Ladies and gentlemen, thank you for standing by, and welcome to the Quarterly 2021 Performance Review. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Operator Instructions. I would now like to hand the conference over to your first speaker today, Ms. Melissa Napier. Ma'am, the floor is yours.

Thank you, Laurence. Good morning, everyone. Welcome to our first quarter earnings call. Today, we have Pietro Satriano, our CEO; and Dirk Locascio, our CFO on the call. Pietro and Dirk will provide an overview of our results for the first quarter of fiscal 2021. We’ll take your questions after our prepared remarks conclude. Please provide your name, your firm and limit yourself to one question. During today’s call and unless otherwise stated, we’re comparing our first quarter results to the same period in fiscal year 2020. References to organic financial results during today’s call exclude contributions from Smart Foodservice, which we acquired in April of 2020. 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 2020 Form 10-K for those potential factors which could cause our actual results to differ materially from those expressed or implied in those statements. Lastly, during today’s call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website. I’ll now turn the call over to Pietro to get us started.

Thanks, Melissa, and good morning, everyone. Today, we’re going to focus on the recovery, the recovery which has been extremely good news for our industry, the recovery that has also called on our associates to work harder than they had before. So, I do want to take this opportunity to recognize our 26,000 associates, whose tireless commitment to serving our customers over the last several months has truly been second to none. In this call, we’re going to cover three themes which are outlined on page two. First, our industry continues to recover and we are participating in that recovery in a meaningful way. During the last few months, we have seen a steady increase in volume and restaurant traffic, as in-person dining restrictions continue to be lifted. The recovery that we have seen over the last few months and our rebound in sales from markets that are mostly open gives us the confidence that the industry will fully recover to, if not exceed, 2019 case volume levels. Second, our scale and differentiated strategy is driving market share gains across most customer types as our technology, innovative products and team of industry specialists have provided customers with the necessary resources and tools to thrive in the current environment. And third, as case volumes have begun to recover, we have seen our financial results strengthen. We expect our financial results to continue to improve as the recovery continues. But, the same recovery that is driving volume gains is also driving tightness in labor for customers, distributors and manufacturers alike. We believe, however, that this tightness is transitory and will ease in the latter part of the year. Moving to slide 3, the foodservice industry is experiencing a recovery as in-person dining restrictions ease around the country, plus COVID-19 vaccine distribution becomes more widespread. The chart on the left shows that traffic at restaurants recently exceeded traffic at grocery and convenience stores, and is very close to returning to pre-pandemic levels. The recovery has been driven not only by easing restrictions, but as importantly, by consumer sentiment. As shown by the chart on the right, consumers are becoming increasingly more comfortable eating out, a trend we expect to continue as vaccination rates increase and COVID cases continue to decline. And last, even if dining out continues to recover, we expect some of the increases in off-premise buying to become permanent, which augurs well for food-away-from-home to continue to gain share from food at home. On slide 4, you can see how the recovery trends that I just spoke about have impacted our case volumes for each of our main customer types compared to fiscal year 2019. Since the beginning of 2021, we have seen a steady increase in monthly case volume with our restaurant and hospitality customers. This is highlighted by restaurant case volume exceeding the quarter with volume levels that were above 2019. While the industry recovers, certainly part of the story behind our recovering volumes is that we are also gaining market share. First, let’s talk about restaurants. Chain volume for March and April was ahead of 2019. And for independents, volume for March was flat to 2019 and above 2019 for April, and a positive trend has continued. The Mother’s Day week that we just concluded on Saturday had the highest shipments to independent restaurants for legacy business of any Mother’s Day week in five years with a 6% jump over 2019 Mother’s Day week. Here, we know that consumable upsides still exist. In markets where local jurisdictions allow more than 50% seating, volume is well ahead of 2019. This includes much of the South and Southeast and a few other geographies. In markets where even less than 50% or less than 25% seating is allowed, like the Northwest, volume is well below 2019. So, as restrictions get lifted everywhere, as vaccination rates continue to increase and as consumer sentiment continues to improve, we expect all markets to move into positive territory. Hospitality: The hotel portion of our hospitality business is recovering as leisure travel returns and occupancy rates recover, with occupancy rates now being only 500 basis points below a year ago. We expect this trend to continue. Consumer surveys highlight that travel, next to dining at restaurants, is one of the top things that consumers are looking forward to doing. Our portfolio of hotel customers leans more towards the leisure side of the industry, positioning us to take advantage of the increase in leisure travel that is expected as the economy reopens. Our health care case volumes continue to remain steady in the negative 10% range, which is where it has trended for the better part of the last year. Restrictions on visitors at hospitals are just starting to be lifted, and hospital cafeterias are just beginning to reopen. We also expect that occupancy rates of senior living facilities, which have declined over the past year, will start to normalize as vaccination rates increase. Both of these factors, plus recent wins in the health care area, indicate that health care case volume will ultimately return to pre-COVID levels, if not higher. For nationally managed customers, which includes national chain, health care and hospitality, you will remember that in 2020, we added $800 million of new customer wins, which is driving some of the increases we are seeing. In the first quarter of 2021, we added $200 million of new customer wins, and our pipeline for the balance of the year is very healthy. Lastly, and for national chains specifically, the contribution margin at which we are signing new customers is well above the average for that portfolio and above the margins associated with recent wins. Turning to page 5. As I’ve discussed, an important factor behind growing case volumes has been the recovery of our industry. But an equally, if not more important factor, has been our market share gains across most customer types. The driver of our market share gains continues to be a Great Food Made Easy strategy, which aims to help customers succeed by taking advantage of our leading technology, our innovative products and our team of experts that support our sellers. Let me give a few examples of how our core programs and our strategy have evolved to meet changing customer needs and contribute to recent market share gains. First, on the technology front. Recent research and comments from new customers indicate that our technology platform still leads the industry. For example, for larger customer wins, like the $1 billion of wins in the last five quarters, we track the main reason why a customer switches to US Foods. In many cases, the determining factor is a combination of our technology and our service model. We see that especially with health care and large chains where technology makes it easier to manage menus and control costs across multiple locations. Similarly, for independent restaurants, we continue to enhance the functionality to make our technology even easier to use. Some recent enhancements include mobile pay functionality and the ability for customers to see our inventory in real time. This visibility provides real value to customers, especially at a time when the industry is experiencing some volatility on the part of manufacturers. Second, on the product innovation side. I mentioned on our last call how COVID has resulted in a shift in the products that customers rely on the most. The three big trends that we observe are off-premise dining, the need to mitigate labor challenges and products that promote well-being, which includes plant-based products. Our Spring Scoop, which launched in February, featured products exclusive to US Foods but addressed all three of these operator needs. As a result, we saw a trial of these innovative products in line with historical norms, which we know contributes to increased retention and market share gains. Our upcoming Summer Scoop will similarly feature products that take labor out of the kitchen, especially ingredients or components that require intense preparation. These labor-saving products enable restaurants to maintain interesting options on their menu and continue to add innovation to their menus. We’re also expanding our range of products that support the continued growth in off-premise dining, such as tamper-evident packaging and grab-and-go products. Note that our 2020 corporate social responsibility report was published two weeks ago. This is a comprehensive review of our progress in our three pillars of people, product and planet, of which our line of 900 Serve Good sustainable products is an important component. The report is available on our website, which I encourage you to visit to learn more about our efforts. The third and final part of our Great Food Made Easy strategy is our dedicated team of industry experts that are available to help customers run their business more effectively. Since the beginning of the pandemic, we have had a dedicated team of restaurant operation consultants helping customers access CARES and Restaurant Revitalization Act funding. Starting with our first webinar in April 2020, the team has held weekly webinars and conducted over 7,500 one-on-one consultations to help customers understand and navigate available funding options. We estimate that our team has assisted customers in accessing over $1.5 billion in funding since COVID began. And as early as mid-February, this team was conducting webinars on helping customers be prepared to access the Restaurant Revitalization Fund even before the legislation was signed into law. These efforts are truly making a difference to customers. As illustrated by this email we received from a restaurant owner in St. Louis, which I’d like to read to you now: "The information you supply is a game-changer. My payroll company said they found $300,000 between both my businesses. I’m not sure how to thank you. You are literally changing people’s lives." This is what we mean by "we help you make it." Now moving to slide 6. Another key part of our strategy has been the acquisitions of Food Group and Smart Foodservice. The Food Group acquisition allowed us to dramatically improve our distribution footprint in the Northwest, giving us a presence in this growing part of the country and making us more attractive to regional and national customers. The acquisition of Smart Foodservice enabled us to scale our entry into the cash-and-carry channel, a more profitable and faster-growing channel in the foodservice industry. Not only does this channel provide a more attractive growth and margin profile and enable growth and share of wallet with our existing delivered customers while extending our reach to target customers we weren’t previously serving. Let’s spend a few minutes talking about the progress we have made on the integration of Food Group and the future growth opportunities cash and carry presents. Starting with Food Group. The warehouse systems conversions are progressing well. Since we last spoke, we have completed two additional conversions, Portola 4, and we are on pace to have all of the Food Group warehouses converted to the US Foods operating system in the second half of this year, in line with our original plan. If you recall, completing the warehouse system conversion is a key enabler to unlocking the $65 million of annual run-rate synergies. In 2020, we made good progress on synergy capture, especially on the product side. And we remain on track to capture the full $65 million synergies by 2023 with 80% captured by the end of 2022. We’ve also begun to expand Food Group capabilities around meat and produce to the rest of the US Foods network. And we are excited about the enhanced product offering this will bring to customers around the country. The Smart Foodservice business continues to outperform our delivered business as it has throughout the pandemic. Same-store sales for April are ahead of 2019 as restaurant demand continues to recover, and we continue to benefit from some direct-to-consumer sales, sales that we are getting without modifying our business model. On our last call, I mentioned that we would be rebranding all Smart Foodservice locations to the US Foods CHEF’STORE brand. I’m pleased to report that the rebranding effort is now complete and customers have responded well. With the rebranding complete, we have begun to fully leverage the power of combining these two channels by offering both sellers and customers incentives to shop the two channels. As a result, we are seeing delivered customers increase their purchases from CHEF’STORE with minimal impact on the delivered business. This multichannel offering is an advantage that no other competitor has access to. Lastly, the conversion to the CHEF’STORE brand will help facilitate our expansion into new geographic markets in which US Foods has an established presence. Having covered the first two themes of our presentation, first, the continued and expected recovery of our industry; and second, how our scale and differentiated strategy is contributing to driving market share gains, I want to spend just a couple of minutes talking about the current operating environment that I referred to in my opening comments, after which I will turn the call over to Dirk. As I’m sure you are all too familiar, all elements of the value chain are facing labor shortages. We are seeing restaurants having to close one day a week to give their staff a break. In some markets, hiring drivers and selectors is taking longer than expected. And lastly, some manufacturers are having trouble meeting the growth in demand. We believe that there are a number of factors contributing to this environment, including workers who have temporarily left the labor force, extended unemployment and the remarkable but as yet incomplete progress on the vaccine front. We believe that all these factors will sort themselves out over the next two to three quarters. In the meantime, we are working hard to mitigate these factors so as to meet increasing demand on the part of our customers. First, we have added significant inventory, a 25% increase in days on hand and on order, as well as working very closely with manufacturers. Second, we are making use of one-time sign-on, referral and retention bonuses to avoid embedding these wage pressures into our cost structure. Lastly, we are pleased with how the recent changes to our operating model have helped mitigate some of the supplier and labor pressures the industry is experiencing. You will remember that by reducing the number of regions to four, we freed up some resources, which then shifted to centers of excellence, whose aim is to quickly develop and deploy best practices across the country and which has helped us in this environment. I will now turn the call over to Dirk for a discussion of our first quarter financial results and how we have positioned the business for earnings growth.

Thank you, Pietro, and good morning. I’ll begin on slide 9, where I’ll cover a few highlights for the quarter. As Pietro referenced earlier, case volume improved as the first quarter progressed, especially with our restaurant and hospitality customers. This resulted in a corresponding improvement in adjusted EBITDA as we moved through the quarter. These volume trends have continued in the early part of the second quarter as the recovery continues to take shape. When comparing last month’s restaurant volume and trends compared to April of 2019, independent cases trended modestly ahead while chain cases were well into positive territory. Gross profit per case for the first quarter of 2021 was below Q1 of 2020. However, the recent improvement in case volume has driven an improvement in gross profit per case as our customer and product mix has started to return to pre-COVID levels. Our gross profit per case improved over the course of the first quarter as volume and mix improved. We saw higher product cost inflation in Q1 2021 than we did in prior quarters, which is negatively impacting our gross margin as a percent of sales. Much of the 2.7% product cost inflation we saw in the first quarter was in center-of-the-plate categories that may persist in coming quarters. If you recall, center-of-the-plate items such as beef and poultry, and some customer contracts are typically priced with a fixed fee per case markup. So, when we have higher inflation, gross margin as a percent of sales can compress for these product categories and customers, even if we are making the same amount of gross profit dollars in each case we sell. Comparing to Q1 of 2019 for a moment, our gross profit per case was negatively impacted by higher freight costs as well as the continued, albeit improved, negative mix impact already noted. As our case volume and corresponding mix continue to improve, we expect gross profit per case will also continue to improve. When we compare our gross profit per case to 2019, the gap for the first quarter was the smallest it has been since COVID began. Looking ahead, we expect to see continued headwinds in gross profit per case from the tight freight market and expect mix to improve as case volume improves. Although we expect the higher freight cost to be transitory, we do think they will remain a challenge for the next two to three quarters. On OpEx, over the last few quarters, I’ve spoken about the $180 million of fixed cost savings that we enacted in 2020. These cost savings are contributing to our results, and we are beginning to see the fixed cost leverage return as case volume recovers. We’ve begun thoughtfully reinvesting some of the 2020 savings back into the business to further enable sales growth and earnings improvement. We’re reinvesting approximately $50 million, primarily to support growth in both our local and national selling organizations as well as within some key areas such as supply chain to further improve our results and customer experience. This equates to roughly two-thirds of the $180 million ultimately flowing through as permanent cost savings. Slide 10 shows our net sales, adjusted gross profit and our adjusted operating expense results for Q1 of 2021 and 2020. Net sales dollars for the quarter were down slightly compared to the first quarter of 2020. And you’ll recall that only the last three weeks of the first quarter of 2020 were heavily impacted by the rapid onset of COVID-19 and the business closures across the country. Our adjusted gross profit dollars for the first quarter declined 2.7%. And our adjusted gross margin was down 30 basis points compared to prior year. Freight costs, customer product mix and higher product cost inflations were headwinds to adjusted gross margin in the quarter compared to Q1 of 2020. We do expect case volume improvements with independent restaurants, health care and hospitality to have a positive impact on our adjusted gross margin going forward. Adjusted operating expenses in the first quarter decreased 2.6% in dollars and improved 30 basis points as a percent of sales. The improvement in adjusted operating expense as a percent of sales is largely due to the cost savings initiatives we’ve put in place over the past year and the sales inflation impact. On a dollar basis, the reduction in cost is primarily due to lower volume and the cost savings initiatives, partially offset by approximately $25 million higher bonus expense in Q1 2021 than Q1 2020. The first quarter of 2020 had a negligible amount of bonus expense. The lower fixed cost base that we operate from today will continue to benefit us as case volume returns, with a larger percentage of gross profit dollars flowing through to the bottom line. We do expect that supply chain cost inflation will be transitory, but will be a headwind through 2021. We expect the cost increases to be transitory until the workforce increases and the hiring demand from the recovery subsides, likely later in the year. On slide 11, adjusted EBITDA was $172 million, adjusted net income was $27 million and adjusted diluted EPS was $0.12 for the first quarter. As I mentioned earlier, adjusted EBITDA improved as we moved through the quarter and the second quarter has started out very similar to how the first quarter finished. We remained in a GAAP net loss position for the first quarter and as a result are not reflecting the additional shares from the preferred equity transaction in our adjusted diluted EPS number for the quarter. We do expect to return to positive GAAP net income in the near future and will reflect the additional shares at that time. And as Melissa noted at the beginning, reconciliations of our adjusted numbers are included in the press release and the appendix of the presentation. Just to wrap up, moving to slide 12. Share gains, cost savings initiatives and the operating model changes have and will continue to improve our effectiveness and our results. These, combined with the leverage from volume returning, have positioned us to take advantage of the recovery and drive earnings growth well into the future. Share gains with both large and small customers since the recovery began last summer have strengthened the top line, and we continue to pursue profitable new business and believe that our differentiated strategy and scale give us an advantage over many of the distributors in our industry. As I mentioned earlier, we do expect some transitory headwinds related to freight and supply chain labor over the next two to three quarters. Our business has historically produced strong operating and free cash flow. As the recovery continues, we expect to return to generating a healthy level of free cash flow. And this cash will be used to reinvest in the business and reduce our outstanding debt balance. In April, we used cash on hand to pay down $150 million of outstanding debt, and we’ll continue to make debt paydowns as the recovery unfolds further through 2021. We still expect to operate the business at a 2.5 to 3 times leverage ratio through a combination of improved EBITDA and debt paydown. Pietro said at the beginning, the recovery is underway. And our second quarter case volume is off to a good start. At this time, it’s hard to forecast the precise timing of the recovery as it may not necessarily progress in a linear manner, but we do see restaurant demand improving as more markets remove restrictions and as warmer weather allows for more outdoor dining in additional parts of the country. As a result, we expect continued improvement in Q2 adjusted EBITDA compared to Q1. Over the last 30 years, customers have shown a consistent preference for eating away from home, and we expect this trend to continue. We’re confident about the future of US Foods and the industry. Operator, at this time, we can now open the call for questions.

Operator Instructions. Your first question comes from the line of Kelly Bania from BMO Capital.

Hi. Good morning. Thanks for taking our questions. Wondering, first, just on the comments on freight, if you can help just — help us understand the magnitude of the headwinds, how much you’re using third-party freight on the spot market versus contract and just how we should think about modeling that over the next couple of quarters.

Sure, Kelly. Good morning. I’ll take that. Although we haven’t talked about the specific breakouts, we do manage a large portion of our freight that is relatively split between vendors delivering using their carriers and where we arrange for delivery either with one of our trucks or contracting directly with third parties. We do use spot rates. In a normal environment, it’s relatively small. When we use third parties, we do try to contract with them. It can increase during more volatile environments like we’re in now. What I would say is this: our teams are not standing still. They’re working closely with vendors on opportunities where we can continue to work with them to try to increase their freight allowances and to look within our own operations to optimize our freight network. It remains a challenge. It’s somewhat similar to prior tight cycles such as 2018. Historically, when you have this tightness, additional capacity tends to come into the market over time. We’re working in the short term to mitigate it, and if capacity comes back later in the year, that will help as well. So it remains a challenge, but not something we expect to be a permanent impact within the industry or our business for the longer term.

Okay. That’s very helpful. And just a follow-up, maybe just a little bit more color on the decision to reinvest some of the cost savings. I think it was $50 million back into the business. Just a little more color on that thought process and what you expect to get out of that reinvestment.

Sure. From the very beginning, we’ve said that we expect to reinvest a meaningful portion of the $180 million of savings, and we’ve talked about how we expect the majority of the savings to remain permanent. Today, it’s providing a little more specificity. The reason we’ve progressed in recent months and moved ahead on these things is a fewfold. One is we see more opportunity in recent months for market share gains than we did pre-COVID, and we really want to take advantage of that, especially in some markets, so we have begun those reinvestments on the local side and on the national side, as well as we see the demand in the pipeline. We’ve also onboarded a fair amount of business and want to support that effectively. To a lesser extent, it remains an opportunity to continue to upgrade some talent in some cases. The new hires are typically not the same individuals, but the intent is to continue to support growth and accelerate share gains as we move ahead.

Your next question comes from the line of John Glass from Morgan Stanley.

Dirk, maybe just go broader and talk about the costs you’ve incurred that you would view as unusual this quarter. So, you mentioned freight. Undoubtedly, there’s some hiring costs. You talked about some one-time bonuses. What are the unusual, or what do you view as kind of one-time? And as you exited the quarter, are those costs still accelerating so to say should we expect greater cost pressures in the next couple of quarters, or is the first quarter kind of representative of where you’re running now and you would expect to until this sort of unwinds later in the year?

Sure. Good questions. A couple things to highlight: freight has been a material factor in the last quarter or so and I think will continue at a similar magnitude for at least the next few quarters. On gross margin, mix continues to be a headwind, although it continues to improve as volume comes back. From an OpEx perspective, there’s not anything necessarily large that I would call out as unusual. There are always incremental costs from small amounts related to weather events and such. The labor-related items you referenced, because the recovery happened so quickly, hiring in advance had less impact in the quarter than one might expect. We are seeing some retention and hiring costs in the quarter and we’ll see a continued ramp-up over the next couple of quarters as we hire additional individuals to support the recovery. So, a little bit higher cost, but we expect most of those to be transitory through the balance of 2021.

And if I could just follow up, you talked about some favorable contract rates in categories versus prior. Is there pricing power in this industry? I understand independents, you might—since things are running hot in the economy and restaurants raising prices—are you able to pass on maybe price increases greater than inflation? And when you now contract, are you getting a bit more wiggle room on pricing or is that just not the case?

I’ll break it into local and our larger national contract customers. On the local side, in an inflationary environment you can see some immediate compression when inflation happens, and then it gets passed through. In this environment, you have the combination of inflation with some supply challenges in different categories across the industry. Our commercial and pricing teams have worked closely and have done a good job of managing that to pass through inflation and gain a little bit of pricing as we’ve gone through, while trying to price fairly for our customers. On the national side, our national sales team has done a strong job over the last few years of bringing in new business at higher margins. We continue to take advantage of the tighter pricing environment. So, for national customers it’s a stronger pricing environment than a few years ago. We try to be priced fairly to our customers, but there are value propositions—service model, technology—that allow us not to be the cheapest if we are adding more value, and that balance helps both parties win.

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

Let me start with—can you give us a sense—if you think—if you look at drop size, average drop size now that we’re starting to cycle COVID, lines per customer, volume per line when you sort of look at the productivity of the business. So, what are you seeing with regard to those? And is drop size up nicely from maybe where it was a year ago, or pre-COVID?

Yes. I’ll take that. Drop size is up above what it was a year ago, John. That’s probably a combination of recovery on the part of demand and also market share gains and consolidation. It’s hard to tell how much is from each, but we are definitely seeing higher drop sizes compared to a year ago, particularly in March.

Okay. And then, maybe take a longer-term view, right? So, if you look back, pro forma for the acquisitions, I think EBITDA was $1.4 billion, give or take. Between synergies and proactive cost reduction, that’s $200 million or so. When you look at where the business can be in three to five years, A is, do you think it’s substantially greater than where you were pro forma? And then, from a margin perspective, can this business be 50 to 100 basis points more profitable than it was pro forma, in part drop size going up as well? I know it’s a long time out there. But conceptually, where do you think this business ends up?

I’ll start and Pietro can add. You’re thinking about it in the right way. We do think the business is on a good trajectory to get back to pro forma levels. Between synergy realization, other cost savings and new business wins, we are positioned to grow EBITDA dollars from that base and continue to increase EBITDA over time. From a margin perspective, as we’ve consistently done over the last several years, we focus on growing EBITDA dollars and taking advantage of opportunities to improve margins via drop size, logistics optimization, private brands, customer mix and so on. So, we believe there are both dollar and margin opportunities as we move ahead.

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

Just following up on that last question, maybe tightening the timeframe a little bit, just want to get a feel for the sales volumes needed in the current environment versus 2019 levels to get back to a, say, 4% plus adjusted EBITDA margin level, just knowing you have been staffing up and investing ahead of the curve, and we’re dealing with the tight labor market and freight. Just any color here or commentary on recent EBITDA margin run rate exiting the quarter would be helpful.

I’ll stay away from a specific number because the exact recovery and mix as it comes back can have different impacts. What I will tell you is as sales volumes return to 2019 levels, we expect the business should be bigger because of the wins we’ve had, and that should drive incremental dollars. The freight challenges are a bit harder to forecast; if they normalize into 2022, we think that as the core business recovers, we will get back to the pro forma EBITDA and grow from there. I know that’s not as specific, but it’s because the industry recovery path is uncertain. We do firmly believe the business is stronger and can generate more EBITDA on similar sales because of the actions we’ve taken and the customer wins we’ve had.

No, that makes sense. On the independent case growth, just wanted to dive deeper behind the drivers behind the strong rebound. Is anything specific that stands out? And I guess, just some thoughts on the potential for further acceleration ahead, as the broader supply chain issues likely create an even wider gap between the haves and have-nots and food service distribution? Might stronger inventory positions and ability to make deliveries fare better than those that are more constrained?

We saw April volumes above 2019 despite a considerable number of markets—probably around a third of the country—still at 50% occupancy or lower. So as those markets recover, we see more upside for gaining market share. Your points about scale and balance sheet allowing us to provide better service are correct. We look at our net promoter scores versus competitors and see advantages. So the independent recovery is coming from both the broader recovery in various regions and our continued share gains.

Your next question comes from the line of Lauren Silberman from Credit Suisse.

Another question on the independents side, really nice recovery with the case growth trend positive in April. Can you help us better understand the dynamics between new customer acquisition, expansion of wallet share and comp declines in case volume? And perhaps, are you willing to share what percentage of independent customers you’re serving today relative to pre-COVID?

I’ll start. Overall, our restaurant customer counts are still down a little bit compared to 2019, but each month that passes it continues to improve. That’s the combination of more markets reopening, existing customers reopening and net new customers our sellers are adding. We’ve seen basket size increases from customers and are focused on holding those gains. In terms of percent of independent customers served versus pre-COVID, we are not providing an exact percentage, but the trajectory is improving month over month. As for the mix going forward, it’s harder to tell exactly for 2022, but over the longer term we expect to keep our focus on target customers: growing at roughly twice the market with independents, growing at market in health care and hospitality, and being opportunistic with chains. The national sales team continues to pursue profitable, higher-margin business, not just cases.

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

I’m kind of curious on capacity. Can you just talk about where you currently stand from a capacity standpoint, given the challenges you mentioned on the labor side and the inventory side? You’ve had the best quarter-over-quarter improvement case growth-wise relative to your peers here. But I’m just kind of curious as to how you’re positioned for the coming months. Do you think there is some constraint around capacity or whether you’ll be able to navigate that?

The capacity issue is on two fronts: drivers and selectors, and inventory. We are currently short about 1,000 drivers and selectors across the network from where we’d like to be as the recovery continues. We are actively working to extend capacity and are focusing on hiring—using referral programs, sign-on and retention bonuses and other approaches—to reduce that gap. These are good jobs with good pay and benefits; we just need to ramp up the hiring more quickly than in the past because the recovery happened so fast. On the inventory side, we are working with vendors to ensure we have the right inventory committed. Where we have excess capacity in our network, we are taking advantage of that. From an inventory standpoint, we are doing the right things to serve our existing customers and continue to add profitable customers that are accretive to our P&L.

Okay. And then, just a follow-up for Dirk. How are you guys going to be presenting the convertible preferred? It looks like the dividend came out of the $0.12 this quarter. I’m just kind of curious because I—hopefully, we’re all going to model this correctly now going forward. How are you going to be presenting adjusted EPS as it relates to the converts?

Good question. We made a change this quarter to show adjusted diluted for net income, not net income available to common, to be a little clearer. While we have a GAAP net loss, we are not including the additional shares from the preferred in our adjusted diluted EPS share count. As soon as we return to GAAP net income—likely in the coming quarters—the dividend would no longer be deducted and instead the roughly 25 million shares would be included in the diluted share count. If you have further modeling questions, Scott or Melissa can follow up, but that is the way we will present it.

Your next question comes from the line of Peter Saleh from BTIG.

Great. I want to come back to your comments on the increases in off-premise dining, which you guys believe will become more permanent. Can you just give us a sense on what gives you that confidence to see those sales remain permanent? And is there any difference between chains able to retain those versus independents, or is it broad-based across segments?

There was a real spike in off-premise dining during the early part of COVID. I think some portion of that incremental business will stick. We base that assertion on conversations with customers and partners. We have a good relationship with ChowNow and other technology partners that enable off-premise dining. Based on what they’ve shared with us, it does look like some of that off-premise behavior will be sustained. It may not all stick, but a meaningful portion likely will.

Your next question comes from the line of Jeffrey Bernstein from Barclays.

Great. Thank you very much. Two questions. One, on the margins: you mentioned the new business you’re acquiring—$1 billion over the past five quarters—is with margins well above the portfolio and maybe prior wins. Can you offer more context on that, maybe what the margin upside is versus the historical, or whether you think you’re able to sustain those higher margin levels with further wins going forward? Then I have a follow-up.

To clarify: the $1 billion refers to large customer wins, including chains, health care and hospitality. The more attractive margin profile is coming primarily on the chain side. That is a function of a more favorable demand/supply environment than a few years ago. We don’t anticipate that changing in the foreseeable future.

Okay. And then, as a follow-up, as you think about the distribution category and consolidation, do you see yourselves or others pursuing more aggressive M&A, or might you be constrained near term? Your leverage levels are well above your target, and you’ve had recent acquisitions to integrate—might that slow you down? Are there reasons you might prefer to win accounts rather than acquire smaller peers? Any thoughts would be great. Thank you.

I’ll take that. Our top priority near term is successfully integrating the two strategic acquisitions we completed—Food Group and Smart Foodservice—and getting them embedded and growing in our core business. After that, the near-term focus is delevering. Over time, I would expect tuck-in acquisitions—smaller deals like we have done historically—but the near term is focused on integration and debt reduction. The industry overall is facing valuation disconnects, so large-scale M&A may be less likely in the immediate term. Over time, we would expect some continued activity, but more modest.

Your next question comes from the line of Nicole Miller from Piper Sandler.

In thinking about the industry more or less being at 2019 levels, could you speak broadly about the industry getting back to that 50-50 split it was at between grocery (eating at home) and restaurants (eating out)? If we keep pace here, is this more like a 6- to 12-month catch-up, a 12- to 24-month catch-up? Is there any reason the industry you sell into can’t get back to the prior level of food-away-from-home sales?

We feel confident about where things net out, but the timing is harder to predict. The recovery has been quick in recent months, and the traffic charts show we are trending back to prior levels. How much of the off-premise increment will stick is uncertain, but it could lift total food-away-from-home. We’re at 2019 levels despite some markets remaining handicapped by restrictions, so we are optimistic about getting back to or above those levels; timing remains uncertain.

Could you talk a little bit—last question—about the cuisine categories that are improving? Which ones are improving the most? Is there anything not keeping pace?

Everything is improving. Early in the pandemic, the more resilient menu types were Mexican, Italian and QSR. More recently, we’ve seen pretty much everything come back in markets with fewer restrictions. That breadth of recovery across independents, chains and different menu types is encouraging and supports our view of the industry's health.

Your next question comes from the line of John Ivankoe from JP Morgan.

You’re not the only large company that, at least on paper, has financed the increase in receivables and inventories with payables. Can you comment as to whether that is unique to the largest foodservice distributors or whether that’s also being seen or realized as a benefit to regional and smaller operators, if there’s a way for you to know that? Working capital buildup was one of the things we had talked about before as an advantage that larger distributors would have relative to smaller ones. I have a follow-up as well.

So, as you pointed out, we have seen payables increases and inventory builds. In our case, it’s largely a timing of purchases and related activity rather than a deliberate change in terms. I would expect inventory build to normalize over the next couple of quarters and similar with accounts payable. From a terms perspective, I wouldn’t call it distinctly different between larger and smaller players. However, the cash required to carry incremental inventory does advantage companies like us that have scale and balance sheet strength to finance that working capital investment. Smaller distributors could be challenged to make those investments, which creates opportunities for larger distributors to target customers that need better supply reliability.

Thank you. Secondly, one of the easier ways for you to win customers from distributors would be to get salespeople and drivers from those distributors. Is that practical? Are you seeing that? Or are there non-competes or other things that make it harder to recruit competitors’ employees?

We definitely see talent flow as an opportunity. As we’ve invested in expanding our sales force, we regularly attract sellers and drivers from competitors. They are drawn by our technology, products, selling model and culture, which allow them to earn better income than at some other firms. That has been an effective channel for hiring.

Your next question comes from the line of Jenna Giannelli from Goldman Sachs.

I just had a question. You spoke about technology being such a point of differentiation in helping you gain market share. Should we expect any incremental investment here that’s needed to keep that industry-leading position? Basically, is there anything else you’d like to do or need to do? And then, any color on the allocation of CapEx dollars as we think about 2021 and any investment? Thanks so much.

Good morning. Out of the $50 million reinvestment, a small portion is incremental investment for digital. Digital is an area we invest in year over year to add capability and serve customers better. There’s not a step change required, but we are investing a bit extra on the OpEx side. On CapEx, nothing big or different to call out for this year. One of the things I’ve talked about previously is you will see some variability between fleet and facilities year to year. This year we’re spending less on fleet and more on facilities relative to some years, but the all-in number is not materially different. We consistently invest in buildings, IT, tech and fleet to support growth.

That’s super helpful. One bigger picture question: on market share gains, can you give us a sense of who you think you’re gaining that share from? Is it other large players or smaller, fragmented players? And when you think about the go-forward, how meaningful could further market share gains be?

It’s hard to precisely tell where all gains are coming from; we don’t have full visibility into competitor activity. Gains come from both small and large competitors and depend on local markets, service levels and relative capabilities. In the longer term, we are around a 10% market share player and see lots of opportunity to grow share over time. We are the number two player in a still very fragmented industry, so there is substantial opportunity to gain share.

Your next question comes from the line of Karru Martinson from Jefferies.

I just wanted to touch on the rise of ghost kitchens and how you guys are penetrated in that. There's talk that that will continue as we recover. Folks tend to like the economics on that. Just wanted to see where you’re positioned there and what the focus is on that side of the market.

Ghost kitchens are similar to commissaries and caterers from a distributor perspective: they still need to purchase bulk food. We have a ghost kitchen playbook—we were among the first to develop one—which includes analytics and menus for different concepts. That has helped existing customers leverage real estate or acquire lower-cost real estate to access new customers. We’ve seen a lot of interest from customers in participating in ghost kitchens.

There are no more phone questions. I’ll turn the call back over to Mr. Pietro Satriano for closing comments.

Thanks, operator. Brief closing remarks. To reiterate the three takeaways: first, the industry recovery is well underway, and we are participating in that recovery in a very meaningful way. Second, our scale and differentiation is driving the market share gains we have discussed. Third, we are seeing continued strengthening of our financial results as the industry continues to recover. I again want to thank all our associates for continuing to go above and beyond to serve our customers in this environment. We look forward to speaking with everyone on our next earnings call in August. Thanks for tuning in today, and have a great day.

This concludes today’s conference call. You may now disconnect.