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

Good afternoon, everyone. Thank you very much for joining us. As we move through the afternoon of day 2. I hope everyone had a chance to grab some lunch. My name is Jeff Bernstein. I'm the restaurant and foodservice distribution analyst here at Barclays. We're thrilled to have our next presenting company with us today, U.S. Foods. With us on stage from Rosemont, Illinois, we have Dirk Locascio, the CFO. By way of background, for those not familiar with US Foods, they are a leader in the U.S. foodservice distribution industry, partnering with roughly 250,000 restaurants and food service operators from 70-plus broadline locations and 90-plus cash and carry stores. Their 2026 guidance calls for 4% to 6% revenue growth, supported by 2.5% to 4.5% case growth, and ultimately, culminating in 9% to 13% EBITDA growth, and a very impressive 18% to 24% EPS growth. So I have a slew of questions for Dirk, but we want to thank everyone for joining us. And again, thank US Foods for making the trip, and I will kick it off with some Q&A.

Jeff, glad to be here. Thank you.

So figured rather than mincing words. We would just start with a question about current environment and trends. We are in the midst of your third quarter wondering what you could share in terms of volumes and how they're trending, if anything?

Sure. Well, it's an interesting world out there, where things change regularly, it seems like. Overall, when I think about our target customer types of independent health care and hospitality, growth rates continue to be very healthy in those. It's a pretty similar broadly to Q2. So just -- so that's the key takeaway. Our team continues to be pleased with the 21 quarters of share gains in independents that we had through the second quarter of '23 with health care. And then if you go sort of broader than that, we have on chain. Our expectation is it continues to be similar to Black Box. We've seen Black Box soften a little bit from Q2 through Q3 so far. So the industry has had a little bit of a short-term challenge from the cycles for our recalls and that, but that's begun to normalize on produce volumes. So that's soon to be behind us. And then I think overall, if you sort of all other type of noise that we've talked about before with a retailer that closed some stores for us, education, just a later back-to-school and customer losses there. But otherwise, key customers, very similar and feel like our ability to continue to gain share in those is well on track.

Being that you service 50,000 restaurants and food service operators you have your finger on the pulse from a consumer standpoint. As you think about the consumer and the restaurant industry, how would you characterize that health of the consumer? I know it sounds like trends have been stable. Clearly, the restaurant industry traffic or at least the big chains that we talk about are still somewhat challenged. But I'm just wondering what you're seeing across different customer types, and what levers can operate as you think, pull to sustain the sales and profit growth?

Well, I think on our last quarterly call, I think David Flitman, our CEO, put it well, challenged but stable, I think, is a good way to describe it out there. You see within specific concepts to your point, you see winners and losers and those that are challenged. It seems like those that have found on the chains, those that have found the right value proposition seems to be winning. I think independents continue to be positioned well. They tend to have a loyal customer base. And they've fared well. So they will lean into values in some ways. They're specials in that, but they're not really the meal deals and some of that, like a lot of the change tend to be. So overall, I think the consumer continues to be pretty stable as we think about the overall consumption ability. And I think the K shape continues to be, unfortunately, fully enforced.

Yes. We're in the independent case growth, it seems like that's the area of focus for you, the most profitable and they have a lower customer base themselves. You had a very strong first half of this year. It seems like momentum has continued into the third quarter based on your comments moments ago. I was wondering what do you think is driving that acceleration in the share gains? And again, why you believe maybe the independents are outperforming those chains?

Sure. Well, I'm pleased, although we believe we can do more. I'm pleased with the continued acceleration 5 quarters in a row of acceleration in our independent case growth. And it really comes down to just core execution. So Randy Taylor, who leads our field sales organization and field operations period, he, his overall with that team, they focused a lot on whether it's underperforming markets and/or capabilities to be able to advance those and that's helped increase. We've seen our net new customer counts, acquisitions continue to grow for those 5 quarters, same as our overall case growth. So we're encouraged by that. And then we have things like our digital platform, our Pronto platform, which both continue to support the growth within the digital platform. For example, we continue to deploy new capabilities leveraging AI to be able to enhance sales growth, cross-sell, upsell type of things and each of those all contribute. What I get really excited about, though, is we have a number of markets that are growing well north of 5%. So we know that over time, 5% is something we can definitely well exceed even in a current environment. So we try not to lose the -- so whatever the noise of the day or the week is into the march toward continued acceleration.

And I know we have the 3 largest players here over the 3 days. It seems like the common theme being when we talk about market share that the big 3, put aside your differences, collectively you have 35% -- less than 40% market share. How do you see that trending over time? We seem like there are other industries that are way north of a number like that?

I think that's exactly right. You -- I would expect us to continue to see consolidation. There's still far more fragmentation in our industry than there are in many others. I think historically, there were very low barriers to entry in this industry. So if someone had few trucks in the rental warehouse they could get in just the cost of real estate, the technology expectations of customer -- of customers, it gets harder and harder. So I would expect that consolidation to continue. And I think your point was right on where the 3 of us only have about 40%. So there's still plenty of opportunity for growth, and we'll get the question sometimes how can each be winning. And that's the point. There's still a lot out there that's from other customer types. And we think that through our continued again, organic growth, leveraging our core service platform, our Pronto, our digital is a good enabler of that and then supplementing that with tuck-in M&A where it makes sense. And our team continues to work that pipeline robustly and sometimes you have more that come to fruition and sometimes less, but I would expect that consolidation to continue in the industry over time.

Yes. And putting aside M&A for a moment because that could obviously drive sales growth. But if you just think about the other ways to do it, if either you're adding new accounts, which you mentioned new account growth has been strong versus further penetrating existing accounts, which would seem like that's a no-brainer to be able to just drop it more packages at an existing customer. So how much of the independent growth do you think is coming from new accounts versus deeper penetrating of existing accounts and maybe how those economics differ?

Sure. Well, in our case, almost all of the growth is coming from net new accounts. And the reason being, although sellers are focused on winning additional lines within existing customer, it gets masked by just slower underlying traffic. So you don't see that show up as much. So the positives that are happening there in conversions get offset by the traffic. So that our trend line on the net new account acceleration looks an awful lot like our 5 quarters in a row acceleration in independent case growth. And that will still always be the main driver. But I think as you get back to a more normalized where you have trapped growth, our expectation is that penetration or same-store will be a contributor on that over time.

Yes. And we talk about the primary being new account growth. people talk about the restaurant industry and just how that such a kind of industry and the closures in the space, like what have you seen -- we know with COVID, there were a fair amount of closures, but how would you size up the industry in terms of closures and reopenings and the number of boxes now versus a few years ago as you think about adding more new accounts?

Well, it's -- I think the last few years, you've seen fewer new restaurants, but you've also seen fewer closures. And so sort of on net, they don't seem to be all that different sort of from a year-to-year than they've been in the past. And I think the things sometimes it gets forgotten in our industry is, if you want to go out to each even if there's not as many new restaurants in your neighborhood or where you may go, you're probably just going to go to some place else that you like or you want to go to. So again, that's a benefit of serving a whole portfolio of different customer types and cuisine types is -- we are essentially an index of a lot of different options out there for people to die. So we benefit when you go out no matter whether it's to a new door or to an existing restaurant.

Yes. But there was a lot of discussion and there has been around your new sales compensation model or the changes you're making to that compensation model. I think it officially launched in June, just a couple of months ago. What maybe you can explain to people just what that change was? And then I just have a few questions about that.

Sure. So this was a change for us going from our local sellers going from 50% fixed and 50% variable in their structure to 100% variable. And so in June, all of those sellers cut over to this new structure. But an important point is that on day 1, [indiscernible] comes in at 100% variable. So it's not as though we come in and it's good luck. Almost every seller comes in a day 1 at 100% fixed or essentially on a stipend. And then they earn their way through this program all the way to 100% variable. And in the first 2.5 months, we've actually had quite a few sellers that have done extremely well that are already on 100% commission and others, again, that maybe are earlier in their tenure that are still mostly through the fixed. So we've been pretty pleased. I give, again, Randy, that I mentioned a lot of credit. He's really spearheaded a lot of this. And 1.5 years or so ago, had a lot of conviction around making sure we did the right amount of work upfront on planning and communicating ongoing and modeling and discipline, et cetera. So that's the overall change. And we're encouraged by seeing a number of the behaviors that we were looking for starting to show up already.

So what -- I know -- I wanted to ask about seller behavior, like what changes were you hoping to see that you are seeing now that obviously gives you confidence in the plan?

Yes. There's a few things. One is it makes it -- so we -- although the construct of the plan of essentially gross profit or contribution margin per drop is not that different than it was before. And then there are additional incentives for private label, for independent restaurants, for Pronto, et cetera. But we've simplified the plan and increase the understanding for sellers. So it's much easier for someone to understand now. If I do this, here's how it impacts my pay. We've also enhanced some of the technology that they can see that on a more real-time basis. And so it's made it again, more effective. And you have certain sellers who have fully embraced it and again, are running and making quite a bit more than they did and others if I'm still finding my way through it, at least I still know if I'm in with a particular customer that there's these things they're not buying from us or they used to or this is an opportunity, then I'm still going to focus on picking up those extra few cases. So we are seeing that increased behavior of wanting to own more of that relationship with customers and understanding how I get paid. And also, they still have autonomy where if they want to invest in certain products in order to make sure they get a basket or more of the basket, they can do that. So it's balancing the structure with the autonomy.

You're not the first others have made that move towards more variable compensation. How do you think about it in terms of retention versus your expectation perhaps in recruiting new salespeople, which seemingly for a very eager aggressive salesperson getting 100% variable comp would be quite attractive. What are you seeing in terms of early days retention and the ability to recruit new sales role?

We've been very pleased. So our retention for the broader sales force and the more tenured groups has actually been in line or less than what it's been historically. So leading into this, it's one of those things where handling this transition again, communication, deliberation, making sure people understand it and transitions to the 100% over the right time was important to us. And so there's -- one of the insurance steps we took was to increase our hiring leading up to it. So if you remember on our second quarter earnings call, we talked about that our seller head count was up about 8% year-over-year. And part of that was we wanted to make sure that if we did see increased turnover that we were ready for. And so ultimately, I think we've taken the right steps for insurance. The other thing is as we've gone through this in a couple of months -- over the couple of months. Again, like I said, we've seen a number of sellers move to the 100%. We've got others that were still kind of protecting as they're being coached and worked through it. And so our transition costs are running a little higher than we expected, but I would take something like that any day because it's temporary over a flawed execution where you have sellers that feel like you didn't do right by them versus -- or some other issue. I mean Dave has been very clear all along. We want sellers to make as much money as they possibly can, and we want them to be there to support their customers and really help those customers make it.

And being that it's only a couple of months in, and this transition can take some time. Like how do you think about investors might see the changes translate into more meaningful presumably case growth, penetration, private label gains? Like how do you think that a change will flow through your system?

I would think relatively quickly. It's try to parse out some of the macro, you start to see -- again, we're starting to see the behaviors show up already. So I don't think this is -- think this is within the quarter or 2 quarters again because we're seeing the behaviors already and very pleased with the reception and the understanding and how people are kind of owning and running with it. .

Yes. There's often talk about more your Pronto business, which is more of your small order delivery business. I think our understanding was it was roughly $1 billion in 2025. We're talking about $1.7 billion in 2027, which is a meaningful acceleration how would you describe or prioritize the drivers of that meaningful acceleration in such a short period of time? And maybe how those customers differ from broad line.

Well, Pronto has been well received from the beginning. And so Pronto, $1 billion last year, as you mentioned, on track for $1.3 billion this year, $1.7 billion next year, and that's upfront. We took that up on our last call. We were originally expecting $1.5 billion. The thing that's exciting is I think Pronto will be a continued growth engine for US Foods for a lot of years to come. And I think the reason that it's been successful is we listen to customers and we listen to what customers want. We're trying to meet customers with what they want. And there's 2 elements of it. One that's been in place for or years, Pronto legacy, which was for customers that were either smaller and needed more frequent deliveries or those that were in dense urban areas that we couldn't get to with the big trucks. And so this is a way for us to give them that more flexible service. And -- but yet they get some of our advanced digital tools, our broader assortment in that, then they're getting from a specialty provider, and that's been very well received. And the second piece that we just began to put in place a little over a year ago is Pronto next day, and that's for our delivered customers or larger truck delivered customers where they can do fill-ins, and this is basically saying instead of ordering those fill-ins from a specialty provider, wanted to order them from us. So it's simpler to have one fewer distributor. And when you're doing fill-ins, instead of just getting whatever that particular whether it's produce or protein, et cetera, you can fill in groceries, et cetera, from us as well. And that's been in place, again, in well received, seeing -- not seeing cannibalization. And that's one where just because you could see that cannibalization. So we went slow to go fast. And so we took our time. But just to give you all that context, in these markets that we've deployed, which is the legacy Pronto is in almost 60 markets and then the Pronto next day and almost 40. And that one, when it's deployed, it has 1 or 2 trucks. And so in order to make sure we're using it with the right customers, the right deliveries, we continue to add trucks. So in 2026, we made our biggest investment in trucks. In '27, I would expect we'll be talking about another bigger investment, but well received, a lot of runway ahead, and Pronto is an area that we get excited about because it's just as profitable as our overall independent business. And again, it's an area where customers are asking for and demanding it, and we want to meet their needs.