US Foods Holding Corp. Q4 FY2023 Earnings Call

Thank you for joining us. I'm Eric, your conference operator for today. I would like to welcome everyone to the US Foods Fourth Quarter 2023 Earnings Call. I will now hand the call over to Mike Neese, Senior Vice President of Investor Relations. Please proceed.

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.

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 2023 financial results as well as fiscal 2024 guidance. 2023 was an exciting year at US Foods; the 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, healthcare 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 two 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 four 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 four pillars. Our first pillar is culture. The safety of our associates remains our number one priority and we made significant strides in 2023 to reduce the number of vehicle accidents and associated injuries 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, we reported reducing absolute Scope 1 and Scope 2 greenhouse gas emissions by 13% during the previous year, achieving 40% of the way toward 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 eight 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 five 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 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 routing pilot in two 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 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 US Foods. 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 healthcare 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 healthcare 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-saving 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 four 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 a presence in 35 markets, and we plan to launch it in another five 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 pandemic. 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 headcount 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 headcount 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 food service 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 a year-over-year reduction in turnover that is approximately twice the rate of improvement versus our other locations, a 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 that 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 one of our 25 semi-finalist nominations. Mike's leadership has driven significant improvements in safety, associate 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 is 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 four pillars of our strategy which are 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.

Thank you, Dave, and good morning, everyone. I will cover three topics this morning. First, I will discuss our fourth quarter and full year 2023 results. Second, I will provide an update on capital deployment. Lastly, I will outline our first quarter and full year 2024 guidance. Turning to Slide 7, let me take you through our fourth quarter results in detail. The fourth quarter was a strong conclusion to 2023 as our full year adjusted EBITDA margins increased by double digits and we continued to grow our margins. Net sales rose by 4.9% to $8.9 billion, driven by total case volume growth of 5.6%. Food cost inflation was virtually flat, while mix presented a headwind of 70 basis points. We achieved strong volume growth across each of our target customer categories this quarter. Volume rose by 7.3% for independent restaurants, which included approximately 100 basis points of growth from acquisitions. Healthcare grew by 8.1%, and hospitality saw a 5% increase. Both healthcare and hospitality continued to demonstrate strong, profitable growth, largely fueled by healthy new business development. We remain committed to expanding within our target customer segments and expect to maintain this momentum into 2024. Chef store volumes in November and December experienced low single-digit case growth, which met our expectations. We anticipate accelerated growth in 2024. This quarter, we categorized Chef store cases as "all other," so they are no longer included in independent results. We made this adjustment to align with how third-party providers like Carcano report market share data, and it better corresponds with how peers express their broadline growth metrics. All periods have been updated for consistency. In the fourth quarter, adjusted gross profit increased by 6% to $1.5 billion, while adjusted operating expenses rose by 4% to $1.2 billion. Our adjusted gross profit continued to outpace adjusted operating expenses. Adjusted EBITDA reached $388 million, reflecting 11% growth from the previous year. We expanded our adjusted EBITDA margins by nearly 25 basis points to 4.3%. Additionally, adjusted diluted EPS grew by 16.4% to $0.64 per share, indicating our EPS growth is outpacing adjusted EBITDA growth. Moving to Slide 8, we made substantial progress on a per case basis in 2023, which we believe highlights the effective execution of our strategy. Our adjusted gross profit per case increased by 4.5% in 2023, while our adjusted operating expense per case rose by 1%. Crucially, our adjusted EBITDA per case was $1.93 for the full year, representing a 14% year-over-year increase and a 4.3% compound annual growth rate since 2019. We have shown strong leverage in our financials, with operating expenses per case growing at a slower pace than gross profit per case, and we aim to sustain that operational discipline through 2024 and beyond. Turning to Slide 9, our robust operating cash flow provides us with the flexibility to strategically deploy capital to facilitate growth. Our operating cash flow for 2023 was $1.1 billion, with free cash flow exceeding $800 million. We invested $309 million in cash capital expenditures, focusing on expanding our fleet and enhancing capacity and technology to support organic growth. Our ongoing cash CapEx target remains around 1% of net sales, and we will maintain discipline in our approach. After completing our previous acquisitions in Q3, we finalized the Saladino's acquisition in December for $56 million. We are committed to returning capital to shareholders, having repurchased 1.6 million shares in the fourth quarter for $65 million. We currently have $192 million remaining from our $500 million share repurchase program. Before moving on to guidance, I want to highlight our significant progress in reducing our leverage in 2023. We finished the year at 2.8 times levered, a reduction of 0.7 turns compared to 2022. We remained committed to lowering our leverage last year through disciplined debt repayment and EBITDA growth. We anticipate remaining within our target leverage range of 2.5 to 3 times for 2024. Our balance sheet is strong, which guides our capital allocation decisions. We will continue to invest in the business, repurchase shares given the current stock valuation, and explore tuck-in M&A opportunities. Now, let’s discuss our guidance on Slide 11. There are several key assumptions on this slide. For the full year 2024, we forecast total company net sales of $37.5 billion to $38.5 billion, marking an increase of approximately 5% to 8%. We believe we can increase our total cases by 4% to 6%, with slight inflation expected between 0.5% and 1.5%. Our tuck-in M&A from last year, combined with the IWC debut, will contribute approximately 2 percentage points to our case growth. We expect our independent restaurant case growth to continue exceeding our overall case growth. As a result of good faith bargaining efforts, our agreement with the union representing our drivers was ratified on February 3. US Foods has a long history of good faith in reaching agreements with the union. From the outset, we took a principled stance and offered fair terms to the union before and after the contract’s expiration on December 29. We are pleased that the agreed proposal largely mirrors the economic terms of that offer. This five-year agreement entails wage and benefit increases that enhance the competitive offerings our drivers currently receive and includes safety improvements aligned with our high priority on associate safety. We incurred increased costs for business continuity and labor relations to serve our customers, along with weather-related challenges noted across the industry. Consequently, we expect a roughly $20 million negative impact on adjusted EBITDA for the first quarter, mainly due to additional costs associated with the labor disruptions. We project first quarter adjusted EBITDA will fall between $340 million and $355 million. Despite the labor disruptions and weather-related issues in January, we remain optimistic about meeting our full year guidance. We expect adjusted EBITDA to be between $1.69 billion and $1.74 billion and adjusted diluted EPS to reach $3.20. This suggests double-digit growth in net income driven by a combination of profitable growth and margin expansion, with expected gross profit per case outpacing operating expenses. In closing, 2023 was a strong year. I am very optimistic about the opportunities before us, the momentum we are building, and our growth potential this year as laid out in our 2024 guidance. I will now hand it back to Dave for his closing remarks.

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.

Your first question comes from the line of Lauren Silberman with Deutsche Bank.

Congrats on the quarter. If I could just start with capital allocation. It looks like you'll get close to $1 billion in free cash flow this year. Not your target leverage, even with acquisitions, it looks like you have a lot of cash left over. Can you just talk about how you're thinking about capital allocation appetite to further pay down debt versus buybacks or even the potential for a dividend?

This is Dirk. So yes, we are excited about the strong cash flow. We do expect that to meaningfully grow as you point out, as we grow earnings. And as our debt is already well within our target range, what we expect in 2024 is to have a reduction in leverage but more from earnings growth as opposed to much more on debt pay down. So that means that in addition to investing in the business, it will be around share repurchases and opportunistic M&A. So we're very excited about the IWC announcement this morning, and we would expect over the course of the year to increase the amount that we allocate for share repurchases.

Great. Very helpful. And then if I could just ask on case growth. And there's a lot of noise is whether in some of the idiosyncratic factors you called out in 1Q. Any color on what you're seeing more recently as things began to normalize and just the confidence in the 4% to 6% case growth for the year?

Yes. Thanks for the question, Lauren. As you've heard from others, there were a few other disruptions across the country in January, that's no surprise. But we were pleased actually with the recovery that we've seen since we've got past the labor disruption and those weather events, notwithstanding what happened on the West Coast last week and a little northeastern earlier this week. And really, really pleased with the team's work around the labor disruption. I've been doing this for a long time in many industries and I've seen labor disruptions before. I will tell you that we were as well-prepared going into that event, as I've ever seen. We came out with a very strong plan to go get our volume back. And so I'm pleased to see the progress that we've made, and largely in those non-labor disrupted markets, we've seen our volumes get back to basically the trajectory we saw in the fourth quarter, which was very strong, as you heard this morning. So really feeling good about that. And just a little bit more color I can give you is the early read on the industry, formerly MPD, as Dirk said, we maintained our market share in January and I was quite pleased to hear that. So all in all, more work to do but feel really good about our trajectory and certainly our team's focus to continue to drive that growth.

Your next question comes from the line of Brian Harbour with Morgan Stanley.

When you think about sort of the productivity and OpEx opportunity this year, what do you think will be most impactful kind of that's different than what you did in '23?

Well, I think largely, Brian, you will see us continue to lean in on the areas that we've been focused on and I was pleased. It's kind of the tale of two halves last year. We spent a lot of time in the first half of the year really honing our focus in on the needle-moving activities and really pleased with the trajectory that you saw us deliver in the back half of the year resulting in those productivity improvements that I quoted. And look, there's more work to do in all of those areas, whether it's in COGS and the work we've done with our suppliers, the pricing optimization work, and certainly the supply chain productivity. Really pleased with the progress we're making at routing but there's a lot more to do there. So largely the same. You heard my comments earlier about indirect spend, that's a piece of work that we started to talk about in the back half of last year and really started to see some traction in the back half of the fourth quarter. So that was very good to see. And I think we will ramp up that effort significantly in the first half of this year and deliver significant productivity improvement there as well. So largely a lot of the same work, just a lot more to do and a few new things.

Okay. And when you kind of talk about low to mid-single-digit increases in headcount, as I think it sounds like the typical rate, how does that usually flow through to case growth? Or do you have like a certain target that like this should drive ex flow-through to case growth?

Yes, it mainly depends on the talent mix we are bringing in. We've had great success in recruiting strong salespeople with industry experience, and not all of them come from our competitors. Others in the foodservice sector who understand the market and have a sales background fit well into our model. We invest considerable time in training our personnel, as you know. Looking ahead, we should aim to grow our cases at a rate of 30% to 50% faster than the growth in headcount. However, there will be a ramp-up period for that. As we enter a phase of stable low to mid-single-digit growth, that is what you can expect over the long term.

Your next question comes from the line of Kelly Bania with BMO Capital Markets.

I would like to inquire about the 2% to 4% organic case growth target for 2024. Can you provide more details about the channels? It seems you expect the independents to significantly outperform the total. In terms of healthcare and hospitality, is there any substantial growth potential remaining in these areas? Additionally, could you share your insights on the new business pipelines for healthcare hospitality?

Yes. For sure, we will continue to maintain our focus in the independent space. It's the most profitable segment of the business. It plays to our strengths in terms of our product and sales portfolio. So that's clearly a very strong focus for us. And what we saw last year, to your question, in hospitality and health care, largely a strong recovery from an industry perspective which provided some tailwinds. And importantly, as we talked about last year, we believe we're differentiated in health care with our VITALS platform and some of the other things we have on the technology front. We've got a very strong pipeline in both health care and hospitality that we expect will deliver outsized growth again this year. Maybe not at the rate that we saw last year, just given the recovery is largely intact but we expect to continue to drive growth at or above market in both of those segments.

Great, that is helpful. Can I just also ask about the sales compensation? It sounds like you're making some tweaks there. Can you just remind us the timing of that change? And what you're seeing across the space from the other private players? Is this kind of a broad change happening across the industry as we've kind of normalized in growth? Or is this just maybe unique to US Foods and a couple of others?

Yes. I really can't comment on what others are doing relative to their sales comp. I think my color this morning largely gave in our prepared remarks where we really haven't made any significant changes to our plan since some tweaks that were made in the pandemic, which was largely aimed at maintaining our sales headcount and providing what we needed to keep folks in the company as volumes decline. And as we get back on this aggressive profitable growth plan, those tweaks that we talked about there are really about giving our sellers the incentive they need to accelerate growth. The couple of things around shifting to more variable compensation, uncapping that portion of their pay, I want our sellers to make as much money as they possibly can if that means great things for our growth and for the company's future. So again, I kind of foreshadowed this last quarter saying these were tweaks, not significant overhauls of our comp plan and it's been well received. Answering your question, that all went into effect here in the first quarter.

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

Dave, I wanted to begin by discussing the investment in account-facing personnel, particularly business managers and territorial specialists. How do you envision this investment impacting new account additions compared to wallet share? What is your strategic focus in this area?

Yes, good question, John. We're focused on adding territory managers to continue to drive growth. But to your point, we have to have the right support around them. So the right number of specialists, new business managers, go out and target new opportunities, sometimes on their own, largely in parallel in partnership with our TMs. And then as we continue to grow our size and scale the sales force, we've got to make sure we've got the right management team in place as well, and the right number of districts, and we add district managers when that makes sense too, to make sure that we don't overload our leadership. So all that is embedded in that 6% growth number, some of those pieces are growing at a slower rate, obviously, than the TMs. But when I think about that low to mid-single digits, that's really comprehensive of all those rules.

Okay. As a follow-up, when you consider the biggest low-hanging fruit, where do you think that lies functionally? Is it in productivity? You mentioned stem miles and warehouse productivity. With the rollout of the day cart, how much do you believe you can further enhance cases per mile?

Yes. So the first part of your question, I think we largely believe that the existing long-range plan that we're finishing up this year, feel really good about our progress. As we commented previously, I think we had outsized improvement in the first couple of pillars of that, the profit and the growth pillars, and largely supply chain activity has lagged since the pandemic. I was pleased with the progress that we made in the back half of the year. However, I think largely that portion of our improvement has still lagged the other two areas. And so I see the greatest opportunity for productivity gains largely coming out of the supply chain. That's why I get so excited about our flex scheduling and the card platform. Despite all the improvements that we've made in routing last year with some record cases per mile, there's a lot more to do and we'll get a lot of benefit once we get the card spread across the country here. So a lot more work to do in all those areas, John, but I would say productivity is the one area we're ramping up most aggressively.

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

I was going to ask a similar question regarding the long-term prospects of flexible scheduling. It appears that more than half has returned to normal productivity levels, similar to those before COVID. The recent improvements in turnover and safety imply there may be significant potential to exceed just returning to previous levels. Is that correct? Can you elaborate on how far this could go before considering other factors like automation?

Yes, Alex, I think you're on the right track. There’s definitely more potential for growth, and while I’m excited about flex scheduling and mentioned our successes in the pilot markets, we haven’t yet seen the same productivity boosts across all our markets. It requires time for our local teams and associates to adapt to the new operating model, and we anticipate ongoing productivity improvements. We’ll share more about our long-term productivity goals in June, but I want to emphasize that we are enthusiastic about our initiatives. We believe we are focusing on the right areas for improvement, and I am optimistic about our capability to enhance productivity further.

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

Congrats on a strong finish to the year. I did want to come back and talk about the compensation for the sales force. You mentioned several changes: variable compensation, more variable focused on private label targets and removing the cap on compensation. Dave, I think you also mentioned this was well received. I'm just curious, have you seen any attrition as this has gone into place? Or are you expecting any attrition from the sales force in 2024 as these changes go into place?

So the gate answer is no. We haven't seen any nor do I expect any. I think our team did a very good job preparing for this rollout. We had a thoughtful approach to that. Any time you make change even if it's positive, you've got a change management process you've got to lead through, and that starts with robust communications. So we did a very nice job of that starting actually very early in the fall last year. So we had plenty of time to not only give our sales team a heads up but to model their compensation in the old model and the new model, so they could see what that looks like and importantly, understand what actions, if any, they had to take differently to maintain or actually increase their compensation. And so as we got further and closer to that date, what we saw was our sellers got excited about it because they see the opportunity to make more money lined up with what we've done here. So I don't expect any attrition from this with something that we look at very closely all the time, every week, as you would expect. And we haven't yet seen anything nor do I expect to.

Great. On MOXe, you mentioned that 50% of national chains are now on the platform, up from about 30% last quarter, which is a significant increase. Can you discuss any changes in behavior you're observing as more chains adopt the platform? Are you noticing an increase in case count? I’d like to understand the changes in behavior following this implementation.

I think it's actually a little early on the national side to see anything significant change yet. We're still in the ramp-up phase. We're pleased that customers are liking it and embracing it similar to how they have in independent restaurants. And remember, what we said that's going on in independents is that those customers are buying more and they're stickier. They stick with us longer. We would expect to see those same sort of benefits through the course of time in the national area just like we have in independents.

Your next question comes from the line of Jake Bartlett with Truist Securities.

My first question is about product cost inflation. You provided guidance of 0.5 to 1.5 and mentioned that it was flat in the fourth quarter. Looking back, it seems you experienced positive movement in October if my notes are correct. It appears to have decelerated since then. Can you share your expectations regarding the cadence? Do you anticipate starting the first quarter with deflation moving into inflation? Could you clarify the cadence for me? I also have a follow-up question.

Jake, this is Dirk. So I would expect us to see inflation. We saw inflation in the fourth quarter. Actually, in January, we saw some modest inflation again, likely increasing as the year goes on. Just I think the overall message embedded within that range is we're not assuming sort of strong levels of inflation throughout the year. That's not that different than the last couple of years. We've tried to be a little more conservative and drive more of our results through our overall things that we control within our business. But inflation through probably most of the period.

Got it. So the comment of flat with, I guess, for the year as a whole. So another question on just your confidence on continuing to drive gross profit per case in '24. You mentioned there's still 40% of your vendors you're talking with you have some modest inflation. But if you could just talk about what kind of gross profit per case increase you expect what's embedded in? And maybe how much of that 40% that you think you're going to be able to hit in '24 and drive that forward?

Sure. To address your deflation question, we mentioned a nearly flat inflation rate of about 15 basis points this quarter, which is significant but still a positive sign. While we won’t go into specifics about the per case increases, it’s crucial to highlight that over the last three years, we've successfully driven gross profit. This has been largely due to our ongoing initiatives and some new efforts on the horizon. As for the cost of goods, we aim to navigate the remaining challenges this year, alongside various additional measures we will be implementing. Our growth rate, particularly with our targeted customer segments, gives us an edge compared to many others. By collaborating with our vendors, we help them tap into these segments, creating a mutually beneficial situation. The savings we generate will allow us to maintain fair pricing for our customers. We will keep focusing on areas like managed cases in logistics. Simultaneously, we strive for operational efficiencies in our supply chain and other areas to counteract most of the cost inflation we encounter. As a result, we anticipate that gross profit per case growth will continue. We will keep emphasizing that our EBITDA growth stems from a blend of profitable growth and margin expansion, and we believe this is essential for sustainable growth moving forward.

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

Dave, I wanted to ask you first about M&A. Your strategy is ramping nicely. You'll get two points of case growth from M&A in '24. Can you talk about the quality of the business you're taking on from a margin standpoint? And then how does the pipeline look like moving forward? And is the contribution that you'll see in '24? Is that sort of a good placeholder for the run rate as we think about this over time?

Yes. We're excited about what we've done in M&A, Ed and certainly the latest one we talked about here this morning with IWC. And as we said, the majority of their business is in the independent space, which fits right in our wheelhouse, exactly the type of strategy we want to deploy. And IWC in particular, I didn't say this on the call, but we're serving that market today but we're coming through two other distribution centers that are probably three hours away from the market. So we're not getting there very efficiently. So in all three of the acquisitions, they've solved that problem for us and have the right mix of business to help us to continue to drive growth on that platform. So we're pleased with it. These are accretive and make great sense. We're not overpaying for these acquisitions. And to the last part of your question, M&A is hard to predict. We don't know when deals are coming to the market. We've been opportunistic on all three of these. We will continue to be, but I'd be hard-pressed to predict how the rest of the year may or may not play out. But what you're seeing us do is drive these tuck-ins in a way that just makes absolute sense for our business over the long haul and that's what we'll continue to look for. We think there's still opportunities out there.

Great. And just a follow-up, I guess, for Dirk. Gross profit per case this quarter was up a lot less than what it's been year-over-year. And I think there are some year-end sort of like some of the year-end timing stuff. Maybe could you talk about that? And then as we think about '24, how do you think about the relationship of GP per case versus OpEx per case in terms of how you grow EBITDA per case? OpEx per case this quarter was actually down a little bit. I'm just kind of curious as to how you think about that relationship in '24 as well.

Sure. Well, as you pointed out for the fourth quarter, not a real surprise. We've talked about this for the last few quarters that you're going to have different cadence things that play out in gross profit. You're right, it still stayed at a very strong level that we've been at the last couple of quarters. So we're pleased, and I think that demonstrates also again that the benefits are coming and the durability from the things that we're doing as opposed to whether it's inflation or deflation. And you're right. So we talked about that a year ago, there were a few benefits in the fourth quarter, and then over the course of this year, we've recognized them over the years. So there's nothing really new or beyond that, as we go into 2024 and less about the specific number but we are very focused on continuing to grow gross profit faster than we do OpEx. And we believe we have a lot of opportunity and let's come back to my comment on the durability. We think that the gross profit that we continue to grow year after year after year through the actions that we're driving from our initiatives that we think there's still a runway there over the course of 2024. So I'm not going to give you a specific magnitude but clearly, we do expect that to grow faster than OpEx.

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

Great. Two questions. The first one, just on the invested EBITDA, Dave, I think you mentioned, or maybe you gave a little teaser ahead of the June Investor Day. But you put you'd grow adjusted EBITDA in the high single-digit to low double-digit range the next several years? The low double-digit was of our expectation. I know consensus is in kind of that 7% to 8% range. But just wondering if you could talk a little bit about the biggest driver of that potential growth acceleration. Whether or not it's more from upside to sales or whether you have increasing confidence or greater confidence in the margin opportunity that would allow you to get into that north of single-digit range? And then, I have one follow-up.

Well, first of all, I'll say we'll say a lot more about all that up in June. But having said that, I think what you've seen us deliver, particularly in 2023 was a great balance in our P&L. We've got very good top-line growth. We're leveraging that quite well based on some of the comments you heard from Dirk and our control of operating expenses. We're leveraging that quite well through the P&L. And so that model is working quite well for us. I'm excited about our top-line growth; we're investing in the right areas, both to drive top-line growth and continue to drive productivity and efficiency in the business. And I think that will continue for a long time to come. So think balance; I think just equal opportunity in the top line as well as the leverage areas of GP and expense control.

Understood. And then, just a follow-up. I wanted because you talked about well, the very strong EBITDA margin expansion of, I think it was 50-plus basis points in 2023. I just think about that expansion in 2024 and longer term. I know you talked about supply chain being perhaps the lagging factor. But should we assume steady increases kind of in the theme of what you just said? Or is it more lumpy? I'm just wondering if you could prioritize the greatest opportunities to drive that EBITDA margin expansion.

I think steadier would be a better way to mention about it versus one. Obviously, every quarter is the same winning is the right way to think about it. And we've demonstrated that ability to drive the leverage with a couple of pandemic and post years aside for a long time. And so it may not be at the 50 basis points, but we think there's still plenty of room for year-after-year opportunity for margin expansion.

Your next question comes from the line of Mark Carden with UBS.

So to start, you guys talked a bit about your expansion of Pronto and that you're now in 35 markets today. When you guys add Pronto to a new market, is the vast majority of the independent case growth lift captured in year one? Do you see much of a waterfall benefit there? And then just more broadly speaking, what inning do you think you're in for the initiative before its maturity?

Great question. We're excited about Pronto, where we penetrated the market with that. We see a great uplift in independent growth, particularly with new customers there, and that comes fairly early. It gives us additional tool in our toolkit to service customers, particularly in those dense geographies where it's hard to get to or they may need more frequent deliveries than we do with our larger deliveries. I would say we're not mature in that yet, but we've got five more markets we're going to penetrate this year. I will say that not all markets are right for Pronto; particularly those larger dense geography markets make the most sense. We still have plenty of opportunity there. And I'd be remiss to not reiterate that we see plenty of growth where we've already penetrated the market with Pronto and continue to add new trucks and capabilities there where we've had success. So I see probably an equal balance for new market penetration as well as existing market growth.

Got it, that's helpful. And then as a follow-up, how are you guys thinking about the labor environment in the year ahead? You gave some really helpful color about the recent strike. Your largest competitor had a few of these as well in recent years. Has there been any underlying changes here? Or do you see it just being more or less of a nice issue?

Yes. We see this as an isolated issue. We pride ourselves on having very strong relations with our associates, whether they're represented or not. We've got a long history of reaching positive win-win outcomes with our labor unions across the country. We had a disruption. And as I said, we were well prepared for it. We got through it in a few weeks and settled largely on the offer that we put forward at the end of last year. So those things come and go over time. You don't expect them to happen, but you need to be planned and ready for it, and we were. We've got a number, just like we do every year, we've got a number of new agreements that are up for negotiations this year and we expect those to go well.

Your next question comes from the line of John Ivankoe with JPMorgan.

I would like to understand the current health of the independent restaurant segment based on your fourth quarter and overall 2023 results. There seems to be some discussion about whether this industry is still growing and if the fundamentals remain strong for independent restaurants to invest in new opportunities as we look towards 2024 and 2025. As you converse with your territory managers, what insights are they providing about this key customer segment? Are they identifying more sales opportunities compared to your current engagement?

Yes. They are excited about it. I'm excited about it. I think the healthy operator is really strong. I think there's been a nice recovery since the pandemic in terms of actual units that have come back online or new restaurants. But importantly, the thing that I always tell our team, even given the health of the industry, it's going to ebb and flow, we think it's very robust right now. But we have ample share gain opportunities regardless of what's going on with the macro. And let's stay focused on the things we can control; our model works, our team-based selling model works. We have great products and services for our customers. And let's not look left or right, let's just stay focused on running our plays that are working. And I think we've got a long runway of growth ahead of us.

Your next question comes from Andrew Wolf with CL King.

Dave, you've consistently emphasized the importance of worker safety. Given your experience in this and other industries, is there a connection between improved safety and other key metrics across the organization, like productivity and timeliness? I'm trying to understand why you prioritize workers.

Well, the reason I lead with it is it's the right thing to do for our associates and for our company. And I say this all the time to our team, Andy, if we can't keep our people safe working for us every day, then nothing else we're going to accomplish matters. I'm that passionate about it. And when I got here, we didn't have actually the focus I felt we needed on safety, and that's why I'm so excited about our 23% improvement last year. We will continue to focus on it because it's the right thing. Now having said that, to your question, Yes. I think safety performance is a good indicator of overall operating discipline that you have in areas like quality, productivity, how you think about the customer. I worked with DuPont for 20 years, you might remember. And I used to be able to walk into an operation and just observe and look around. And if I saw a good housekeeping and safety behavior, you can kind of get a good sense for how that operation was run top to bottom. So it's the right thing for our people, it's the right thing for our company, and for our business, and we'll stay focused on it.

Okay, that's good color. Appreciate it. And just a last follow-up on the sales compensation changes. You've had a bunch of questions, but do you think having an uncapped compensation can help you recruit better territory managers? Is there a recruitment advantage to that? Or more of a...

I think it will be. That's not really the driver of it. But I think folks coming in from the outside that are hungry great salespeople, and we tell them that that's the way the comp is structured. I think that will be a real benefit. We just want to empower our folks in the right way to drive as much profitable growth as they can for themselves and for the company, and we thought that made sense.

I will now turn the call back over to Dave Flitman for closing remarks. Please go ahead.

Thank you and thank you all for joining us today. We have very strong momentum in our business. We're excited about the future. We look forward to seeing all of you on June 5, we'll talk before then. Have a great rest of the week.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.