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

Good morning, and welcome to U.S. Foods Second Quarter 2026 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to Mike Neese, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to U.S. Foods Second Quarter Fiscal 2026 Earnings Call. On today's call, we have Dave Flitman, Chair of the Board and CEO; and Dirk Locascio, our CFO. We will take your questions after our prepared remarks conclude. Please limit yourself to one question and one follow-up. Our earnings release issued earlier this morning and today's presentation can be found on the Investor Relations page of our website at ir.usfoods.com. During today's call and unless otherwise stated, we're comparing our second quarter fiscal 2026 results for the same period in fiscal year 2025. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our Form 10-K. For a detailed discussion of potential factors that could cause our actual results to differ materially from those anticipated in forward-looking statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release, as well as in the presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures. Thank you. I'd like to turn the call over to Dave.

Thanks, Mike. Good morning, everyone, and thank you for joining us. Before we begin, our thoughts are with our associates, customers and communities impacted by the devastating wildfires in Spokane, Washington. While our operating facilities were thankfully not impacted, we have 3 associates who tragically lost all or a portion of their homes. The U.S. Foods family is rallying to support them, our customers, the affected communities and the brave firefighters and first responders serving on the front lines. At the same time, we remain focused on the safety of our associates while actively supporting our customers through our business continuity plans. With that, let me turn to our second quarter performance. Starting on Slide 3. We delivered a strong quarter with record adjusted EBITDA and adjusted EBITDA margin and another quarter of double-digit adjusted EPS growth. Importantly, independent restaurant case growth of 5.1% was the strongest since the fourth quarter of 2023 and marks our fifth consecutive quarter of acceleration despite persistent pressure on industry foot traffic. Additionally, health care grew 3.5% and hospitality grew 4.4%. We also gained share with our target customer types, marking our 21st consecutive quarter of share gains with independent restaurants and our 23rd consecutive quarter of share gains with health care. Within independent restaurants, our momentum is strengthening, supported by healthy new account growth and improved penetration with existing customers. This top line momentum translated into strong financial performance. We grew adjusted EBITDA 10% and adjusted diluted EPS, 21% through a combination of volume growth and 29 basis points of margin expansion to a record 5.7%. Our strong and accelerating cash flow generation provides substantial financial flexibility. And during the quarter, we invested in key growth initiatives while repurchasing more than $370 million of shares underscoring our commitment to creating long-term shareholder value. Just as important as our financial results is how we are achieving across the business. Our teams are applying a continuous improvement mindset while leveraging investments in technology, including artificial intelligence, to raise customer service levels, improve productivity and create a stronger foundation for sustainable long-term growth. These efforts are strengthening our competitive position and creating additional opportunities to deliver value. I'll provide more details on our AI capabilities a bit later. This quarter represents one of our strongest since I joined U.S. Foods 3.5 years ago. As we navigated a dynamic and volatile environment during the second quarter, our team stayed focused on controlling what we could control while acting decisively in response to what we could not. I am incredibly proud of our team for delivering these results through outstanding execution in what remains a challenging operating environment. As we look to the balance of 2026 we will remain grounded in disciplined execution and focused on the actions that will strengthen our business. We are also committed to further strengthening the competitive advantages that differentiate our business while delivering consistent volume growth double-digit earnings growth and long-term value creation for our shareholders. I thank our 30,000 associates for their unwavering commitment to delivering excellence in serving our customers and to pursuing our ambition to become the undisputed best in our industry. The strength of our team is what reinforces my confidence in our continued success. I'll now highlight the progress we made in the second quarter under each of our 4 strategic pillars. Dirk will then provide additional detail on our second quarter financial performance and full year guidance. Turning to Slide 4. Our strong culture is a competitive differentiator. We remain focused on keeping our people safe, investing in their development and building an empowered workforce that supports our long-term growth. Safety remains our top priority, and we are making meaningful progress in protecting our associates while strengthening our operations. In fact, we have improved our injury and accident rates by over 50% over the last 3.5 years. Aiding this improvement is the deployment of approximately 2,500 center ride pallet jacks across our distribution network. Our rollout is now 87% complete, and we anticipate full deployment by the end of this year. This investment is reducing exposure to 1 of our most serious workplace hazards, and reflects our ongoing commitment to providing a safer work environment for our associates, where we have converted the center ride pallet jacks, the most serious injuries associated with this type of equipment have essentially been eliminated. Our commitment to building a strong culture also extends to talent acquisition and development. During the second quarter, we launched our Valor campaign to advance our Mission 2030 goal of hiring 3,000 military veterans by the end of the decade. Through Valor, we are expanding our veteran recruiting efforts with a dedicated web page, new strategic partnerships and ongoing investments to recognize and support the more than 1,500 and growing number of veteran associates already contributing to our business. Veterans bring proven leadership, a strong work ethic, discipline and teamwork to US Foods, and we are honored to support those who have served while strengthening our workforce for the future. Our focus on people is also reflected in our recently published 2025 sustainability report, which highlights our progress across key focus areas and our commitment to building a stronger and more sustainable business. In 2025, we invested 1.2 million hours in training to build critical skills, develop leaders and equip our teams to execute at a high level. I encourage you to read the report on our website to learn more about our sustainability journey and the initiatives we have underway across the business. Moving to Slide 5 in our service pillar. We strive to deliver a best-in-class customer experience by continuously improving the consistency of our service reliability across our network. A key measure of that progress is operations quality composite or of QC, which tracks our ability to deliver accurate, error-free orders to customers. In the second quarter, Ops QC improved 13% compared to the prior year. And over the last 2 years, it has improved 37%, reflecting disciplined execution and ongoing improvement work in this important customer experience metric. Additionally, earlier this year, we began testing autonomous inventory scanning robotics in one of our warehouses and the early results have been encouraging. We believe this technology will help to further improve inventory accuracy and warehouse efficiency. Based upon the results of the pilot, we plan to expand testing to 6 additional locations by year-end. Our focus on operating discipline is improving our efficiency and strengthening our customer value proposition by helping us deliver the reliable, consistent service our customers count on and deserve every day. Now let's turn to our growth pillar on Slide 6. We are consistently accelerating profitable growth and gaining market share across our target customer types. Highlighting the durability of our model during times of macro uncertainty. I'm very pleased with the progress we've made over the last 5 quarters in accelerating our independent restaurant case volume growth. Pronto our small truck delivery service is a key enabler of that growth and remains a powerful competitive differentiator. Through Pronto, we provide customers with greater convenience and flexibility, including later cutoff times smaller order sizes and more frequent deliveries. This opens up our addressable market by enabling us to compete more effectively with local and specialty distributors. We're expanding the reach of Pronto, which is now live in 52 markets. At the same time, Pronto. Next day, which extends the service to our existing independent customers, is now live in 35 markets with plans to add an additional 8 markets this year. The overall Pronto program is growing at strong double-digit rates. After delivering $1 billion in sales in 2025 and -- we estimate Pronto will deliver approximately $1.3 billion in sales this year. Based on our recent success, we now believe Pronto can generate more than $1.7 billion in sales in 2027 and up from our prior estimate of $1.5 billion. Moving now to our sales compensation change. Our new seller compensation plan successfully went live across the company in June. An important milestone to further align our sales force incentives with our business strategy and long-term growth objectives. Early results are very encouraging, and we are already seeing positive indicators and seller engagement that are consistent with our strategy and key growth priorities. Sellers understand how to maximize their earnings, have confidence in the plan and their leaders and are moving quickly to align their actions and behaviors in ways that will accelerate long-term profitable growth. Year-over-year attrition remains flat, which we believe reflects our robust investment in seller training, sales leader preparation and clear ongoing communication and support over the last year and throughout implementation. As we have previously discussed, we've taken a very thoughtful approach to this transition and it may take 2 to 3 years for the majority of our local sales force to fully transition to 100% variable compensation. Together, Pronto and our seller compensation change underscore our confidence in our ability to accelerate profitable growth and drive further share gains with independent restaurants. Finally, our health care and hospitality businesses, which represent over 25% of total sales, continue to deliver strong performance. Backed by a strong pipeline and the success of our vitals and signature programs we see meaningful opportunities to drive growth for the remainder of 2026 and into the years ahead. Now let's move to our profit pillar on Slide 7. Our disciplined execution and self-help initiatives drove another quarter of profitable growth and margin expansion. Adjusted EBITDA grew over 10% to a record $604 million and EBITDA margin expanded by 29 basis points to a record 5.7%. The Strategic vendor management remains a key contributor to margin expansion and a clear example of our self-health initiatives delivering measurable value. During the first half of the year, we generated more than $50 million in additional cost of goods savings, and we are highly confident in our ability to deliver more than $300 million over the 3-year long-range plan ending in 2027. We are also driving measurable value from our initiatives in inventory management and indirect spend. For inventory management, we expect to generate an additional $10 million of gross profit benefit in 2026. Building on the $35 million realized last year. Importantly, this work is also improving in-stock performance, product quality and service levels for our customers. In the area of indirect spend, we completed the baseline deployment of our new indirect procurement system during the first half of this year, creating a stronger platform to capture additional savings. Year-to-date, we generated more than $20 million in incremental savings, and we expect this initiative to deliver more than $75 million of benefit this year. We remain on track for over $100 million of savings in 2027. Next, on Slide 8, I'll highlight the ways we are leveraging AI to further widen our competitive moat. AI is embedded in the way we serve our customers, enable our sales force optimize our supply chain and manage core enterprise functions. Our approach remains focused on deploying AI against the highest return opportunities and tying those initiatives to measurable business outcomes. The key area of focus is sales force productivity. Visit Assistant insights as an internally developed AI-enabled tool that provides sellers with customer-specific insights to identify priority opportunities improved sales call preparation and make those visits more productive. By streamlining the preparation work that sellers would otherwise do on their own, visit assistant allows them to spend more time engaging with customers. In the first 6 weeks, the tool delivered more than 700,000 actionable insights to our sellers across independent restaurant accounts. As the AI model continues to learn and scale, we expect these insights to become increasingly valuable, supporting stronger sales execution, deeper customer engagement and sustained growth over time. In parallel, we are piloting our AI sales assistant, known internally as Su AI assistant, which is a generative AI-powered chatbot that enables sellers to ask questions and receive real-time answers insights and recommendations directly within their daily workflow. We are also applying AI across our supply chain, AI-driven product demand forecasting, labor planning and [indiscernible] routing are helping improve service and productivity while reducing working capital. Better forecasting supports stronger in-stock performance and less last while more efficient routing enables better delivery execution and fewer miles driven. When we talk about AI, we are talking about practical capabilities embedded in our core business processes that are already improving how we operate. While we are still in the early innings, we see meaningful opportunities to deepen our differentiation, accelerate volume growth and improve our supply chain productivity. Of course, technology and stronger processes only create value when paired with talented associates who bring them to life every day. I saw that firsthand at my third annual CEO award ceremony where we celebrate associates who ignited excellence across U.S. Foods while exemplifying our cultural beliefs. One of those outstanding associates was [ Lori Miracle ] who is the Manager of inventory control in Tampa and received a CEO award. Lori and her team streamlined South Florida's inventory tracking efforts by getting to the root cause of overshipment occurrences and building a new system for tracking inventory discrepancies that enabled real-time selector coaching to stop future errors. For work optimized product recovery, reduced excess stock and improved receiving accuracy, generating $4 million in annual inventory adjustment savings in her area. Our processes have been scaled company-wide and are now used across all markets. Thank you, Lori, for your commitment to embracing our cultural beliefs of deliver excellence and stop waste to drive meaningful cost savings. With that, let me now turn the call over to Dirk to discuss our second quarter financial performance and 2026 guidance.

Thank you, Dave, and good morning, everyone. Our second quarter results demonstrate the financial benefits of disciplined execution, continued progress on our self-help initiatives and effective capital allocation. We delivered profitable volume growth expanded adjusted EBITDA margin to a record level and generated adjusted diluted EPS growth that significantly outpaced adjusted EBITDA growth. Starting on Slide 10 with our financial results. Second quarter net sales increased 4.5% to $10.5 billion from total case volume growth of 1.9% plus food cost inflation and mix impact of 2.6%. Total and independent restaurant case growth both accelerated this quarter. Independent restaurant volume grew 5.1%, while health care increased 3.5% and hospitality grew 4.4%. The Chain restaurant volume declined 1.5%, 30 basis points better than industry traffic as reported by Black Box. Turning to profitability. Second quarter adjusted EBITDA grew 10.2% to a record $604 million, driven by volume growth with our target customer types and progress on our continuous improvement efforts to increase gross profit and enhanced operational efficiency. Finally, adjusted diluted EPS increased 21% to $1.44, meaningfully outpacing adjusted EBITDA growth. we expect adjusted EPS to grow faster than adjusted EBITDA over time as it has for the past several years, supported by earnings growth and the disciplined deployment of our strong cash flow towards share repurchases. Turning to Slide 11. We again drove operating leverage with adjusted gross profit per case growing faster than adjusted operating expenses per case and resulting in strong adjusted EBITDA per case growth. Adjusted gross profit per case increased $0.41 or 5% compared to the prior year, supported by profitable volume growth and our self-help initiatives including strategic vendor management and improved inventory management. Adjusted gross profit per case was higher this quarter, primarily due to timing of strategic vendor management gains and higher customer fuel surcharges to offset the higher fuel expense we incurred. Adjusted operating expenses per case increased $0.21 or 3.7%. We continue to offset a portion of operating cost inflation through productivity improvements across the business, including warehouse productivity gains, process standardization, labor planning and disciplined expense management. Our adjusted operating expenses were also higher this quarter with roughly 1/3 of the increase versus prior year from higher fuel costs, combined with the higher sales cost related to the compensation plan transition. As a result, adjusted EBITDA per case increased $0.21 or 8.3% to $2.73. Importantly, adjusted gross profit per case grew 130 basis points faster than adjusted operating expenses per case, demonstrating our consistent ability to drive operating leverage through profitable growth, and disciplined cost management. As you can see on Slide 12, our strong cash flow generation and balance sheet provides significant flexibility and support our balanced capital allocation priorities. Year-to-date, we generated $725 million of operating cash flow from strong earnings and effective working capital management. This performance enables us to invest in the business to drive growth, return capital to shareholders through share repurchases and pursue accretive tuck-in M&A. During the second quarter, we repurchased $374 million of shares, bringing year-to-date repurchases to approximately $500 million. We ended the quarter with net leverage of 2.6x and well within our 2x to 3x target range and our leverage profile remains among the strongest in the industry. Finally, we successfully refinanced our ABL facility during the quarter. extending the maturity to 2031 and modestly increasing the size of the facility to $2.5 billion. Our debt structure is strong, and we have no long-term debt maturities until 2028. Together, our cash flow generation, disciplined capital allocation and industry-leading leverage position demonstrates the financial strength of our business and support further investment in our growth. Now turning to our guidance on Slide 13. Given our year-to-date performance and outlook for the balance of the year, we are reaffirming our fiscal year 2026 guidance. We expect net sales growth of 4% to 6%, adjusted EBITDA growth of 9% to 13% and adjusted EPS growth of 18% to 24% and driven by total case volume growth of 2.5% to 4.5%. As a reminder, our full year guidance includes the impact of a 53rd week which we expect to add approximately 1% to total case growth and adjusted EBITDA growth. While there is a range of potential outcomes depending on how macro conditions evolve, including restaurant industry traffic, inflation and fuel prices. The midpoint of our guidance represents our best estimate for 2026, and we are confident in our ability to deliver within our reaffirmed guidance range. The business is positioned for consistent double-digit adjusted EPS growth over time as we focus on achieving our long-range plan. With that, I'll now pass it back to Dave for his closing remarks.

Thanks, Dirk. Reflecting on the second quarter, I am encouraged by the strength of our performance and the momentum we are building across the business. We are gaining profitable share and strengthening our competitive position because our model is working. Supported by greater alignment throughout our sales force, growth initiatives like Pronto and continued productivity improvements, all increasingly enabled through the application of AI. Our strong cash flow and balance sheet provides significant flexibility to invest in growth, return capital to shareholders and pursue accretive tuck-in acquisitions that strengthen our local market presence. I have never been more confident in our ability to deliver our long-range plan and sustain our momentum well beyond next year. That confidence is grounded in the quality of our team and the durable competitive advantages that we continue to strengthen. As a reminder, US Foods maintains a unique position in the industry as the only pure-play U.S.-focused food service distributor with national scale. That focus allows us to go deep on broadline distribution and concentrate our resources on the 3 fastest growing and most profitable customer types in the industry, independent restaurants, health care and hospitality for our differentiated service model, digital capabilities and track record of share gains position us to win in any environment. We are also the industry leader in digital innovation with an ecosystem increasingly enhanced by AI that makes it easier for customers to do business with us, improve seller productivity and strengthens our supply chain. At the same time, we continue to advance our operational excellence initiatives and see a meaningful opportunity to gain further share, improve productivity and expand margins over the long term. We are also just beginning to unlock the benefits of AI and automation, which we believe will further enhance the customer experience, drive efficiencies across our operations and support profitable growth for years to come. Let me close with one final point highlighted on Slide 14. Since 2023, we have consistently delivered volume growth and double-digit adjusted EPS growth, creating meaningful shareholder returns through the combination of compounded earnings growth and accretive share repurchases. Importantly, our earnings growth over that period has significantly outpaced our foodservice distribution peers, industrial distributors and consumer staples companies. Yet, we do not believe our current valuation fully recognizes our track record of execution, sustained margin expansion disciplined capital allocation and a substantial runway we see for continued earnings growth and shareholder value creation. Our strategy is working. Our strong execution is delivering results, and our competitive position continues to strengthen. We are building a more differentiated, profitable and durable U.S. Foods and I am confident in our ability to create compelling long-term value for our associates, customers, suppliers and shareholders. Thank you for your continued interest in US Foods. With that, operator, please open up the line for questions.

[Operator Instructions]. Our first question is coming from Lauren Silberman with Deutsche Bank.

I'll just start on the independent case growth, real strong. I think best in over 2 years. Can you talk about the cadence you saw throughout the quarter? And given traffic has been pretty steady in the industry, it seems like you're accelerating your pace of share gains there. So what's driving that? And as the sales compensation transition happens, do you think you can help further accelerate share gains over the next few years?

Thanks for the question. I think we saw a fairly consistent case growth throughout the quarter. I feel really good, to your point, the strongest since second quarter of 2023, lots of good momentum consistent with what we've been accelerating over the past 4 or 5 quarters here. So I feel really good about that. At the heart of it is our net new account generation, which has always been the lifeblood of our growth. Our teams have really focused on that over the past couple of years, and you're seeing that continue to gain traction really confident that we're going to continue to lean in to independents and expect that volume to continue to accelerate. Importantly, the sales comp change will be a long-term growth driver. Really pleased with the start-up here. I think Randy Taylor and the team have been working on that for 1.5 years, did a really good job of leading up to the implementation here in June.

[indiscernible], that will definitely impact our growth going forward. But as I said, it's going to take a while to get everybody up to that full commission rate. Early returns are exciting. Importantly, our turnover remained flat, as I said in the prepared remarks, and we're off to the races and excited about the future.

Great. You guys originally guided in Q2 to mid-single to upper single digits, I believe, EBITDA growth you beat that with 10% despite elevated fuel. What drove the upside relative to your expectations? And Dirk, what are you embedding for fuel costs in the back half of the year?

Lauren, So there's couple of main things that drove to be. One is our fuel recovery was higher and better than we expected. So we expected, as we commented before, about a 2% headwind from fuel and ended to be in less than half of that. And it really relates to just the discipline and making sure that we are enforcing the surcharges that we have and also with fuel getting to higher levels some of the surcharges for some of our larger customers that don't kick in until higher prices did go into effect. And so our recovery rate instead of our typical 30%, 40% was more like 70% for the quarter. So pleased with the execution of the team there. And then the second piece was some of the strategic vendor management negotiations and outcomes that we expected to be completed in the second half of the year were completed sooner and so that team delivered some incremental value. Otherwise, the business performed largely as we expected. And our outlook for the year of the range and then my comments in there about the midpoint being our best estimate assumes fuel stays around where it's at currently. So we feel very good about coming out of Q2 where we are and the balance of the year and thus the strong confidence in delivering the guidance.

Your next question comes from the line of Jacob Aiken-Phillips with Melius Research.

This is Sam Barton on for Jacob. You described the early results from the new sales compensation plan is encouraging. I'm just wondering if you could double-click on that a little bit. what behaviors or results specifically changed, if there's anything results wise that you could provide for us? And how do you distinguish the early impact of the compensation plan from the independent momentum that was already building before the rollout? Thank you.

Yes, I think it's early to comment on a lot of that. But I would just say that the early behaviors that we've seen around growth, and as you'll recall, we aligned specifically this compensation plan exactly with our strategy. So things around our brands, independent restaurants, growth importantly in sending Pronto, we're starting to see some early returns and the focus that we like to see in those areas. It will take a while for that to impact our growth in a big way. But I said, we just started this a month or so ago and turnover is flat. Our teams are excited and we're starting to see good behaviors.

Your next question comes from the line of Alex Slagle with Jefferies.

I wanted to ask on Pronto, the progress on the incremental investments you're making in the business this year and clearly seeing results from the top line. Just curious where you're seeing the most success if there are certain markets or customer types that really stand out and really like how the team is managing this growth, managing the margins as they continue to accelerate the growth?

Alex, thanks for the question. Just as you recall, this is a multiyear journey around PRONTO. We did a lot of piloting work first as we were applying the new model to just looking for new customers. We spent several years doing that, and it was only a couple of years ago when we actually started to pilot the work to our existing customers. And importantly, there were two pieces of work that we went slow to go fast around as we took it to our existing independent customers. That was exactly what you asked about was will we maintain the margins and the profitability to support the incremental costs of that service. And then secondly, importantly, we just didn't want to cannibalize our existing Broadline business and just shift those volumes over to smaller, more efficient -- inefficient deliveries. And we proved that. We're thoughtful as we take it into new markets to make sure that those two key pieces are performing as intended. But what you've seen us do then over the past few quarters has start to accelerate that penetration across our existing markets with our existing customers because we are confident in the model. So as I highlighted there, we're pleased with the performance last year, we're looking at $1.2 billion this year, and we expect that model to continue to drive growth for the future.

Just to add, Alex, that -- so as you pointed out, the return on this investment is quite high and quite strong, and we see a long runway, a lot of years of growth here. and we've got a good partnership across my team, Randy's team as we deploy more trucks into markets and being very thoughtful. And like Dave said, speeding up the pace of deployment, but not lose the pragmatic approach we have to achieving such good outcomes on volume growth and margin growth overall. So there's nothing that we see that will slow our pace of investments in Pronto, and we continue to be as excited as ever on that.

Great. And a follow-up on the gross profit per case growth, which continues to be really strong ramping year-over-year and you explained the OpEx per case bump as well. And I realize going into the third quarter, we're going to be lapping a bump from food kinetics. I think that event with last year. Just curious if that's a recurring event that you expect to be able to sort of grow the gross profit per case on top of that and what the OpEx per case might look like so we should expect some sort of moderation?

Sure. So the -- the increase last year from the event in the third quarter has been spread throughout this year. So this is not an every-year event. So you've seen the gross profit gains and the happening throughout the different quarters. So you're right, you will see a slowing of increase in gross profit per case and OpEx per case in the third quarter. Our expectation is that we will still grow GP per case meaningfully in the quarter. Just expectation is not as strong as it's been. We feel very good about our ability to grow gross profit per case for the back half of the year and for a number of years to come because of the various initiatives we've talked about, two of which were mentioned today in strategic vendor management and the inventory adjustments work.

Your next question comes from the line of Edward Kelly with Wells Fargo.

I wanted to follow up. You mentioned on independent case volumes that you expect this business to continue to accelerate. Curious specifically what you saw in July? And then your compares do get harder in the back half of the year. So I just want to parse out sort of that comment about acceleration.

Yes. Great question. Appreciate it, Ed. So I would say largely July was consistent with what we saw in the second quarter, so maintained that momentum. And my point around continued expectations, not only for the back half of this year but going forward, when you combine the differentiation that we bring, the focus that we have on this segment, our continued ability to add high-quality sellers to our team and importantly, just the deep focus that we have, not only on generating new business, but also penetrating our existing customers gives me the confidence that, that momentum will continue. You overlay the sales comp change on top of that. And as I've said before, I believe that's going to be the key unlock for the future in this organization to accelerate growth. I couldn't feel better about the momentum and what the future looks like.

Great. And just a follow-up on the AI comments. I mean, foodservice seems like a business where you could really generate some large benefits over time. You've been the tech leader, I think specifically as it relates to customer-facing stuff. How much of the opportunity are you capturing so far? I think you've kind of said you're in the early innings. And then please do the math, Dave, you've captured a lot of opportunity and upside from better sortie operational execution. Is the opportunity with the implementation of AI into the sales force and the supply chain as big as that over time? Just kind of curious as to how you're thinking about sizing like the size of the price long term here?

Yes. I mean we've been working on this for quite some time in very practical applications for the business and as we talked about there in the prepared remarks. It's touch supply chain, it's touch sales. You think about Moxy and some of the things that we've talked about over the last couple of years, anything from where's my truck to improving product recommendations for customers. Did you forget something. Last quarter, I believe we talked about our rollout of menu IQ. All of these applications are AI-based and very practically oriented around our customer, making it easier to do business with us and then importantly, also our sales force productivity because to the extent the customers are helping themselves more, it gives our sellers more time to go find the next customer and importantly drive penetration. And then more recently, things like visit assistants that we talked about this morning, all AI-based helping our salespeople just be more productive. When you think about Descartes, which has AI embedded in it, and how we do our routing, the labor planning tools we've developed there, some back-office work that we've got going on. So while I believe that we're in early innings, I do believe, long term, there will potentially be some transformational opportunities as we apply this more broadly across the business. But I think for the near term, what you can expect us to do is more of the same. And all of this, I would point to helping to support our underlying performance and the strength of both our top line and bottom line growth. that you guys have come to expect from us. And then I think the other thing, and when we talk about the early innings is although I'm quite pleased with the progress that our team has made in the last few years of applying these. And in measuring the results where it's helped drive, whether it's additional case growth, improved working capital management customer service levels and productivity. We know the pace of change in the models and the capabilities for AI is rapidly advancing. And as we continue to take advantage of that, that's why we believe there's significant opportunity and that will continue to be across growth and the customer experience as well as productivity.

Your next question comes from the line of John Heinbockel with Guggenheim.

So Dave, I want to start. I know that net account growth, right, is the biggest driver. Where do we stand now on drop size? I think we may be in positive territory, you think about penetration right versus cases per line. Maybe talk about that. And this between the AI and the change in compensation, can penetration -- we've been sort of waiting for penetration for all you guys really to move. Do you think we're on the cusp of that, where that -- that can be the biggest change in local case growth?

Yes. I do, John, actually. And as I've commented in the past few quarters, our penetration, while still pressured has improved sequentially for several quarters in a row, including in the second quarter. that's continuing to show up based on all the good work that our teams are doing and some of the AI support that we've given our sellers. Importantly, lines per customer continues to improve, consistent with that penetration. I think where you see the put traffic pressure show up in penetration as those cases reline, which are still a little bit pressured and, I think, more reflective of the foot traffic challenges. But the things that we look at to say whether we're winning or losing continue to move in the right direction and they have been for several quarters, and I expect that will continue.

And maybe switching gears. The 3% to 5% productivity target. So where are we within that? I think last we heard maybe it was between 3% and 4%. Where are we in? How are -- when you think about differences between transportation, right, and the warehouse there are material differences today between those 2 buckets or no.

John, we're still in that 3% to 4% range. And depending on the year, warehouse or delivery can be a little higher or a little lower. But every year, we have activities and technology enablements that support both of those. And I think that, that will continue to be the case going forward. I think as we think about some of the tools, whether we talk about AI and/or continued just process improvements that will benefit both of those. One thing that is as when you were asking about same-store penetration as the market stabilizes and those gets back to positive, that will help that, so just broadly across the network as well.

Your next question comes from the line of Kelly Bania with BMO Capital Markets.

Congrats on a great quarter. I was wondering if we could go back to just the independent case growth, obviously quite strong, accelerating you mentioned penetration, but also it sounds like maybe a little bit more from new account growth. Maybe you can clarify that. But I'm curious if there's any behavior changes that you're maybe already starting to see from the sales force in advance of the comp changes or at the start of the comp change that are working to incentivize the behaviors that you'd like and if that's kind of already maybe starting to come through as the sales force has been aware of that and prepared for some of these changes coming through or if you feel like there's just more to come on that front?

Yes. I'll take the first question first, they're really excited about the net new account generation. It's continued to accelerate for the past several quarters. In fact, this quarter, Kelly, our net new account generation was the strongest it's been in 3 years. So really good momentum there. It continues to be the lifeblood of our growth. And as I commented earlier, we are starting to see some early green shoots around the reshaping of the comp plan, particularly around independent growth Pronto, which gives us the confidence to put out the forecast that we did this morning around Pronto, Importantly, our brand penetration. The things that we talked about previously that we embedded into this comp plan, we're starting to see early returns on that. Again, we're 30, 40 days into this. So a lot more to come in that regard. We'll continue to give color as time goes on. I think for me, we've launched this quite successfully. I give our team a lot of credit, very thoughtful approach. Change management was big. Communication is ongoing. Importantly, we haven't seen an uptick in turnover. We continue to attract new sales talent to the company. feel really, really good, and I think we get an A+ for execution on this one.

Dave, if I could just ask one other one on AI, maybe a little bit different. Obviously, you guys have been ahead on the technology and digital front and maybe this is empowering that further. But how do you think AI impacts some of the smaller private distributors. As you talk about penetration improving, presumably that's coming at the cost of some of those smaller private regional distributors. And is this something that you think further widens the gap between some of these smaller competitors that may not have this level of technology.

I think over time, it can for sure. I think we've commented in the past, Kelly, that the amount of investment that we make in this area of the business consistent with the larger competitors out there who can afford to do this work at scale like we are. It will be a competitive differentiator over time because I think it becomes increasingly more difficult for the smaller competitors to make those sort of investments over time, not that there's not capability out there that they can't leverage and I'm sure they are. But I just stay focused on the things that we can control and accelerating independent case growth. The momentum that we've seen here in the past 5 quarters, the team feels really good about and we expect that will continue over time.

Your next question comes from the line of Mark Carden with UBS.

So the head count growth, how does head count growth play out for your sales force in 2Q? Any shift to how you're approaching this in the back half of the year? And then you talked about continued success in attracting talent to your sales force. Do you guys think that the formal move to the more variable model impacted what you're seeing from a talent pool perspective.

Yes. Appreciate the question on headcount. So I'll start with nothing has changed in terms of our expectations around what the right head count growth number is for us. That's around the mid-single digits. I will tell you, in the second quarter, we were up 8% and sell our headcount. As you might expect in anticipation of any potential turnover uptick that we might have seen, we hired in advance of that. So again, another area that the team was very thoughtful about thinking about all eventualities. I think you'll see that settle out a bit to get right back into the normal range that we expect here as we go into the back half of this year. What was the second part of your question, Mark?

Just in terms of now that you guys have formally moved over to them a variable model, has that impacted what you're seeing from a talent pool perspective with respect to potential sales force candidates?