Good day and thank you for standing by. Welcome to the Q2 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. The operator provided instructions. I would now like to hand the conference over to your speaker today, Ms. Melissa Napier. Please go ahead.

Thank you, Angelica. Good morning, everyone. Thank you for joining us today for our US Foods second quarter earnings call. Pietro Satriano, our CEO; and Dirk Locascio, our CFO will provide an overview of our results for the second quarter and first six months 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 second quarter results and first half results to the same period in fiscal year 2020. References to organic financial results during today’s call exclude the contributions from Smart Foodservice through April 23, 2021 as the acquisition closed on April 24. 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. And 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. And I’ll now turn the call over to Pietro.

Thank you, Melissa. Good morning, everyone and welcome. So during today's call, we are going to cover three main themes just like last time. First, the industry recovery that we spoke of on our last call continues to progress. Restaurants are welcoming customers back into their establishments as restrictions have been lifted across the country and US Foods continues to participate in this recovery in a meaningful fashion. Second, a Great Food Made Easy differentiated platform is helping to drive market share gains with both small and large customers. And third, our financial results are continuing to recover to pre-pandemic levels. Our improved results are being driven by a recovery in case volumes, improved margins and the performance of our recent acquisitions. So let's begin on slide three. Restaurants are recovering at a rapid pace as evidenced by the foot traffic at food-away-from-home establishments shown in the chart on the left. The traffic for the industry has continued to increase over the last several months and is very close to returning to pre-pandemic levels. A nearly full recovery in foot traffic has occurred despite the fact that some markets across the US are still ramping up, which is shown by the chart on the right. This shows our own restaurant volumes for markets that have opened less than three months ago versus markets that have been opened six months or longer. Restaurants in markets that have been opened the longest are showing growth rates in the high single-digit range compared to 2019, while restaurants that are in markets that have recently reopened are still down compared to 2019. We believe our view to be representative of what is happening in the country, which indicates that even with volume above 2019 levels, there's still some headroom for growth for restaurants. Moving to slide four, the benefit of markets reopening can be seen in the improvement in total case volume that we experienced during the second quarter. In the chart, you can see that restaurants continue to trend ahead of 2019 levels with both independents and chains ahead of 2019 by roughly comparable margins. We expect this to continue, supported in part by the growth from the recently reopened markets that I just spoke about. Most of July was also in line with May and June, but we did see in the last two weeks a tick down of about 100 basis points, but it's too early to say whether that small change is due to the impact of the Delta variant. Moving to other customer types, the reopening and the related increase in travel is also benefiting our hospitality business, which is now running at more than 70% of 2019 case volumes and a large improvement from the first quarter. Leisure travel has returned in a very meaningful way this summer and is driving a large part of the improvement. We expect this improvement in that customer type to continue as other customer types within hospitality catch up to leisure travel. First, even within leisure travel, some large parts are still operating below maximum capacity. Second, large conventions, which have in part returned, typically require considerable lead time of up to a year. And third, as we've discussed before, there is a little bit of uncertainty about the future level of business travel. When we consider the impact of these trends, we expect hospitality to recover later in 2022. And when combined with our market share gains, we do expect our hospitality volume to return to pre-pandemic levels. Our healthcare business has remained steady throughout the pandemic. Different factors are impacting different customer types within healthcare. With senior living, for example, occupancy rates are still down in the mid to low single digits, but with aging demographics, we do expect demand from senior living facilities to recover over time. With acute care, some employees are still working from home and it is yet unclear where this will settle over time. So to hospitality, when we consider the above trends combined with our market share gains, we do expect healthcare to return to pre-pandemic levels as well, sometime later in 2022. So in summary, based on what we know today about trends within each customer type combined with our recent market share gains and our strong pipeline of new customers, our best estimate is that we will return to pro forma 2019 total case volume later in 2022. I am now on slide five. A Great Food Made Easy strategy is the primary reason that we win new customers. The 'Great Food' piece of our differentiation strategy is anchored by Scoop, our product innovation platform. Given the labor challenges restaurant operators are facing, the latest edition of Scoop features a number of labor-saving products that are very much on trend, as well as a number of fresh items. We've also begun rolling out the Food Group Tender by Design beef products to the Legacy US Foods markets. Tender by Design is a specialized process that produces high-quality cuts that resonate with customers. The rollout has been met with rave reviews by customers. Our leading technology solutions and expert support are the backbone of the 'Made Easy' part of our differentiation strategy. In past calls we've talked about our ghost kitchen playbook, which has played a big part in helping operators generate additional revenue. The following is a quote from an owner of an Italian restaurant outside Chicago: 'They used the ghost kitchen concept to diversify to chicken wings. We survived the first 100 days of the shutdown, and I don't think we would have survived this one if we didn't have our ghost kitchen of bakedwings.com; it has literally been a lifesaver for us.' Most recently, restaurant operations consultants have been focused on a series of webinars to help customers navigate the challenging labor environment, including topics such as payroll management and doing more with less staff. Thanks to the benefits of virtual technology we are able to leverage our best operations experts and Food Fanatics chefs across a number of geographies and customers can easily schedule one-on-one conferences and simply scan a QR code. Finally, on the topic of technology, I would like to welcome John Tonnison to the US Foods team. John was recently announced as our new Chief Information and Digital Officer. He brings extensive experience leading IT organizations in the distribution space, most notably, the last 10 years as CIO of one of the largest tech distribution companies globally. John's mandate is to continue to enhance our leading e-commerce platform while working with Phil Hancock, our Chief Supply Chain Officer to make our supply chain the most effective and efficient in our industry. Moving to Slide six, last quarter, we spoke about the challenging operating environment for customers, distributors and manufacturers alike and while labor and product supply challenges continue to persist, our actions have helped mitigate these challenges. On the labor side, we have made good progress in hiring warehouse and transportation associates. We filled over a third of the open positions that we discussed last quarter, and we expect to continue to close this gap. Hiring and retention incentives have contributed to improving the pipeline and to reducing churn. In addition, we do expect the labor market to continue to improve. In those states that have ended supplemental unemployment benefits, we have seen a dramatic increase in applicant rates. Lastly, in some select markets, we have made some hourly wage rate increases, especially for entry-level wages. Taken together, these incentives and wage adjustments are having a modest impact on the P&L, which Dirk will discuss shortly. On the product supply side, service levels from vendors are still well below 2019 as a result of manufacturers experiencing the same labor and freight challenges that we are. We are utilizing our scale, our relationships and alternative sourcing arrangements to help secure the product we need to effectively serve our customers. Our net promoter survey confirmed that we are faring as well as, or better than, our competitors on this front. Moving to slide seven, both the Smart Foodservice and Food Group acquisitions are performing at or above expectation. Beginning with cash-and-carry, Chef'STORE same-store sales — stores open at least one year — are ahead of 2019 levels. Part of the rationale for the Smart Foodservice acquisition is that the cash-and-carry market will roughly double our delivery market with higher margins. As the reopening continues, we're seeing these pre-pandemic trends take shape again. We are bullish on the outlook for Chef'STORE and expect that 2021 EBITDA levels will exceed those of 2019. The other rationale for the Food Group acquisition was the long runway of growth that we see for Chef'STORE. We expect to have three new stores open in 2021, all in existing markets. 2022 is when we should begin to expand our footprint, ultimately doubling our store count, making Chef'STORE a meaningful part of our growth story. Turning to Food Group, with dining restrictions recently lifted in the Pacific Northwest, we are starting to see volume return to those markets. Combined with the introduction of our differentiated Scoop, e-commerce and team-based selling, we expect these markets to be poised for growth in the future. As you'll recall, we have completed four warehouse systems conversions and now expect to have the remaining systems conversions completed by early 2022. Synergy capture remains on track and we expect to fully achieve the previously announced $55 million of synergies in 2023. As I mentioned a few minutes ago, we are extending Food Group's Tender by Design process to legacy US Foods locations. In addition, we're also extending Food Group's fresh produce capabilities to the rest of our customer base. Both of these initiatives will bring synergies to the legacy US Foods network by providing customers with one of the highest-quality product offerings in the industry in two very important categories: center-of-the-plate and fresh produce. I'll now turn the call over to Dirk to discuss our second quarter results and full year financial outlook. Dirk?

Thank you, Pietro and good morning, everyone. I'll begin on Slide nine. Our second quarter financial results improved significantly compared to recent quarters driven by continued volume recovery and strong gross profit results. During the quarter, restrictions on restaurants were lifted and leisure travel increased as Pietro noted. This resulted in greater case volume with both our restaurant and hospitality customers and contributed to the significant increase in our adjusted EBITDA. During the second quarter, we also experienced record food cost inflation across a number of different categories. Our teams did an excellent job of managing that inflation and passing it through to customers. This resulted in very strong gross profit dollar and per-case performance, which also was a significant contributor to our increased second quarter EBITDA. As Pietro mentioned, the operating environment remains difficult, but manageable. We've had success filling many of the open warehouse and driver roles, but, like many other companies, we still have work left to do in order to get to full staffing levels, especially as demand increases further. Inbound product supply from vendors also remains a challenge. We have the processes and the tools in place to manage through these challenges and focus on minimizing the impact on our customers. However, we do expect these headwinds to persist at least through the end of 2021. Moving to Slide 10, net sales for the quarter were $7.7 billion, up 68% from the second quarter of 2020. Food cost inflation for the quarter was 8.2% driven by product shortages and disruptions in the supply chain. We experienced inflation in almost every major product category with the largest increases in poultry, pork and disposables. Adjusted gross profit for the quarter was $1.3 billion, up 73% from prior year and our adjusted gross margin improved by 50 basis points. Adjusted gross profit dollars increased faster than net sales despite the high food cost inflation, highlighting our very strong gross profit per-case performance in the quarter. As a reminder, inflation benefits our gross profit dollars while it is typically a headwind to gross margin rate. As I just mentioned, we had over 8% food cost inflation in the second quarter with much of it in commodity categories. This means our gross margin as a percent of sales is compressed, yet our gross profit per case is by far the best we've had since COVID began and in fact was ahead of 2019 second quarter on our Legacy US Foods business. This high level of inflation and our ability to effectively manage it increased our second quarter gross profit by approximately $25 million and as inflation moderates, or if we see deflation, we don't expect this gain to continue in Q3 or Q4. We're very pleased with our gross profit performance in the second quarter, especially given the freight headwinds, which we expect to continue at least through 2021. Adjusted operating expenses in the second quarter were $940 million, up 46% versus the prior year. As a percent of sales, adjusted operating expense was 12.3%, down from 14.2% in the prior year. While food cost inflation is a headwind to our gross margin rate, it is a benefit to our operating expense as a percent of sales. Just as a point of reference, our OpEx as a percent of sales for our legacy US Foods business is about 60 basis points lower, or better, than it was in the second quarter of 2019, largely due to the significant food cost inflation I just spoke of. Pietro mentioned earlier that we are seeing additional supply chain labor inflation this year, primarily related to signing and retention incentives. The additional inflation this year is about $20 million to $30 million and is above and beyond the approximately $50 million of normal annual supply chain labor inflation we experienced. As the labor market normalizes we anticipate not needing to use these bonuses to the same extent and therefore expect most of these costs to be transitory. We increased the use of these bonuses during the second quarter and as a result, didn't have the full run rate in our second quarter numbers. We have made a lot of good progress hiring warehouse and driver associates; however, we are still in the process of filling open positions as our business continues to recover. On slide 11, adjusted EBITDA was $332 million for the quarter, a very strong rebound from the second quarter of 2020. Adjusted EBITDA as a percent of sales was 4.3%. Earlier, as Pietro mentioned, our current best estimate is to return to pro forma 2019 case volume levels later in 2022. We also expect to return to 2019 pro forma adjusted EBITDA, though we expect that to be later than the return of case volume. During 2022, we expect the recovery in restaurant volume plus market share gains will make up for the slower recovery in the hospitality and healthcare volume. While our category gross profit rates are well on their way to recovery, we expect the logistics headwinds to continue into 2022. For distribution costs, the two years of wage inflation, plus the temporary incentives and potentially some higher wage inflation will require additional productivity and customer margin improvements to offset. For fixed costs, we still expect the $130 million of permanent cost reductions completed in 2020 to flow through to the bottom line. As Pietro said, the integration of Food Group is on track, including expected synergies. Overall, we are very confident about achieving 2019 adjusted EBITDA levels, but the continued uncertainty with respect to freight and labor markets makes the specific timing less certain. We know the actions we have and continue to take will result in us being a stronger company going forward than we were pre-pandemic. Finally, on this page, adjusted net income in the second quarter was $146 million and adjusted diluted EPS was $0.58 compared to a loss in the prior year. We are now reflecting the additional shares from the preferred equity transaction in our adjusted diluted earnings per share calculation. With these shares reflected, our outstanding adjusted diluted share count is approximately 250 million shares. I am now on Slide 12. Operating cash flow for the first six months of the year was $250 million. In the first half of 2020, we had a significant benefit to operating cash flow from working capital. This was a result of reduced inventory levels and extended accounts payable days during the early stages of the pandemic. In the first half of 2021, working capital has been largely neutral for operating cash flow. Our business generates a significant amount of operating cash flow each year as evidenced by the $250 million we generated in the first half of this year, despite our business being in a recovery phase. We will use this cash to reinvest in our business and reduce our total outstanding debt. In the second quarter, we proactively paid down $200 million in total debt in addition to our standard debt repayments. Our leverage ratio dropped by more than two turns due to the paydown and significant adjusted EBITDA improvement. Our target leverage ratio remains between 2.5 and 3 times, and we expect to continue to make progress against this target over the balance of this year through additional debt reduction and increased EBITDA. We had a very strong second quarter and are focused on the continued recovery of our business. Looking ahead, we expect both Q3 and Q4 EBITDA dollars to be below Q2 as a result of not repeating the approximately $25 million of inflation benefit from Q2, as well as the increased OpEx related to the full run rate of supply chain sign-on and retention bonuses put in place during the second quarter and the impact of our continued reinvestment in sales resources as we discussed previously. Our industry is rapidly recovering, and we are participating in that recovery in a meaningful way. Our volume is recovering well. Our gross profit is strong and we are focused on effectively managing the supply chain challenges we and the industry are facing and our acquisition performance is on track resulting in improved results and we're using the cash flow generated to invest in our business and reduce debt. Finally, the actions we took during the pandemic have positioned us to continue to gain share with both large and small customers. Operator, at this time, we can now open the call for questions.

Yes, sir. The operator provided instructions. Our first question comes from the line of Alex Slagle from Jefferies. Your line is now open.

Thanks. Good morning. Just a question and thinking about some of the incremental headwinds from the accelerated hiring and retention efforts, it sounds like you expect these headwinds to continue for a few more quarters. At what point do you think the acceleration in these costs peaks and move toward a more moderated pace with the cost increases?

Good morning. This is Dirk, I'll take that. It's hard to know exactly, but to your point, I would expect, just based on some of the early evidence that we've seen in states that have ended supplemental unemployment, and as we continue to make good progress in hiring, that as you get toward the end of the year, we should be quite a ways there. So it's hard to know exactly, but at this point, the best estimate would be as we get towards the end of the year into 2022, you begin to see that moderate and begin to return to a more normal environment. What I will tell you though, is in this environment, some of the labor challenges and supply challenges have also been a really good opportunity for us to engage in discussions with a number of our customers about margin and other operational factors to improve our ability to serve them. So overall, really partnering with our customers as well as trying to manage through this as best we can.

Sounds good. Thank you.

Our next question comes from the line of Peter Saleh. Your line is now open.

Great. Thank you very much. I believe last quarter you guys were talking about the labor shortage, and I think you had mentioned you were about a thousand drivers and selectors short of where you'd like to be. Can you give us an update on where you are today in terms of getting up against that goal?

Yeah, this is Pietro. So as I mentioned in my comments, we've covered over a third of that gap, and that gap refers to what we anticipate as we move into the future, not necessarily the gap today. So we're making really good progress. What I would say is we've really ramped up the hiring machine for selectors and drivers. We're hiring exactly the number that we are looking for. The challenge right now is just reducing the churn rate. As I'm sure you've seen in the process, churn rates are at an all-time high and so part of the measures we're putting in place are really aimed at reducing the churn so we can continue to close the gap.

Our next question comes from the line of Nicole Miller from Piper Sandler. Your line is now open.

Thank you. Good morning. Also on labor inflation my question is, why do you feel like it's transitory? The total cost might not come in the form of bonuses, but why does someone who wants to net that make less? I'm just curious of what circumstance you would see where it's just a transitory conversation and you try to make it whole going forward in that way. And then at what level would you pass it on? The answer to the first question on the call about engaging the customer would lead me to believe that perhaps that's happening now. Thank you.

Yeah. I'll start and I'll start with the second part of your question. So, as you mentioned, and as Dirk mentioned, we have been passing on some of the inflation that we have seen certainly on the product side, but also where possible on the labor side. In terms of your question as to why it's transitory, I think there's a school of thought that is shared by many that the labor supply imbalance is in itself transitory. With the speed of the recovery, probably faster than many expected, we've seen the demand for labor go up fast and the supply lag. Partial evidence for that is what I noted in those markets where supplemental unemployment benefits have ended: the hiring pipeline is several times better than it is in those markets where supplemental benefits are still in effect. And so those are some of the reasons why we believe these are transitory in nature.

Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open.

Yeah. Hi guys. Good morning. Hey, Dirk, I wanted to get back to the color that you gave around EBITDA for Q3 and Q4. I was hoping you would provide a little bit more color to sort of bridge the $332 million of this quarter to the expectations you gave. I think you mentioned some numbers, but I'm not sure if some of them were annualized or quarterly. And I don't think you talked about a number around sales resources. So maybe just help us bridge how we think about the back half and also what you're assuming for volume and inflation. Any color would be helpful.

Sure Ed. Happy to. The reason we wanted to provide the additional insight is really because in the second quarter we benefited from the strong inflation and our ability to pass that through, with gross profit per case being above 2019. The important takeaway is our second quarter results were strong with or without this additional inflation benefit. The $25 million I mentioned was the incremental increase in gross profit from that inflation, and we do not expect that to repeat in Q3 or Q4 if inflation moderates. On sales resources, we haven't talked about a specific amount, but we've continued to invest in sales across Q2, Q3 and Q4. We're well on our way to our targeted level, and we expect to continue ramping to the full investment later this year. Regarding supply chain, the $20 million to $30 million I referenced is largely what we expect in incremental supply chain labor costs this year, with a portion in Q2 and the remainder through the balance of this year; most of that is in the form of sign-on and retention bonuses. From a volume perspective, we expect volume recovery to continue, putting aside any short-term impact from the Delta variant. So overall, nothing we see is derailing the strong recovery; the items I highlighted are non-recurrent or transitory, and we wanted to make you aware of them. Hopefully that helps.

Okay. And then I wanted to ask about sales growth versus case growth. There was a 14.5% gap due to inflation, but the rest was mix. What's driving that mix and is there incrementality within that mix? It's actually positive for gross profit dollars. How should we think about case growth plus that mix going forward?

Sure. The mix can be driven by product categories or customer types. For example, restaurants have recovered faster than healthcare and hospitality, which has a net positive effect on sales. There's not a direct mathematical correlation between the sales percentage mix and gross profit, but the important point is that the faster recovery in independents and other attractive customer segments has been accretive to gross profit dollars. So the mix has been positive and will be influenced by how hospitality and healthcare recover. Overall, gross profit dollars and per-case are on a good trajectory and we feel good about that recovery.

Our next question comes from the line of John Glass from Morgan Stanley. Your line is now open.

Thanks. Good morning. You mentioned that freight and labor headwinds are going to stick around and you may need additional productivity. Do you have line of sight? Is there work going on now to increase productivity beyond what you've already experienced? If so, where does that come from? Can you talk about new areas to save? And specifically on the cost of inflation, are you actually seeing the rate of inflation beginning to come down versus your expectation? How are you exiting the quarter in July on inflation?

You've packed a lot into that question. I'll start with inflation: we have seen the rate of inflation slow in recent weeks. We're still seeing modest inflation in some categories and meaningful deflation in others, which nets closer to zero. On productivity, yes, we have initiatives underway in supply chain to drive productivity as we normally would in any year, but the pace has been slower because we've been directing a lot of energy to running the business and serving customers during this challenging environment. That has left less time to focus on productivity projects, so progress has been more limited recently. Under Phil Hancock's leadership, we expect to ramp up productivity efforts going forward. Pietro, do you want to add anything?

And just to add, John, the $130 million in fixed cost reductions completed in 2020 remains intact; no change there. The productivity initiatives Dirk referred to relate more to variable distribution costs. Our focus on customers and onboarding a large number of new associates has slowed the typical pace of productivity gains on the variable side.

Our next question comes from the line of John Ivankoe from JPMorgan. Your line is now open.

Hi, thank you. The question is in the context of your gross profit dollars per case being ahead of the second quarter of 2019. Some distributors, given the profitability recovery across the space, may be using these gross profit dollars to gain share with existing or new customers. Do you think that's an opportunity over time for you to use gross profit dollars per case to drive case volume?

Maybe I'll start because we're really talking about market share and volume. We've continued to make market share gains, John. But I think the recovery happening as quickly as it did over the last year has probably helped a lot of smaller competitors. When we look at our net promoter score, there's clearly some competitors more challenged than others in being on time or fulfilling orders. The temporary staffing challenges have probably held back even more aggressive market share gains for the industry, including us, but we are making progress and continuing to gain share with both small and large customers.

The team is always looking at the balance between volume and margin. We will, from time to time, choose to invest in categories or relationships that we believe are accretive to the overall basket. The goal is to drive more gross profit dollars to the bottom line, and that's what we're trying to balance. We've made progress in gaining share while achieving very good gross profit results at the same time.

Our next question comes from the line of John Heinbockel from Guggenheim. Your line is now open.

I want to start with where do you think your capacity is now? With volume recovering, is this a good time to think about accelerating the calling of less profitable accounts? How are you approaching that?

So it depends on how you measure capacity, John. The capacity constraint that's been discussed has largely been staffing: if you're short drivers, there's only so many trucks you can run, and that has hampered our ability to grow more than we have. But we still see market share gains. As staffing stabilizes and we continue to close the gap, we believe we have the opportunity to continue to gain market share. We've done a very small number of optimizations in terms of resetting economics or terms with a handful of customers, and you might have seen some of that press. The impact on our results has been diminutive when you look at volume growth versus 2019.

And then maybe secondly, I know you were investing in sales. I thought the number was $50 million, but were you saying the sales investment is still to be completed? It sounds like it's not all front-loaded and may stretch into next year. Is that fair?

I'll take that on the sales. We haven't provided a specific dollar figure in the call, but we're well on our way in that journey and making progress. We expect to reach the full investment run rate later this year. From a supply chain perspective, we expect to get to full staffing levels in 2021, subject of course to market dynamics, but we continue to press hard on staffing given the business recovery and customer wins.

Our next question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Hi, good morning. Thanks for taking our questions. Just had a quick one: given that inflation seems to be moderating a little bit, is there an opportunity to pass smaller costs on at a slower rate and maybe capture some margin as costs moderate? Is that happening across the industry or do you have opportunity to do that, given where elevated supply chain costs are?

Hi Kelly. Yes, there is some limited opportunity to do that, but the timeframe tends to be short because many of our contract resets can be weekly to monthly. The reason I highlighted Q2 is that the combination of inflation plus product shortages, combined with our processes and tools, allowed us to capture an outsized gross profit benefit in the quarter. We are pleased with that, but we wouldn't expect that level of gain to continue going forward.

Got it. That's helpful. And just another one on gross margin: we were estimating gross margin about 100 basis points below pro forma levels. Can you help us think about the factors that get back to full gross margin potential?

Thanks for clarifying. It's a bit harder to talk about specific gross margin percentages right now given the outsize inflation we experienced. Much of the inflation was in commodity categories with fixed markup mechanics, which compresses the gross margin percentage while increasing gross profit dollars. We would expect gross margin to generally return to 2019 levels over time. The major factors are recovery of attractive customer mix, logistics and freight normalizing, and continued productivity. If you stripped out the impact of inflation on sales, our second quarter gross margin would actually be above 2019. So it's a difficult comparison given the inflation, but we're confident in gross profit dollar and per-case recovery, and that has a net positive impact on adjusted EBITDA.

Our next question comes from the line of Lauren Silberman from Credit Suisse. Your line is now open.

Thank you. Industry supply challenges and shortages are well-documented. Are you seeing customers stockpiling inventory given concerns on the supply chain? And a related question: I think you noted a 100 basis point tick down in restaurant case volume over the last two weeks of July. Do you think that stockpiling has anything to do with it, or is it more related to an underlying deceleration?

I don't believe there's widespread stockpiling happening. Inventory levels look appropriate. I can't be certain what caused the 100 basis point tick — there is a chance it may be related to Delta, but I haven't seen restrictions imposed that would point clearly to stockpiling or a structural slowdown. Historically, after waves of COVID, demand has tended to bounce back quickly, and we would expect that pattern to hold.

Great. Thanks. And if I could just follow up on the LIFO comment, you had a pretty big LIFO adjustment. What is its impact to adjusted gross profit dollars or gross margin in future quarters, if at all?

You're right to point out the LIFO charge. Because of the magnitude of inflation in the period and how LIFO accounting works, we recorded an unusually large LIFO charge in the quarter. I wouldn't correlate that directly to adjusted gross profit — it's an accounting effect. If inflation moderates, LIFO charges tend to be neutral; if deflation occurs, you could see a credit. But I would focus more on the operational gross profit per case and gross profit dollars as the better measure of underlying performance.

Our next question comes from the line of an analyst from UBS. Your line is now open.

Good morning. Thanks so much for taking the questions. How has the competitive environment shaken out as the recovery has ramped up? Have you seen any smaller distributors start to go out of business, given the flexibility needed on inventory and fluctuations in demand? And have you seen any meaningful wallet share increases with your independent customers?

The competitive environment has been relatively stable in terms of number of competitors. The speed of the recovery helped many smaller competitors. When we look at NPS, some competitors appear more challenged on timeliness and fulfilling orders. Regarding wallet share, our cases per line are up about 7% year-over-year, which is a combination of smaller share gains and recovery-related increases where restaurants expand menus and order more items. So we've seen positive wallet share movement with independents and others.

Got it. That's really helpful. And just one quick follow-up, there's been news that supplemental unemployment benefits may end around September 6. Could you comment on what you might expect from that?

It's hard to predict exact timing, but we have observed that in markets where benefits ended, applicant flow improved materially. So if and when benefits end more broadly, that could improve the labor supply. Regardless, we've focused on recruiting and retention measures and see signs that the labor market imbalance may be trending toward normalization.

Our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.

Thank you very much. One follow-up clarification and then a question. Dirk, I know you mentioned July was strong but slipped 100 basis points the last couple of weeks. You also mentioned the second half volume recovery will continue. Is that 100-basis-point pullback likely a blip, and what gives you confidence it's not something more sustainable?

Pietro noted the small decline. The way to bridge those comments is that if there's an impact from Delta, it's hard to predict and could cause a short-term effect. Historically, waves of COVID have been followed by a quick recovery in demand. If you set aside the short-term uncertainty, the underlying demand trends — particularly in markets that have only recently reopened — point to continued improvement. So our view is that any short-term dip could be timing-related rather than a durable deceleration.

Understood. Then the final question: since the start of COVID there was discussion about being able to penetrate existing accounts and add new accounts. It seems like you've achieved that with meaningful new business wins. Moving forward, do you see the opportunity to continue to add new accounts organically and via M&A, or are you shying away from M&A in the near term?

In terms of new accounts, we've demonstrated success with large-scale wins — we mentioned about a billion dollars of new business since the pandemic started — and we expect to continue adding to that. The temporary staffing challenges have held us back somewhat from being as aggressive as we'd like, but we're making progress. On M&A, the early expectation of widespread distressed consolidation did not materialize as broadly because the recovery was faster; however, we have taken advantage of select market opportunities where competitors showed distress and we've hired sales teams and pursued targeted growth. So we remain opportunistic on M&A where it makes strategic sense.

Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open.

Hey guys, thanks for letting me back in. A couple things: first, on commodity inflation, you're suggesting the incremental 8% in Q2 is unlikely to repeat. How is that possible given broad inflation commentary across CPG vendors and others? Are we missing something?

Think of it this way: year-over-year, you will still see inflation show up, but what we captured in Q2 was an incremental gain driven by commodity spikes — the $25 million — that was unusually large. In recent weeks we've seen certain commodity categories that drove Q2 spikes begin to show deflation while other categories show modest inflation, which nets to a more moderate picture. So we don't expect the same incremental benefit from a sudden spike to recur in Q3 or Q4.

So year-over-year there may still be some inflation which benefits gross profit dollars, but the Q2 spike is not likely to continue at that rate. Understood. Last question: thinking about post-COVID profitability, I calculate pre-COVID pro forma adjusted EBITDA around $1.3 billion. With cost saves and synergies you mentioned, plus share gains, is there any reason to think when everything is normalized you wouldn't be above that level? I'm not trying to pin a date, but is the structural profit outlook above 2019?

You're thinking about the right elements. We expect to get back to roughly that $1.3 billion range and then grow from there. Remember to consider annual cost inflation that we incur in a normal year. There are levers for productivity and margin recovery, and while some incremental costs this year are transitory, we don't see structural reasons that should prevent us from returning to and exceeding the 2019 adjusted EBITDA level over time. There are a lot of moving parts, but the path and the levers exist to get there.

Okay, great. Just one last quick math check: with increases in driver costs and potential ongoing pressure, some offsets in case growth can mitigate that. Thanks.

You're definitely in the right neighborhood. The offsets you mentioned exist, and with customer partnership and operational changes there's opportunity to offset portions of the costs. We see levers to mitigate impacts.

I will now turn the call back to Mr. Pietro Satriano for the closing remarks.

Thank you. Maybe a couple of takeaways since we spent a lot of time talking about the P&L. Very good quarter: volume was strong and you see a path to full recovery on the volume side. Margins performed well in the quarter and gave us nice upside. Our challenge is variable distribution costs, but we believe we have a handle on them. Acquisitions are performing well and we're paying down debt. So overall, a very good story. I'll close by thanking our 26,000 associates and all of our teammates for the results we've covered today. Thanks to all for tuning in.

This concludes today's conference call. Thank you for participating. You may now disconnect.