US Foods Holding Corp. (NYSE:USFD) Q4 2023 Earnings Call Transcript
US Foods Holding Corp. (NYSE:USFD) Q4 2023 Earnings Call Transcript February 15, 2024
US Foods Holding Corp. misses on earnings expectations. Reported EPS is $0.64 EPS, expectations were $0.68. US Foods Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Fourth Quarter 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mike Neese, Senior Vice President, Investor Relations. Please go ahead.
Mike Neese: Thank you Eric. Good morning and welcome to US Foods fourth quarter and full year fiscal 2023 earnings call. On today's call, we have David Flitman, our 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 in 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 fourth quarter and full year 2023 results to the same period in fiscal year 2022. 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 the potential factors that could cause our actual results to differ materially from as anticipated in those results. 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. Now, I'd like to turn the call over to David.
David Flitman: Thanks, Mike. Good morning, everyone and thank you for joining us today. Let's turn to today's agenda. I'll start by sharing highlights from my first year at US Foods and progress against our key strategy pillars and long-range plan. Before I hand it over to Dirk to review our fourth quarter and full year 2020 financial results as well as fiscal 2024 guidance. 2023 was an exciting year at US Foods to execution of our strategy and long-range plan which underpins our company's transformation, we accomplished many of our goals, including capturing profitable market share and enhancing margins. Following this past year's success, I am even more confident in our ability to continue to gain profitable market share with independent restaurants, health care and hospitality customers, improved productivity, drive margin expansion and deliver double-digit adjusted EPS growth.
We achieved record full year 2023 adjusted EBITDA of $1.56 billion, driven by strong case growth, including independent case growth of nearly 7% and market share gains with target customer types. This was combined with 53 basis points of adjusted EBITDA margin expansion which came as a result of the implementation of key operational initiatives we outlined at the beginning of the year. Our proprietary digital platforms, MOXe and VITALS were key drivers of our top line performance in 2023 and are enablers of further growth in 2024 and beyond. We also deployed our strong operating cash flow to reduce net leverage to 2.8x which is within our target range, repurchased approximately $300 million in shares and completed 2 accretive tuck-in acquisitions, all while investing in the business for continued organic growth.
We continue to lead the industry in the digital customer experience by constantly innovating and adding new capabilities to meet our customers' needs. Our differentiated business model, digital expertise and sustainable competitive advantages will enable us to drive continued market outperformance. The structural improvements we made in 2023 position us to win in any macro environment. My confidence comes from the strong momentum we've built, delivering against our long-range plan and from our 30,000 dedicated associates who bring their expertise and tireless dedication to work every day. Turning to Slide 4; our strategy guides how we operate and what we are focused on to win and comprises 4 pillars: culture, service, growth and profit. I believe these are the right areas of focus to ensure continued service improvements and sustainable top and bottom line growth.
We're excited about the progress we've made to accelerate each of these coming into this year. Moving to Slide 5; let's take a look at some of our key accomplishments in 2023 that our team delivered under our 4 pillars. Our first pillar is culture. The safety of our associates remains our number 1 priority and we made significant strides in 2023 to reduce the number of vehicle accidents and associated entries across our facilities. Our injury and accident frequency rates improved from the prior year by 23% and importantly, our fourth quarter and full year 2023 safety results were our best in recent history. Additionally, creating a supportive and inclusive workplace is key to our success and we enhanced our diverse talent pipeline by filling 47% of new or open leadership roles with women or people of color, exceeding our 40% goal.
We also remain responsible stewards of our planet. And in 2023, reported reducing absolute Scope 1 and Scope 2 greenhouse gas emissions by 13% during the previous year, 40% of the way toward achieving our 2032 target. We continue to make progress on infrastructure design and construction to support electric vehicles and took delivery of 40 electric trucks and 8 electric yard tractors in addition to completing the delivery of 42 compressed natural gas trucks. We also continue to innovate and offer our customers more sustainable private label products many of which come under our Serve Good product portfolio. In 2023, as part of our strategic focus on fighting hunger, we donated more than $13 million in food and supplies to hunger and disaster relief partners which is the equivalent of roughly 5 million meals for more than 225 drug loads of food.
As a Feeding America mission partner, US Foods provides year-round support to food banks across the country through financial and product donations. This work is supported by our associates who volunteer their time and resources to fight hunger through annual company-wide engagement campaigns. Since 2007, US Foods has donated more than 170 million pounds of product to a national hunger relief efforts. Turning to our service pillar; we continue to focus on providing a best-in-class delivery experience. We are proud to report our on-time and in-full customer service levels are now back to pre-COVID levels. We delivered the best cases per mile in our company's history again in the fourth quarter, improving over our prior third quarter record. We launched the Dicard [ph] routing pilot in 2 markets in the fourth quarter and have taken away early learnings to apply to our national launch this year.
Our routing initiative provided us with more than 5% improvement in routing effectiveness in 2023, while also focusing on further improvements in on-time deliveries enabled by the Dicard [ph] platform. As I mentioned earlier, we are also transforming the experience for our customers through our MOXe digital solutions platform that enables customers to easily place orders, manage inventory and pay bills while freeing up time for our sales teams to further accelerate growth. In short, it puts our supply chain in the hands of our customers. which will generate tremendous efficiency for both our customers and U.S. fees. MOXe is now fully embedded with our independent restaurant business and approximately 50% of our national chain business with full deployment anticipated by the second half of 2024.
Our digital penetration is at an all-time high of 73% for independent restaurants. Our Net Promoter Score which is the highest in the industry among top foodservice distributors continues to increase since the launch of MOXe. We want to help our customers succeed and are giving them digital tools to make it easier for them to do business with us which we believe is a key differentiating factor in our success. Now let's turn to our growth pillar. In 2023, we had net sales growth of 4.5% to $35.6 billion, driven by our 4.4% growth in total case volume led by a 6.9% increase in independent restaurant case volume, a 7.2% increase in health care volumes and an 8.9% increase in hospitality volumes. We exceeded our 1.5x restaurant market growth goal and have now gained market share with independent restaurants for 11 consecutive quarters.
We anticipate this will continue over the course of 2024. Our volume gains in both health care and hospitality were driven largely by converting our pipeline of customers into new business through our service model and innovation, such as our highly differentiated VITALS platform for acute care and senior living facilities. This platform allows customers to increase patient satisfaction and reduce labor and staffing costs. This improves revenue flow and bolsters operations through more effective pricing strategies, staff training and menu planning. We also continue to differentiate ourselves through our fresh, on-trend and labor savings Scoop product innovations, such as our recently launched Chef's Line exclusive brand of Kim Chi Fried Rice and a unique team-based selling model featuring our expert chefs and restaurant operation consultants, these are significant competitive differentiators that our customers have grown to value.
Our hard work and commitment to constantly innovate was recognized as one of Fortune's most innovative companies that are transforming industries from the inside out. Companies were ranked based on an assessment of 4 dimensions of innovation, product, process, culture and revenue growth. We believe our products will continue to be industry-leading as we use our in-house expertise, market research and supplier relationships to deliver value to our customers. We also expanded Pronto which is our differentiated and flexible small truck delivery model aimed at improving customer service in targeted dense geographies. Today, Pronto has the presence in 35 markets and we plan to launch it in another 5 markets in 2024. Pronto has been a great addition to our customer service model and has accelerated independent restaurant case growth in markets where we have added it.
Much opportunity remains for continued growth in both existing and new markets. The real machine behind our growth pillar is our sellers. Last quarter, I highlighted that we were working on revisions to our territory manager sales compensation plan. I want to provide a bit more context on the changes that we've made. Why change now? We had our current sales compensation trends for several years and last made modifications during the early portion of the pandemia. We wanted to ensure our sales teams are aligned and accelerating profitable growth and that requires effectively incentivizing our sellers for that profitable growth. A few highlights; we made more of our sellers compensation variable with a variable component now uncapped and focused on accelerating profitable growth and private label penetration.
We have signed individual volume targets and higher-margin private label targets for sellers that roll up to our company business plan. ensuring we are all working together to achieve our profit and market share growth goals. Finally, we have implemented a more disciplined approach to route splitting to ensure our territory sizes are manageable. We are confident this plan better positions us for success and ensures we are growing together across the organization. In 2023, we increased seller head count by 6%. We're having great success in finding the right sales talent to ensure that our profitable growth continues well into the future. We continue to believe adding sales head count in the low to mid-single digits is the right model for US Foods going forward.
Turning to M&A; to bolster our local footprint in select markets, we executed two tuck-in acquisitions last year, renting foodservice and Saladino's food service. And this morning, we're excited to announce that we've signed an agreement to purchase IWC Food Service which serves the greater Nashville area, one of the fastest-growing markets in the country. This acquisition fills an important gap in our footprint and allows us to expand into the Central Tennessee market. IWC has approximately 220 associates and $200 million in annual sales. More than half of their business is in the growing independent restaurant space. We're excited to welcome the IWC associates to the US Foods team and are targeting to close the transaction in the second quarter.
Finally, let's move to our profit pillar. Driving margin, productivity and optimization of our business are the key tenets of this pillar, addressing cost of goods sold proactively managing pricing to help neutralize commodity volatility and healthy volume growth with target customer types all contributed to enhancing our margins. As a result of our improving execution, we grew adjusted EBITDA 19% to a record $1.56 billion and delivered record EBITDA per case, while expanding adjusted EBITDA margin by over 50 basis points to 4.4% and growing adjusted EPS by 23% to $2.63. Adjusted gross profit grew 9% in 2023 to $6.1 billion. We drove further progress on initiatives such as cost of goods sold by working collaboratively with additional vendors.
We addressed approximately 60% of COGS last year and continue to look for additional cost savings in 2024 as we deliver on the remaining 40% of our vendor spend that has not yet been addressed. We are also focused on growing our private label brands where our penetration was up 40 basis points to over 50% with independent restaurants. Adjusted operating expenses grew less than gross profit, resulting in operating leverage. Our flexible scheduling initiative is now live at over half of our locations and we continue to receive positive feedback. We will roll out the remaining appropriate locations in 2024. We continue to see significant improvements across our network, especially in our pilots, including year-over-year reduction in turnover that is approximately twice the rate of improvement versus our other locations.
33% improvement in safety and continued improvement in productivity. As a result of our supply chain initiatives, we delivered more than 5% improvement in both delivery and warehouse productivity. We began to see early results with our indirect spending initiative late last year and expect to accelerate those savings in 2024. We have identified a number of opportunities which will favorably and permanently impact operating expenses. This work is an important enabler to achieving our target of 3% to 5% overall annual productivity savings in 2024. Before I hand it over to Dirk, I would like to highlight one of our talented associates. Soon, we will be celebrating associates who ignite excellence in our first-ever CEO awards. Out of hundreds of associates nominated across the company, Mike Talmadge, our night warehouse manager in Albany is 1 of our 25 semi-finalist nominations.
Mike's leadership has driven significant improvements in safety, associated engagement, quality and profit at the local level. His efforts have quickly become a benchmark for excellence within the company, influencing customer service and our ability to grow profitably. Mike has one of thousands of our associates who strive for greatness within US Foods and we appreciate his leadership and the dedication of each of our associates. I am pleased with our progress in 2023 as we gained momentum, executing against the 4 pillars of our strategy which is driving improved safety, service, productivity and profitability. Even considering this tremendous progress, we have a long runway of profitable growth. The team and I look forward to sharing our next long-range plan during our Investor Day in June and we hope you will join us.
Let me now turn the call over to Dirk to discuss our fourth quarter results and our 2024 guidance.
Dirk Locascio: Thank you, Dave and good morning, everyone. I'll cover 3 topics with you this morning. First, I'll discuss our fourth quarter and full year 2023 results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our first quarter and full year 2024 guidance. Turning to Slide 7. I'll walk you through our fourth quarter results in greater detail. The fourth quarter was a strong finish to 2023 as our full year adjusted EBITDA margins increased double digits and we continue to grow our margins. Net sales increased 4.9% to $8.9 billion, driven by total case volume growth of 5.6%. Food cost inflation was essentially flat, while mix was a headwind of 70 basis points. We drove strong volume growth in each of our target customer types again this quarter.
Volume increased 7.3% for independent restaurants, including approximately 100 basis points of growth from acquisitions. Healthcare growth was 8.1% and hospitality was 5%. Health care and hospitality continued to deliver strong profitable growth, driven in large part by healthy net new business. We remain focused on expanding within our target customer types and expect to continue that momentum in 2024. Chef store volume in November and December had low single-digit case growth which was in line with our expectations. We continue to expect accelerated growth in 2024. This quarter, we moved Chef store cases to all other and thus, they are no longer included in independence. We made this change to be consistent with how third-party providers such as Carcano, formerly known as MPD, report market share data and it better aligns with how peers communicate their broadline growth.
All periods have been up for consistency. During the fourth quarter, adjusted gross profit increased 6% to $1.5 billion, while adjusted operating expenses increased 4% to $1.2 billion. Our adjusted gross profit continues to grow faster than adjusted OpEx. Adjusted EBITDA was $388 million or 11% growth from the prior year. We expanded adjusted EBITDA margins by nearly 25 basis points to 4.3%. Finally, adjusted diluted EPS grew 16.4% to $0.64 per share, demonstrating our continued growth of EPS faster than adjusted EBITDA. Turning to Slide 8; we made significant progress on a per case basis in 2023 which we believe emphasizes the strong execution of our strategy. Our adjusted gross profit per case increased 4.5% in 2023, while our adjusted operating expense per case was up 1%.
Importantly, our adjusted EBITDA per case was $1.93 for the full year. up 14% year-over-year and represents 4.3% compound annual growth rate since 2019. We have demonstrated strong leverage through the P&L with operating expense per case growing at a slower rate than gross profit per case and we expect to maintain that operational discipline in 2024 and beyond. Moving to Slide 9; our strong operating cash flow creates flexibility to deploy capital strategically to enable growth. Our 2023 operating cash flow was $1.1 billion with free cash flow of over $800 million. We invested $309 million in cash CapEx. We continue to focus on -- to expand our fleet and invest in capacity and technology to enable organic growth. Our ongoing cash CapEx target is approximately 1% of net sales and we will remain disciplined in our approach.
Following the successful closing of [indiscernible] in Q3, we closed the Saladino's acquisition in December for a purchase price of $56 million. We remain committed to returning capital to shareholders as we repurchased 1.6 million shares in the fourth quarter for $65 million. We have $192 million remaining on our $500 million share repurchase program. Before moving on to guidance, I want to highlight the significant progress we made in reducing our leverage in 2023. We ended the year at 2.8x levered which is a 0.7 turn reduction versus 2022. We were steadfast in our approach to lowering our leverage last year which we accomplished through disciplined debt paydowns and EBITDA growth. We expect to remain in our net target leverage range between 2.5x and 3x for 2024.
Our balance sheet is in solid shape which informs our capital allocation framework. We will continue to invest in the business, repurchase shares given the current valuation of our stock price and evaluate tuck-in M&A opportunities. Now, I'll discuss our guidance on Slide 11. Importantly, there are several assumptions on this slide. For full year 2024, we expect total company net sales to be $37.5 billion to $38.5 billion. an increase of approximately 5% to 8%. We believe we can grow our total cases by 4% to 6% and we expect slight inflation of 0.5% to 1.5%. Our tuck-in M&A from last year, combined with the IWC announcement will add approximately 2 percentage points to our case growth. We expect our independent restaurant case growth to continue running higher than our overall case growth.
As a result of good faith barging efforts, our agreement with the union Investa bill that represents our drivers was gratified at February 3. US Foods has a long-standing record of our being in good faith and reaching agreements with the union. From the start, we took a principal approach and provided a fair offer to the union before and after the expiration of the contract on December 29th. We are pleased that the agreed upon proposal largely reflects the economics outlined in that offer. The 5-year agreement provides wage and benefit increases that builds on the highly competitive offerings are drivers [indiscernible] currently receive. It also includes safety enhancements aligned with the very high priority we place on associate safety. There was an increased cost to us for business continuity and labor relations to serve our customers.
as well as weather-related issues across the country which have been noted by several others in our industry. As a result, we expect an approximate $20 million negative impact to adjusted EBITDA for the first quarter, primarily driven by incremental costs during the labor disruptions. We believe the first quarter adjusted EBITDA will be in a range of $340 million to $355 million. Even with the labor disruption and the weather-related issues that we experienced in January, we remain confident in achieving our full year guidance. We expect adjusted EBITDA to be $1.69 billion to $1.74 billion and adjusted diluted EPS to be $3.20. This translates into double-digit growth on the bottom line from the combination of profitable growth and margin expansion as we expect gross profit per case to grow faster than OpEx. In closing, 2023 was a strong year.
I feel very good about the opportunity in front of us. the momentum we are generating and our growth potential this year, as outlined in our 2024 guidance. I'll now pass it back to Dave for his closing remarks.
David Flitman: Thanks, Dirk. As we move into 2024, we will continue to execute our strategy and maintain our disciplined approach to capital deployment to drive long-term value creation for our shareholders. Before we head into Q&A, I would like to comment on our long-term growth prospects. As I've said before, our 2024 adjusted EBITDA target is not a ceiling for this company. and we are confident that we will continue to grow adjusted EBITDA in the high single to low double-digit range over the next several years. And we will continue to grow adjusted EPS even faster through a combination of earnings growth and share repurchases. Stay tuned. There's more to come at our Investor Day on June 5. We are in a great position today and I believe we have sustainable competitive advantages to outperform the market well into the future as we continue to do what we do best, helping our customers make it every day.
Thank you for your continued trust and confidence in US Foods. I have never been more excited about our future. With that, Eric, please open up the line for questions.
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