event. Super excited right now. I've got with me today the team from US Foods. For anyone new to the story, leading food distributor, partners with roughly 250,000 restaurants and food service operators across the country. We have Dave Flitman, the company's CEO; Dirk Locascio, the company's CFO, with us today. And with that, thanks, Dave and Dirk, and just having some questions.

Appreciate it.

Thanks for having us.

So maybe to start, we'll just start with the consumer. Obviously, we faced an extended period of demand softness in the food away-from-home space overall. How are you guys just thinking broadly about the health of the consumer today?

Well, I think to your point, I mean, the consumer has been under pressure for 2.5, 3 years now coming out of COVID. I don't really think anything has changed in that regard recently. We were encouraged coming out of Q3, as we talked about on our earnings call about momentum in the early part of the fourth quarter. It got a little choppy between the government shutdown and some weather in December. But I think for us, fundamentally, nothing has changed. I think we've got a stable consumer backdrop. We'd love to see it stronger, but it's stable. And ours is very much a self-help story as it has been for a very long time. So our ability to continue to take market share in our 3 focused customer types, along with the work we've got going on in gross profit and operating expense productivity is really what's carrying the day for us. We've been at this for a very long time, and we've got a long runway of doing more of the same.

That's great. And then as we think about 2026 and the year ahead, there's some tailwinds that are potentially on the horizon. You've got potential for higher tax refunds. You've got the potential for some stimulus. What have you guys seen typically with your business demand in situations like these in the past?

Well, I'm hopeful that both of those that you pointed to, could be nice tailwinds for 2026. But importantly for us, I think the key is interest rates. As you think about the consumer and the pressure that they've had over the past few years, anything from mortgage rates to buying a car, the leases and all that is really tied up in the interest rate piece. And so I think as we start to see that continue to come down, I was encouraged last week to see that get below 6% the first time in 3 years. So if that's a bellwether of things to come, I think that will only strengthen consumer sentiment. The tax piece, any stimulus will certainly help. Looking -- I'm encouraged and I think '26 will be a stronger consumer backdrop than we've seen for the past few years.

Got you. And then just from a general spend standpoint, we've also got a situation, of course, where household savings tend to be a bit lower than what we've seen historically. To the extent that we do see consumers get incremental dollars into their pockets, do you think that it could be any different this time around, just given the different consumer set up in that sense? Or do consumers would you expect them to continue to spend?

Well, I think for us in our space, particularly the restaurant space, very resilient. Again, I'd point to the great recession for us specifically. That's about as bad as it will get separate from a big cataclysmic event like COVID. We saw a mid-single-digit decline in cases. And I think the food traffic in the industry, albeit pressured over the last couple of years is still held up relatively well, certainly better than other parts of the consumer sentiment industries and other places. So very resilient industry. I think it will rebound very quickly once the consumer sentiment starts to rebound.

Makes sense. And then, I guess, to that resiliency, I think 1 dynamic that's been pretty interesting is that we've seen independent restaurants, have continued to outperform chain restaurants. And this has come in a setup where -- I mean, independents in a lot of cases, they're going to have higher cost structures. Presumably, they want to some of the managers at large chains have on cost. I mean, would you expect for independents to continue to outperform in 2026? How do you think about that general setup?

We would. And really that's not just a more recent trend. That trend has been a long-term trend where independents have been taking share from chains and even QSR. I think the difference around independence is they have a very loyal local customer base. And they come in for a dining experience, tougher to get that on a consistent basis with change. Now there's changes that do a great job, but we really believe that the decade-plus trend that we've seen of independents gaining share from other segments, the restaurant space will continue in '26 and beyond.

Makes sense. In terms of pivoting a little bit over to your overall algorithm, your initial 3-year algorithm built in 5% to 8% annualized independent case growth, contingent on the industry, return to 2% traffic growth industry traffic growth. I mean, obviously, it hasn't materialized outside of your control. You guys have still been able to hold firm on the 10% EBITDA, 20% EPS CAGRs, what's allowed you guys to really sustain such strong profit growth even with some of the industry-related top line pressures.

More effective execution. It really boils down to that. It's not -- it's more complicated, I guess, to do, but that straightforward. And it's really what we've talked a lot about the last few years of control the controllables and keeping the teams focused on what the things are that we can influence. We can't influence the macro, but we can influence whether we gain share, we can influence how we drive gross profit initiatives. We can influence how we drive productivity. And that is a big change over the last few years, just the effectiveness in which we've done that. And that the thing that I continue to -- and we continue to be very excited about and really like is the balance in which we're doing it from -- we know top line growth is important. So gaining share in those 3 core customer types of independents, health care and hospitality. Along with continuing to drive increased gross profits and drive productivity to offset a good portion of our cost changes. And you see that balance really show up in our P&L when you see against some of the top line growth. You see gross profit has been a big driver of our improvement. Our costs are going up, but we are offsetting a good portion of that with productivity. And so you see, though, we are investing in the business that shows up still in higher cost. It shows up in our record levels of CapEx. So we think that we've got a long time of that to come, not only for this long-range plan, but well beyond.

Dirk made a lot of good points there. Just let me reiterate. We are the only 1 of the large food service distributors that are focused on the 3 fastest growing and most profitable segments in the space, that being independent restaurants, health care and hospitality. In each 1 of those cases, we've got significant differentiation, be it our people on expertise, the technology, the way we go to market and our message is, I'd love to have a stronger economic backdrop, but our ability to continue to take share in those segments is completely within our control, and that's where you see our team executing.

And it seems like you have been able to do this without really cutting into any muscle, so to speak.

No. And we get this question a lot. We're driving productivity and efficiency at 3% to 5% because it's the right thing to do. And our focus is on offsetting inflation. We are still investing heavily in the business, both in terms of capital expense, and we've never invested more in fact. And our operating expenses continue, while we're driving productivity, they continue to escalate. So we will continue to invest in the business aggressively to support our growth.

That's great. Turning on to M&A. Obviously, you guys explored a merger with performance. And as we know, those talks didn't really progress beyond initial diligence. Can you walk through maybe just what attracted you to performance initially and just your decision to end negotiations mutually.

Yes. I've probably limited a little bit, Mark, in terms of what I can say at this point. But I would say initially, you don't get a chance to take a look at a large transformative acquisition that would actually transform both companies and also the industry very often. So our executive management team and the Board felt it was worthwhile looking at. And we did a lot of work before we engaged with PFG just on our own and had a point of view. And for us, it really came down to 3 key points. 1 is synergies, 2 is the regulatory environment and 3 is return for our shareholders. And while we had a point of view on all that until we actually engage and exchange information through the clean team, you really didn't know what the data would tell you. And as a result of that analysis, we decided that it didn't make sense. I will tell you that the synergies were strong, and we felt would be solid. There's really those other 2 pieces that didn't make sense. And so we backed off quickly. Did not want it to be a distraction for ourselves or for our shareholders than it wasn't.

Great. Then just in terms of M&A, you guys still have been pretty active in it. You guys have targeted a lot of, call it, smaller companies that fit quite well with your existing strategy, as looking at performance though, has that changed at all how you might think about -- there's a lot of players that are larger independents that might be in, call that 2% to 10% range. I mean, does that -- does that open up your thoughts more on some of those larger players? Are you still thinking mainly the smaller players or what makes the most sense?

Yes. I think, obviously, we're open to anything that makes sense. But our focus has been strategically on the tuck-in M&A I think there's a long runway of opportunities for us to continue to acquire small companies in certain markets to help our local market scale, take miles out of our delivery system, and that's where we will remain focused. Anything opportunistic that comes along, we'll take a look at it, if it make sense, but that's not our day-to-day focus. Yes. Our team continues to work the pipeline, continues the outreach and some of these transactions that come to fruition. We know them, we're engaged with them for a number of years, and they're at that point where they're ready to finally engage in a discussion. And -- we're going to continue to do that because there's still a number of opportunities out there that we think would be good fit within our network.

That's great. Then in terms of moving maybe to your compensation model, it's obviously been a big topic of discussion as well. You guys are moving now to 100% commission model, similar to what you operated in a previous life when you were at PFGC. Why is now the right time to go over to a 100% variable compensation model, maybe you can walk through that thought process?

Yes. I think -- well, first of all, to your point, in the background that I've got in the industry prior to this was in 100% commission system. So I actually contemplated that change the day I showed up at US Foods. And for me, it was all about timing and when to get there to your question, to your point. We had a lot of work to do over the last 3 years. I think we've got very good momentum on the top line, focused on taking share, where it makes sense for us to take share driving the productivity and efficiency and just strengthening the core of the company. And now it makes sense. The other thing we've been working on it for quite some time. And when I said on the earnings call, back in November that we've been working on it the entire year of 2025, that's reality. So it's not something that we stepped into quickly or thoughtlessly. We spend a lot of time on this. And -- for us now, we're in the middle of some pilots. So we're organized geographically, and we've got a pilot going in each 1 of those geographies. And we're not changing any compensation in those pilots. We're just giving visibility to the old comp plan and the new comp plan and how that will look. And when we go forward to take this across the company, we'll take whatever learnings from those pilots, make any tweaks that make sense. But we'll do exactly the same thing as we take this across the company, meaning that we will not change comp for some period of time, give visibility, gives us a chance to have important individual conversations with our sellers and make sure that we're doing this thoughtfully and right. And another key point, I think, that's lost on people, we have a 50-50 commission plan today. No seller comes into the company at 50-50, they all start at 100% base, and they work their way into a 50% commission. We will do the same thing as we move to this 100%. So there won't be a date certain by which we will take every 1 to 100% commission. In fact, Mark, it may take us a few years to get the majority of our sellers to 100% commission, and that's okay. It's more important for me and for the organization that we moved thoughtfully and start this journey, than it is that we get there by a date certain. So we've got a robust change management process in place. And the important quarter also to point out is we've had no increased turnover since we started these pilots. It's been 4 months now since we announced this to the sales organization, they're excited about it and looking forward to the change and what it can mean for them personally.

Because overall, I mean, this is not a head count play, it's not a cost play, it's really about effectiveness of the go-to-market, allowing our sellers to actually have the opportunity to make a lot more money, as Dave often says, maybe we want our sellers to make as much money as they can. So this really is about taking 1 more step in aligning their incentives and our incentives to the business.

And then in terms of just this whole click-through process, it sounds like your initial move to a 50%-50% compensation structure also involved, similar phasing. Is everyone, I guess, phased over to the 50%-50% plan before you guys go over to this 100% variable plan?

Not necessarily, right? They can insert themselves into that click-down process wherever they are in the existing process. It's just a different ramp now gets to 100% versus it would be 50%, so we're not going to force this in any sort of timing, either collectively for the company or for any individual.

Got you. And so in terms of within your test markets, I mean, has turnover been any higher than expected in any basis?

We've not seen any increase in turnover at all.

That's great. And then just in terms of independent restaurants, obviously, you guys continue to do a nice job taking market share. I think it's what, 18 quarters?

18 consecutive quarters.

Market share gains. How are you guys thinking right now just about the balance between new account growth and penetration growth? I mean, obviously, in this kind of environment, there can be limits on the penetration front, but as you guys think about how you target your focus and with the new compensation model, how do you think about that balance?

Well, we work on all of them every day. The new, the lost and the penetrated. I think there's opportunities for us to continue to improve in all those areas. But the reality is the lifeblood of our growth is the new account generation and minimizing lost business. And that's why we're so excited on the third quarter to point out that we grew that net new account generation, the difference between new and lost by 4.4%. That was the highest since the second quarter of 2023. And so we focused on this, particularly because the penetration to your point, that's where the foot traffic challenge shows up. While we continue to drive that, it's been masked by the foot traffic. So we've leaned into that pretty hard and really glad and excited that the sales force is delivering as they are.

And then just in terms of another initiative you guys are pretty excited about is Pronto. Obviously, investing more into the concept in 2026. How do you guys think about the opportunity both between legacy Pronto and Pronto penetration? How the 2 can kind of back off each other.

Well, we're excited about both. We've been at Pronto legacy much longer several years. And that's, again, as a reminder, where we took Pronto to just new customers. Really proving the model and trying to aggressively grow our new customer base. Pronto penetration is only about a year old, a little more than a year now. and that's offering it to our existing customer base. And by the way, we're calling that Pronto next day now because it speaks to the service model and the attentions of later cutoff deliveries and the ability to deliver the next day overnight. We've got that in 20 markets now. And to your point, we announced that we're going to make the largest single investment in Pronto in 2026, and that's aimed at continuing to expand that to more markets. But also importantly, and another very important element of growth is when we enter a market, we may go in with 1 or 2 trucks. And as the market continues to prove out the model and it supports that growth, we'll continue to invest in trucks and drivers to do that. And so that will drive that growth in Pronto for a number of years to come. So we're very excited about it. We just took our long-term projections up to $1.5 billion revenue over the midterm from $1 billion and making that large investment kind of speaks to our excitement around Pronto. And much of this is opportunity that we otherwise really couldn't effectively reach for their big trucks in the past because either they wanted more frequent deliveries or they were in dense geographic areas that we could get to as easily. So this really allows us to serve a broader array of customers, address essentially more of the TAM and better serve our existing customers that are buying some from us rather than have them split with others now can buy more from us, the more operators that someone buys from our distributors and someone buys from it is more complicated for them.

Sure. And you guys have talked about this as an opportunity for you guys to compete in some of the specialty business that you guys might have in the past. Maybe walking through a little bit of opportunity on that front?

Yes. To Dirk's point, that's where the TAM opens up for us because those specialty suppliers, oftentimes that's focused on center of the plate or produce -- we have all those great products in our distribution centers. What was missing for us was the service model. Broadline deliveries are typically larger trucks and a couple of weeks, deliveries a week. The service model around Pronto could be as frequently as daily if they want it, smaller deliveries, fresh product. So it's really opening up that competitive opportunity for us, and we're getting really good traction, and that's why we'll continue to invest. In fact, we've been investing in our capabilities in proteins and in produce over these last several years, and they're each growing faster than the overall business. And so it really makes it even more conducive to the Pronto.

Maybe quickly in health care. I know it's obviously, I mean, a big focus for you guys. Just you guys have continuously taken margin in this category. I think that from a market share standpoint, you guys have even more consecutive quarters of growth relative to even independent restaurants. What you guys just really been most impactful in terms of helping you guys outperform in what's a pretty complex category?

Yes. So overall, on health care and independent health care and hospitality, it's different forms of differentiation to effectively serve those customers. So in health care, specifically, it's -- it's some of our expertise within the particular team, our go-to-market, but also our technology suite, vitals we have there, which in health care, our technology suite even reaches further into the customer to help them beyond just their interaction with us. Vital has things that help them with understand their own patient feeding costs, understand retail performance, nutritionals. So it really is a very robust offering. And as you know, that's a tough business to operate in. So it really helps us help them again, our own capabilities with some of our own dieticians and nutritionals on staff that help operators because that's important to them. And then lastly, I would just comment to our significant partnerships with several large group purchasing organizations across health care and hospitality that we've had in place for decades. And that really allows for effective economics for the end customer, but also allows them to still be profitable customers for us. So you put that together, it makes it a very attractive value proposition and we're taking it to market, and that's why we've been able to continue to onboard significant amounts of net new business there, and hospitality is very similar.

That's great. And I want to save you some time at the end. But 1 question I do want to ask before we get to that is just, obviously, Dirk, you've talked a lot about in the past, the self-help opportunity that you guys have at US Foods, you have some pretty big initiatives in place between strategic vendor management, indirect spend, the cart, a number of other margin opportunities as well. You guys are doing some exciting work with AI. Just how do you think about in terms of impact, which ones will be the most impactful over the course of the next couple of years? And just how they fit together?

Sure. Well, I think I'll start with the end. How they fit together is I love -- like I said earlier, that balance that we're approaching with the top line growth for share and then the combination of GP and OpEx. Strategic vendor management by itself is probably the biggest initiative that we have. But really, it's each of those that you mentioned drive significant value in our formal sustainable improvement. And then there's a number of other smaller items that go together with it. But in each of these are just the great examples of, as they reach maturity, we have other initiatives that continue to come online and on board and I look back over the last decade plus, and we've continued to improve EBITDA per case pretty much year in and year out. And that's why when we get the question of sustainability of our ability to do this for a long period of time, we're both highly confident that we'll be able to continue to improve our EBITDA margins for a long time to come. And our overall earnings because the combination of process improvement, technology and some of the technology enablements, now will probably enable step changes over time that we haven't seen historically, so we're excited, and we know there's a lot more to go, but very pleased with the execution we've seen across each of those.

That's great. Then with the time we got left, Dave, you're quite excited about this company overall, what excites you most?

Everything. We've got a lot of very good momentum. And as excited as I am about the journey we've been on for the last 3 years, I'm more excited about our future than I've ever been. We're the only pure-play foodservice distributor U.S.-focused with national scale. Our business model was simple. It's easy to communicate both inside and outside the company, what we're focused on, and we're staying true to that. We're the only 1 of the big 3 that are focused on the 3 most profitable segments and taking share which we've been doing for quite some time. And I think I get this question all the time, like what's most misunderstood about the company? We just talked about a lot of it here. The amount of self-help that we have both at the GP level and the operating expense level is not a flash in the pan. It will continue for a long time to come. And in the same context of that question, we get asked, are we starving the business in anyway? Well, first of all, we wouldn't be growing the top line and continuing to deliver the bottom line, if we were starving. We're making significant large investments, both in capital and operating expense as that continues to grow, and we will continue to invest aggressively in the business. So the results you've seen for the last 10 quarters in a soft backdrop are sustainable. We're excited about the future, and we're going to deliver.

Fantastic. With that, please join me in thanking Dave and Dirk. And appreciate you guys all coming in today.

Thanks, Mark. Appreciate.

Thanks for having us.