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Edited Transcript of USFD earnings conference call or presentation 7-May-19 2:00pm GMT

Q1 2019 US Foods Holding Corp Earnings Call

Rosemont May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of US Foods Holding Corp earnings conference call or presentation Tuesday, May 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dirk J. Locascio

US Foods Holding Corp. - CFO

* Melissa Napier

US Foods Holding Corp. - Senior VP of IR & Treasurer

* Pietro Satriano

US Foods Holding Corp. - Chairman & CEO

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Conference Call Participants

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* Andrew Paul Wolf

Loop Capital Markets LLC, Research Division - MD

* Edward Joseph Kelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* John Edward Heinbockel

Guggenheim Securities, LLC, Research Division - Analyst

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Judah C. Frommer

Crédit Suisse AG, Research Division - Senior Analyst

* Karen Fiona Short

Barclays Bank PLC, Research Division - Research Analyst

* Kelly Ann Bania

BMO Capital Markets Equity Research - Director & Equity Analyst

* Marisa Sullivan

BofA Merrill Lynch, Research Division - Research Analyst

* Vincent J. Sinisi

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good morning. My name is Ramon, and I'll be your conference operator today. At this time, I would like to welcome everyone to the US Foods First Quarter Fiscal 2019 Earnings Call. (Operator Instructions)

Ms. Melissa Napier, Senior Vice President, Treasurer and Investor Relations, the floor is yours.

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Melissa Napier, US Foods Holding Corp. - Senior VP of IR & Treasurer [2]

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Thank you very much, Ramon, and good morning, everyone. Welcome to our Q1 call. I'm here today with Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an update on our first quarter fiscal year 2019 results. We'll take your questions after our prepared remarks conclude. (Operator Instructions)

During today's call and unless otherwise stated, we're comparing our first quarter results to the same period in fiscal year 2018. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website.

In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our latest Form 10-K filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements.

And lastly, I'd like to point out that 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 in our earnings press release.

And now I'll turn the call over to Pietro.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [3]

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Thanks, Melissa. Good morning, everyone, and thanks for joining us for our first quarter earnings call. We had a good start to the year with our first quarter results in line with expectations, and we are on track to achieve our 2019 full year guidance targets that we discussed on our last call.

So let's begin with Page 2, an overview of this quarter's results and the following 3 key points. First, from a volume perspective, organic total case growth for the quarter was 1.4% and was the best since the middle of 2017 as we accelerated growth across all 3 of our customer types. We are especially pleased with our independent restaurant volume, which grew 5.5% on an organic basis, the highest since we've been a public company. This highlights that our differentiated strategy continues to resonate with customers and that transitory operational issues are behind us.

Second, we expanded our operating leverage for the 13th quarter in a row, with growth in gross profit per case generally in line with historical gross profit increases. Improving customer mix and the continued growth in private brands were both contributors to increases in gross profit per case. Operating expense did increase at a higher rate than we've seen, primarily in distribution, as a result of the continued challenges in the external environment.

As we discussed in our last call, higher wage costs and higher turnover are causing distribution costs to increase more than we've seen historically, and this is offsetting some of the benefits we are seeing as a result of our portfolio of supply chain initiatives. I'm confident that as the year progresses, the benefits associated with our initiatives will mitigate a greater and greater portion of increasing costs resulting from tight labor markets and higher turnover.

And finally, we grew our adjusted EBITDA by 3.6%, in line with our expectations for the quarter, and we remain confident in achieving our full year adjusted EBITDA guidance of at least 5%.

Let's now take a closer look at our volume growth for the quarter, beginning on Page 3. Volume growth accelerated sequentially with all 3 customer types, headlined by independent restaurants growing at 5.5% on an organic basis for the quarter. We feel the outlook for independents continues to be strong and our differentiated strategy is resulting in profitably gaining market share. As a result, we expect to come in at the high end of the 4.5% range for fiscal 2019.

Still on Page 3, health care and hospitality growth also improved over the prior quarter and came in at 1% for the first quarter, in line with our expectations. End demand in the market remains strong and we have seen improved growth from some of our key customers.

Our pipeline is also strong, which leave us confident we will achieve our expected 1% to 2% growth rate for the year. As we have said in the past, the lumpiness associated with the size and timing of new customers does make it more difficult to predict the quarter-to-quarter growth cadence.

And last for our discussion of volume for the first quarter, the all other group of customers came in at a negative 60 basis points, a substantial improvement over Q4 and very close to the roughly flat that we guided for this customer type. We are now past the low-margin chain exits that we discussed last year. We continue to expect roughly flat growth as this part of the industry is characterized by mixed performance, with some concepts performing better than others. This is also consistent with publicly available industry numbers, which have shown negative traffic for chain customers. So overall, our volume outlook for the industry remains strong and the competitive environment as a whole remains stable.

Let's turn to Page 4. On our last call, I gave a quick update on how we are doing relative to the 3 elements of our story that we presented at Investor Day a year ago: first, the tailwinds this industry enjoys; second, our differentiated platform; and third, our focus on cost. Today, I'd like to delve a little deeper on our progress with respect to some key aspects of our differentiated platform and how these are contributing to both volume and margin growth across key customer types.

First, let's talk about our Spring Scoop, which just ended. As you will recall, Scoop is our 3x a year platform by which we launch innovative products that are new to the industry and exclusive to US Foods. Also recall that customers who purchase Scoop products have a higher retention rate and a higher basket. Our latest Scoop launch from the spring was focused on continuing to expand our sustainable product offering. Sustainability continues to be a hot trend, with 88% of restaurant operators indicating that substantially -- that sustainability, I apologize, that sustainability is important to their operation. And our portfolio now includes more than 350 sustainable products.

As you can see from the chart on the left, our Spring Scoop at the highest trial rate of any previous Scoop, with over 45% of our independent restaurant customers purchasing at least 2 cases of Scoop, which just goes to show how mainstream sustainability has become.

Expanding sales of private brands remains a key part of our strategy to improve gross margins. Our private brand portfolio consists of just over 20 unique brands falling into the either good, better or best tier. As a result of our high-quality portfolio and disciplined sales execution on the part of our sales force, as you can see from the middle chart, we have now grown private brand penetration by 100 basis points for the third consecutive year, and we expect similar increases for the foreseeable future.

The third critical element of our differentiation is our e-commerce platform, which continues to help us win new business and retain existing business. As shown on the right side of the slide, our e-commerce penetration with independent restaurants reached nearly 60% this quarter and more than 70% of our total sales volume comes through e-commerce, supporting the Made Easy part of our Great Food Made Easy strategy. And one of the areas in which we are evolving our platform is mobile. And as a result, very close to half our independent restaurant customers are now using our mobile app.

In terms of marketing to support our differentiation strategy, we also launched the third wave of our We Help You Make It digital campaign. You will remember that We Help You Make It is our promise, our promise to our customers. Helping them to make their food every day and helping them to achieve their goals, whether it's an entrepreneur pursuing her dream of opening a restaurant or a hospital looking to increase patient satisfaction while continuing to drive down costs. This particular campaign focuses on the unique tools and value-added services that we offer operators.

So as you can see, we continue to enhance our offering on both the product and the technology aspects of our differentiated platform, contributing to profitable growth with target customers as well as gross margin gains across all customer types.

Before I turn it over to Dirk, I would like to provide 2 quick updates. First, we are pleased to announce Tim Connolly will join US Foods as our new Chief Supply Chain Officer. Tim joined US Foods with more than 30 years of experience leading large distributed supply chain organizations. Most recently, he served as the Senior Vice President of Operations at Uline. And prior to that he was Chief Operating Officer at Essendant, where he oversaw a network of over 70 distribution centers. We are excited to welcome Tim to the team.

And second, I'd like to provide a brief update on the SGA Food Group acquisition. We remain engaged with the FTC and we remain hopeful that we will close by the end of the second quarter. Our integration teams have done an exceptional job of preparing for day 1, and over 90% of playbooks are now complete and waiting to be deployed. More importantly, I know from our recent set of town halls that we conducted across all SGA facilities, SGA associates are looking forward to combining the strengths of our 2 companies and are excited to join US Foods soon.

Finally, I'd like to close by thanking associates at US Foods for their commitment to helping our customers make it. And I'd also like to thank associates at SGA for their continued commitment to serving our future customers with the same dedication that's made SGA a great company.

I will now turn it over to our CFO, Dirk Locascio, for a walk down of our P&L and our balance sheet.

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Dirk J. Locascio, US Foods Holding Corp. - CFO [4]

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Thanks, Pietro, and good morning. Our business performance in Q1 was consistent with our expectations. And as Pietro noted, we are reiterating our outlook for the full year. We're very pleased with the continued acceleration in our independent restaurant case growth and we continue to focus on driving further operating leverage gains in spite of the higher cost environment largely due to higher wage and other distribution costs.

Adjusted EBITDA for the quarter increased 3.6% and adjusted diluted EPS of $0.37 for the first quarter increased nearly 6% over the first quarter of 2018.

On Slide 5, first quarter net sales were $6 billion, an increase of 3.6% above the prior year. We experienced 220 basis points of year-over-year inflation in product mix combined with the 140 basis points of case growth. Case volumes in all 3 customer types accelerated from Q4 2018 resulting in the 1.4% total case growth as Pietro noted.

On Slide 6, we continued to deliver strong gross profit results for the quarter. Gross profit was $1.1 billion, which was a 6% increase over the prior year period on a GAAP basis and a 3.9% increase on an adjusted basis. As a percent of sales, gross profit was 17.4% on both a GAAP and adjusted basis. This is 40 basis points higher than the prior year period on a GAAP basis and 5 basis points higher on an adjusted basis.

Adjusted gross profit as a percent of sales was relatively flat as a result of a little higher product cost inflation and would have increased nearly 20 basis points if inflation had been flat. Our adjusted gross profit rate per case expansion was strong again this quarter, up $0.15 per case, and we saw nearly 3x the growth in GP dollars compared to case growth. The expansion was driven by customer mix and a continuation of initiatives we've discussed, such as freight optimization and private brand penetration, which increased 100 basis points over the prior year quarter again this quarter.

Moving to operating expenses on Slide 7. OpEx increased 3.6% for the quarter from the prior year to $921 million driven primarily by higher wage, other distribution and acquisition-related costs as well as about $3 million in timing shifts of costs within the year to earlier this year as we had expected. Adjusted operating expenses increased $30 million or 3.8% over the prior year quarter, and as a percent of sales were 13.6%, an increase of 3 basis points.

We continue to be impacted by supply chain wage pressures and higher distribution costs as expected. Our supply chain in shared business service initiatives are delivering benefits. However, the benefits did not fully mitigate the higher costs we're seeing. As Pietro mentioned, we believe we can mitigate the higher wage impact over time as we continue to execute the initiatives in our supply chain road map.

On Slide 8, our operating leverage gain was $0.03 per case as a result of adjusted GP per case increasing $0.15 and adjusted OpEx per case increasing $0.12 in Q1. We remain very focused on opportunities to reduce OpEx and improve our operating leverage by growing adjusted gross profit per case meaningfully faster than adjusted OpEx per case as we have historically. The impacts of higher distribution wages and fuel shows in the results right away, while OpEx control initiatives take a little longer as they are deployed. As a result, we expect our year-over-year cost per case increases to lessen over the balance of the year.

I'm now on Slide 9. Adjusted EBITDA was $232 million in the first quarter, up 3.6% over the prior year period. As a percent of sales, adjusted EBITDA remained flat at 3.8% for the quarter. Adjusted diluted EPS increased $0.02 or nearly 6% to $0.37 per share for the quarter. And finally, on the far right, Q1 net income increased 6%, while adjusted net income increased 8% primarily due to adjusted EBITDA growth.

Turning now to cash flow and net debt on Slide 10. Operating cash flow for 2018 was $154 million compared to $192 million in the prior year. The decline was driven largely by timing-related working capital benefits during Q1 '18 that did not occur to the same extent in Q1 2019. We do expect most of this Q1 negative working capital impact to be mitigated over the balance of the year and we continue to expect operating cash flow growth for the full year.

Our business continues to produce strong operating cash flow and we've continued to decrease our debt levels and improve our leverage ratio. Net debt at the end of the quarter was $3.3 billion, a decrease of approximately $60 million from year-end 2018, and our net leverage ratio remains at 3.0x.

Moving now to Slide 11. For fiscal year 2019, we are reiterating our outlook, as I mentioned earlier, that we provided in February. The first quarter results were in line with our expectations and we continue to expect adjusted EBITDA growth of at least 5% for the full year, due to continued volume acceleration, strong gross profit per case gains and lesser year-over-year OpEx per rate -- per case increases.

I'll now turn it back to Pietro for a few comments before we go to Q&A.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [5]

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Thanks, Dirk. So in summary, a good start to the year, EBITDA growth in line with expectations, volume growth was strong, especially with independents, good growth in private brands and initiatives in place to mitigate our higher operating costs that everyone in the industry is experiencing and confidence with delivering our 2019 guidance.

So let's now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Kelly Bania of BMO Capital.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [2]

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Just wanted to start with the independent case growth, clearly quite strong. Just curious how much you attribute to some of your internal execution, you talked about the success with Scoop and maybe your team-based selling approach, versus maybe what you think the external environment did during the quarter. And then, as you dissected that, how much you think is driven by same-store sales growth versus new customer wins? Or even if you track it down to that level, just curious what you think is going on underlying the independent backdrop.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [3]

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Kelly, so the environment -- the external environment has been pretty consistent if you look at -- when we look at Technomic data, NPD data, there's a little bit kind of change, but it's relatively consistent over what it's been. So the acceleration is really due to, as I said, the combination of our operational issues being behind us and our differentiation strategy continuing to help us both win new customers and to penetrate existing customers. And we have seen, over the course of the last few quarters -- couple of quarters, I should say, as we put our operational issues behind us, we've seen penetration increases go up. We often measure that in terms of lines per drop. And so, the growth is really back to a balance of growth coming from customers that are new to us, and increased share of wallet or penetration with the existing customers.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [4]

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Okay. And just another one on your guidance for the year. So should we think about that kind of 5% EBITDA growth relatively consistent? Or is there any puts and takes? You did call out the improving costs per case kind of metrics as we move through the year. But just maybe any color as you think about the next couple of quarters.

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Dirk J. Locascio, US Foods Holding Corp. - CFO [5]

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Kelly, this is Dirk. Now there's nothing specific as we think about the balance of the year. So it's relatively consistently in order to achieve that level of growth for the year.

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Operator [6]

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The next question comes from the line of Judah Frommer from Crédit Suisse.

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Judah C. Frommer, Crédit Suisse AG, Research Division - Senior Analyst [7]

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Maybe just first digging a little further on the independent cases, can you help us at all with cadence of case growth during the quarter and, potentially, on a quarter-to-date basis?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [8]

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Sure. There's not much more -- this is Dirk. There's not much more we can share. Overall, we saw strong case growth as we went throughout the quarter. So there's no anomaly to really call out. And although we can't share specific numbers even post the quarter, what I would say is, our case growth continues to be consistent with our outlook and guidance for the year in this space. So as Pietro said, we'd feel, for the reasons he talked about, very good about the growth acceleration that we have and continue to see.

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Judah C. Frommer, Crédit Suisse AG, Research Division - Senior Analyst [9]

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Okay. Great. And then just on the SGA update, is there anything further you can share in terms of progress you've made in the review? I know you said you're hopeful that the deal will close by the end of Q2, but any puts and takes that could push it out further? And is there any insight into retention of salespeople or otherwise at SGA that you can share?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [10]

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So in terms of the -- I'll take your Part B of your question a little more broadly, Judah, because, as you know, The Food Group is a private company and we have to continue to respect their -- the information to disclose or not disclose. The best way to answer Part B of your question and really reassure everyone is that performance ending in 2018 has been in line with expectations both from a top line and bottom line perspective. So the company continues to perform well.

In terms of the first part of your question, it's a process that -- the FTC process is one we're engaged in. There's -- we don't have control over it, and there's also a range of timing which certain stages happen. So as I said, we remain hopeful that we will complete the transaction by the end of the second quarter. There's obviously a chance that it could trail into July a little bit. And it's really hard to know between the end of the second quarter and early in the third quarter, July, when that might be.

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Operator [11]

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The next question comes from the line of Marisa Sullivan of Merrill Lynch.

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Marisa Sullivan, BofA Merrill Lynch, Research Division - Research Analyst [12]

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Just really a quick follow-up on SGA. Are you contemplating the potential to have to do any divestitures in order to get the deal closed? And if so, would that change the previous outlook for accretion and dilution from the deal?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [13]

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So I think, we've pretty much said everything we can say about SGA. Hopefully, you can understand that we really can't talk about the process in terms of what is happening. And we'll be able, soon enough, to talk about when it closes what form that takes.

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Marisa Sullivan, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Got you. And changing topics to inflation. It sounds like it's come through a little bit more maybe than expected. Have you been able to pass it on to our customers? And also can you just provide us an outlook for -- how you think inflation is going to trend over the next couple of quarters?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [15]

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Sure. So it's really continuing to see very modest inflation in grocery as we've talked about for a few quarters. You saw that tick up a little bit, but very consistent, and the increase is more on some of the commodities. And generally speaking, able to pass it through. You can have some time delays depending on the significance at any point in time but nothing beyond what you would normally expect. And I'll just remind you that, for a lot of those commodities, they tend to be more of fixed markups per pound or per case. So they impact the top line a lot more than they impact the bottom line. And we'll continue to focus on the execution as we have. I think, our outlook for the year is, for grocery, continue to be pretty modest inflation. As we've seen -- and for some of the commodities, it gets a little harder to tell, since they've continued to bounce around a little bit more. And then back to my point on the execution, that's where we focus as we see it coming to make sure we manage through it effectively.

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Operator [16]

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

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [17]

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I wanted to just dig into the cost side. And I was hoping you could maybe just talk a little bit more about the cost pressure that you guys have been experiencing. Cost per case was, I guess, a little bit worse than what it was at the end of -- for the full year last year but, I think, better sequentially. It seems like maybe the worst is behind you. But I was just hoping that you could really dig into this $0.12 year-over-year delta, the key drivers. And then as we think about this line item getting better from here, the key drivers to that. And how are you thinking about a -- like an appropriate year-end target for that?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [18]

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Sure. Ed, this is Dirk, I'll take that. I think, it's -- in Q1, the primary drivers were distribution-related costs around the labor and fuel, as we've talked about. The other piece that increased a little bit in the first quarter was some of the timing differences that we've talked about that hit a little earlier in the year, that was a few pennies. So I think as we kind of think throughout the balance of the year and getting back to a lesser increase, you get to, in the second half, fuel becomes not the negative that it is here in the first half. Distribution gets a little bit better as we continue to deploy more of our initiatives, and so that has a larger mitigating impact as you go across there, and then just other things we have around cost control across the business.

So it's -- in the environment we're in, I think, it's -- rather than give a specific number or target, it's really about continuing to work that back down more in line with what we've seen over the past. And then continue to just working the environment we're in, especially in the distribution area of working around improving turnover and the like to engage our employees more and more so, and we'll continue to be focused on that.

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [19]

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Great. And just one follow-up for you, Pietro. And as you think about independent growth, obviously, the business has accelerated nicely and there was a, I guess, a narrative last year around issues with your selling model versus -- the selling model versus peers. Can you just now take a step back, though, and help us better understand what you're hearing from customers from a service level perspective? Where you are? What you think is really the key drivers of what's very nice share gain actually?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [20]

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Yes. So I think there's 2 parts in there, Ed, the selling model and the fill rates from customers. Look, when we embarked on this journey of centralizing replenishment, our primary goal was around enhancements to the gross profit line as a result of better managing freight and taking advantage of opportunity buys. Our hope was to stay consistent with historical service levels. And I'll be honest, what we found that is we've actually achieved a higher service level than historical. We're at service levels that are higher than we were in 2012, which is one we were tracking on an apples-to-apples basis. And that's because when you centralize a function as this one, you're able to drive best practices, standardized learning, better tools, and we're actually performing better from a fill-rate perspective than when we embarked on this journey. Unfortunately, we had to go through -- around the moon to get to this point, which is a necessary result associated with the renovation. So from a fill-rate perspective, we feel good and we actually see opportunities to go up from there. So again, you can do things in a central environment that are much harder to do in a distributed environment. I think, what was the other part of your question, Ed? Oh, in terms of the selling model, what's your question specifically on the selling model?

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [21]

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Well, I was really just looking for you take a step back and sort of thinking about the selling model today, the performance -- there was concerns about it in the prior year and just -- your -- where you think you stand at this point from like a salesperson perspective and productivity and where you're going?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [22]

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Okay, thanks. Thanks for that. So look, we really believe that, there's just 3 legs of the stool that work together in concert: the innovative products, the technology and the selling model. And they work in concert because the tools and technology allow our sellers to be more consultative, and the investments we've made in the team-based selling in terms of experts and specialists allow the specialist -- the territory manager to manage a larger book of business, to keep our best talent in front of our customers and to do a better job of offering the brand -- the brand proposition as it truly can be offered. And that's what we're seeing, and that's why we're back to historical levels of growth if not higher. And we expect to continue to stay at that level, if not increase, as we become more and more consistent in terms of applying that selling model.

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Operator [23]

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And the next question comes from the line of Andrew Wolf of Loop Capital Markets.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [24]

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I have a few follow-ups on the operating expenses. First, just to clarify, at least the way I did the math, it looks like the incremental cost per case actually increased in the quarter. Could you just tell us whether it increased or decreased or stayed the same?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [25]

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The year-over-year increase was a little higher in the first quarter as we go through the -- versus where we were in the fourth quarter and that's -- then we would expect that to increase to sort of lessen over the balance of the year for the reasons that I talked about. Is that your question?

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [26]

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Yes, yes. No, it's just Ed thought it went down, and I did -- my math was the other one, I just wanted to clarify. Second, in the fourth quarter, you called out $0.03 per case of increased health care costs. Is that continuing? Is that part of the cost inflation that's in the quarter? Or is it other type of cost inflation?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [27]

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No. Health care costs were back to the norm. So it wasn't more the anomaly as we had expected. So within the quarter, the primary drivers were, as I talked about, distribution, labor, fuel and related costs. And then, also, there were the -- a little bit of incremental costs for some of the other timing shifts that we've seen throughout the year earlier.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [28]

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Okay. And lastly, particularly in regard to wages, which I think is your largest variable cost or rate, I guess. Does just anniversarying some of the big increases and wage rate increases that happened last year, is that just a natural benefit that, as long as wages stabilize to at least some extent, the increment comes down just through running the business at the current steady state? Or is it more reliant on the initiatives that you're talking about?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [29]

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Well, it's really -- so you would see a -- late in the year, the anniversarying of some of those. And so to the extent that the wage increases were a little bit less, then you would see a lesser increase as a result of that. I think, the environment, it continued the tight labor markets. We're not assuming a significant improvement as we go forward. So I think, the -- back to the self-help term that we've used a lot really remained very focused on assuming a very similar labor environment and focused on really driving the initiatives and the benefits that those drive, which helped from productivity and then actually some of them also helps from an employee engagement perspective. So they have the double win, which helps with retention.

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Operator [30]

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The next question comes from the line of John Heinbockel from Guggenheim.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [31]

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Two things. The summer Scoop, as I recall, you didn't do one last year. Is the idea to do one this year? And then business managers, will you add about the same number that you did last year or more or less?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [32]

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So we will do a summer Scoop, John, we're back to 3 Scoops. Again, the reason we took one out last year wasn't because we were experimenting but because we had plans to do another launch. There's only so much that our customers and the territory managers can absorb, and so that was the reason for that. But 3 is really our operating model, and the sales force is pretty excited by it. In terms of the rate of the new business managers that you are talking about, Dirk and I are looking at each other. I'm fairly certain we're close to the end of adding the number of business managers and reaching steady-state.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [33]

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And then you had mentioned that, if you had no inflation, right, gross margin would have been up 20 bps. Is that -- when you think about timing of pass-through, was that just the rate of step-up on some of those items? Or was there a conscious decision? We're trying to rebuild good faith with our accounts and we have good momentum. Let's be a little slower or more deliberate in passing that through. Was that a big part of it?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [34]

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John, this is Dirk. That map was just to really simply illustrate how it can skew the gross profit by basis points and that's why really we began to talk about per case rates a few years ago because when it comes in those commodities like that it can skew. But on a $0.15 per case, we continue to be very pleased with the gross profit per case acceleration we're seeing.

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Operator [35]

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The next question comes from the line of Karen Short of Barclays.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [36]

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Just a couple questions. So first question is when you first gave directional guidance for fiscal '19 EBITDA growth back in November, I guess, I got the impression back then and even in February that there was kind of an element of conservatism built into that growth rate. And I guess, so I just want to clarify is it really -- there really isn't conservatism into that 5% just because there is a little bit more OpEx headwind than you kind of anticipated. Is that fair?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [37]

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So our outlook remains and continues to be the at least 5% case growth. And I think on our year-end call, though, I explicitly talked about the fact that we expected Q1 to be a little bit below that. So I think, our outlook and progress continue to be in line with what we had talked about.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [38]

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Okay. But as we look at, say, your Slides 6 and 7 when we look at adjusted gross profit growth versus OpEx growth, what we should expect to see maybe is similar like trajectory on gross profit adjusted growth but that adjusted operating expense year-over-year should be meaningfully less in the next 3 quarters?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [39]

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So gross profit per case continues to be solid as we've talked about in gross -- in OpEx per case. So we'll continue to get better, we expect, as the year goes on.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [40]

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Okay. And then I just wanted to clarify one thing. You just called out a new hire, I guess, for Chief Supply Chain Officer. Is that -- I just wanted to check, is that in addition to Ty Gent. Is that a new role? Or I just wanted a little color on that.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [41]

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No. Ty left the company about a year ago, and -- maybe a little less than that, and we've just fulfilled that role. And Tim starts in the next week or 2. He will be in field for a couple of months kind of getting oriented. And so he'll be in the chair as of July.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [42]

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Okay. And then last -- just last housekeeping for me. Anymore color on the working capital delta in 1Q that you could elaborate on?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [43]

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Sure. It's really mostly a timing-related thing related to some accounts payable. There's nothing, we don't believe, comes back over the course of the year. So if you look even back compared to the overall operating cash flow compared to Q1 2017, still meaningfully stronger and that's really about it. We continue to feel very good about the operating cash flow strength that we'll generate this year.

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Operator [44]

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The next question comes from the line of Vincent Sinisi of Morgan Stanley.

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Vincent J. Sinisi, Morgan Stanley, Research Division - VP [45]

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Very nice quarter here. Wanted to just go back for a second to the independent growth. Obviously, very solid in 1Q. Just wondering, though, did you see pretty consistent strength or was there a lot of variability in any particular either types of customers or geographies? One of the things I don't think you'd mentioned was weather, which was, of course, a topic yesterday. Just wondering if that, either to independent or overall case growth, played in at all as well?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [46]

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Vinnie, this is Dirk. Maybe I'll just touch on the weather and then Pietro can talk more broadly. But for us, the weather impact was pretty negligible in the quarter. When you look at what this year had -- the polar vortex as an example, last year, had some widespread. So overall, the net impact was pretty minimal.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [47]

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And in terms of the performance, Vinnie, if you remember from a year ago, when we talked about growing independent restaurants in the 4 to 6 range and we had a number of questions what would drive that. Is it new tools? We said a lot of it really will be doing just driving more discipline, more consistency, more talent, upgrading our sales force. And so really that's what you're starting to see because the external environment, as per Kelly's question at the outset, has been pretty consistent. And in fact, when we look at the disparity between the best performers and the lowest performers in terms of geographies, we're starting to see a narrowing of that range.

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Vincent J. Sinisi, Morgan Stanley, Research Division - VP [48]

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Okay. That's encouraging. Okay, cool. And then, just quickly so nice to hear, of course, now that the customer exits are fully not part of the picture. Just on the centralized replenishment, I know you guys said earlier that you're starting to see some of the benefits there that impacts past. Just wondering, though, like since it has, of course, been a bit of an impact the last couple of quarters, are we having any impact left or is it now kind of just in full-motion? And are we kind of seeing the greatest benefit of that starting now? Or should that be, I don't know, it could like -- a quarter or 2 down the road? How do you guys feel about that?

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Dirk J. Locascio, US Foods Holding Corp. - CFO [49]

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Sure. So it's what I would say is we've seen even while we were going through some of the challenges, we've seen some of the benefits coming through. As you may recall freight, I've talked about a few times. We are very pleased with the teamwork we've seen between the logistics team and the replenishment team. And Pietro's point about more consistent execution, that allowed us to adapt to that changing environment much more so. I think over time, we'll continue to see improvement, whether it's in that area continued around optimization of our purchasing, et cetera. So pieces in place and likely more to come.

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Operator [50]

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(Operator Instructions) The next question comes from the line of John Ivankoe of JP Morgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [51]

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Yes. First I think, a little bit of a clarification of some things that you said earlier. In terms of the size of the selling organizations, and obviously, I realize there's different people and different team-based roles. Could we talk about what that was 1Q '19 versus '18? And whether the -- I'm assuming stability or even growth in that you think is directly attributable to some of the increases in the independent case volumes? And if that's the case, whether we can actually add more to the teams at this point to give yourself even more your case volume visibility?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [52]

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So I think, in the last quarter -- I'm looking at Scott and Dirk, we had a page that show the size of the team-based selling organization, the investment in the, what we call, sales support and that how that -- some of that had been used to invest, again, some of the benefits of the reduced sales force, which again, in the last several years, has really been motivated by customer experience more than operating segment, which was the story 4 or 5 years ago.

So long story short, you should consider that selling organization in terms of the total selling organization as being fairly flat in terms of the size of it. In terms of -- we are always looking at opportunistically investing in the sales force. We look at it market-by-market, and it's a function of what we think our potential market share is in a particular geography and what is the current route size. So in a market where we have high route size and we think we have an opportunity to gain share, those are the first geographies where we will invest in growing the sales force in order to continue to grow share. That's very much of a geography-by-geography decision.

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Dirk J. Locascio, US Foods Holding Corp. - CFO [53]

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And that's an (inaudible) process we have with the sales team on a regular basis.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [54]

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That was helpful color. And the next,, in terms of the app, I mean, 60% of the independent restaurant customers order off the app. It's obviously a high number that could, in theory, go even higher. I guess, what are the reasons why some of the independent restaurants haven't necessarily taken up app adoption? Secondly, you're so ahead of your competition, but your competition has certainly closed a lot of that gap. I mean, are you working with anything to kind of leapfrog the next evolution of digital ordering for your customers? And kind of in that context, if you could talk about some of the customer facing technology that you have, any updates that may be coming? Is it -- are we looking at more evolutions or might there be like substantial new versions to come that could drive your effectiveness further in this important initiative?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [55]

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Okay. So I guess, to start with how high is high, we're close to 60%. Look, we have many markets and we have many TMs who are even higher than that number. We have many in the 70% range or higher. What keeps some from going higher, I would say, the constraint or the hurdle is more in terms of the sales force than the customers. It's an ongoing process to ensure that every single one of our TMs fully embraces all our tools and that happens at different rates. So we see it continuing to go higher over time but obviously at a decelerating rate. In terms of improvements, a lot of focus on mobile, as I said. We're seeing really great adoption of our mobile tools. And the investment also has been, in addition to the customer facing mobile side -- sorry, customer facing in 2 other areas: one, in terms of enhancements to our CRM platform to enable team-based selling; and thirdly, in some of the value-added services that we continue to expand. And I think, the growth in value-added services kind of year-on-year is probably 50% or 60%. So we could see -- so just to summarize, we've seen opportunity to increase. We'll continue to invest in the functionality and the experience be at the order entry platform or other elements that hanging off of that, either are CRM platform or value-add services.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [56]

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And is there a way, and I guess, are you even concerned about or do you think about the kind of the relative usability or the relative preference of the US Foods app versus the apps or digital platforms of some of your major competition. I mean, is it -- first question is, one, has that gap narrowed? And it has and you're concerned about it, do you have something in place that can allow that to widen again?

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [57]

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Right. So we're, as I said a minute ago, John, continuing to -- we still have a long list. It's a bit like product innovation. I know when I first started in that realm, I thought, at some point, you run out of ideas. And what you learn is, there's no shortage of ideas. And it's really the art is in prioritizing the ideas, prototyping them quickly and driving adoption, that's really, I think, what we've done a good job of is driving adoption. And right now, we're, with respect to certain individual sellers, focused on driving adoption or driving adoption of our value-added services in our CRM platform, which just helps drive profitable sales growth.

The other thing I would say in terms of comparison to competitors. So, one, it's really hard to measure apples-to-apples. As an example, we exclude EDI from our measurement. So it's hard to compare exactly where we stand relative to others. And then, the other thing, too, I would say is, there are, as we've always said, it's an incredibly fragmented industry. And while our lead with respect to a handful of competitors may be narrowing, we still have a very dramatic lead relative to most competitors out there. And we compete against the whole suite of local, regional, cash and carry and other distributors. So still an important tiebreaker with customers when you look at a large competitive set.

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Operator [58]

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(Operator Instructions) There are no further questions at this time. Speakers, you may continue.

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Pietro Satriano, US Foods Holding Corp. - Chairman & CEO [59]

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All right. Well, I had the opportunity to thank our associates earlier and associates at SGA for their continued commitment. Hopefully, you see the continued progress against our strategy by way of our results and our confidence with respect to future results. I'd like to thank everyone for your questions today and for joining us on our call today. Thanks, again.

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Operator [60]

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And this concludes today's conference call. You may now disconnect.