Earnings Call Transcript - USFD Q2 2025

Operator, Operator

Thank you for your patience. My name is Jordan, and I will be your operator for the conference today. I would like to welcome everyone to the US Foods Holding Corp.'s Second Quarter 2025 Earnings Call. I will now hand the call over to Mike Neese, Senior Vice President of Investor Relations. Please go ahead.

Michael D. Neese, Senior Vice President of Investor Relations

Thank you, Jordan. Good morning, everyone and welcome to the US Foods Second Quarter Fiscal 2025 Earnings Call. On today's call, we have Dave 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 and today's presentation can be found on the Investor Relations page of our website at ir.usfoods.com. During today's call, unless otherwise stated, we're comparing our second quarter fiscal year 2025 to the same period in fiscal year 2024. 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 those anticipated in forward-looking statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures. With that, I'll turn the call over to Dave.

David E. Flitman, CEO

Thanks, Mike. Good morning, everyone, and thank you for joining us. Let's turn to today's agenda. I'll start with our key results for the second quarter and first six months of the year, which are underpinned by significant achievements across our strategic pillars as our team continues to execute very well. I will then hand it over to Dirk to review our second quarter financial results and our updated fiscal 2025 guidance. Turning to Slide 3. We delivered strong second quarter and year-to-date financial results as we continue to demonstrate consistent progress against the long-range plan we presented at our Investor Day last year. Importantly, our year-to-date earnings and EPS are in line with our long-range plan algorithm. Year-to-date, we grew adjusted EBITDA 11%, expanded adjusted EBITDA margin by nearly 30 basis points, and grew adjusted EPS 27%, which highlights our team's consistent execution and the strength of our differentiated business model. This momentum has fueled further market share gains with our independent restaurants, healthcare, and hospitality customers. I'm incredibly proud and appreciative of our talented team of 30,000 associates whose dedication and hard work are delivering on our promise to help our customers make it. Moving to Slide 4. We delivered record second quarter adjusted EBITDA of $548 million and a record adjusted EBITDA margin of 5.4%, a 40 basis point increase through a combination of top line growth, strong gross profit gains, and disciplined cost management. Our record adjusted EBITDA margin is not a ceiling, and we have significant margin expansion opportunities for years to come, largely through continued improvement in the execution of our core business processes and benefits from improved customer mix. And again, this quarter, we gained market share with our target customer types of independent restaurants, healthcare, and hospitality. This is the 17th consecutive quarter of market share gains with independent restaurants and the 19th consecutive quarter of market share gains with healthcare. In addition to our strong financial performance, we remain committed to delivering shareholder value through our capital return strategy. On our last earnings call, we stated we would accelerate share repurchases in the second quarter and balance of the year given our strong cash flow. We did just that and repurchased $250 million of shares in the second quarter. We will remain prudent as we allocate capital, first, by investing in the business to drive growth, and then balancing share repurchases with tuck-in M&A opportunities. Let's turn to our case growth and our perspective on the industry. We continue to outperform the market and take share as our independent volume growth was 2.7%, in line with our 2% to 5% guidance for the year. Our organic independent case growth accelerated 100 basis points from Q1 to Q2, and we gained share in every month of the second quarter. Total independent restaurant volumes per Circana increased from the first quarter to the second quarter similar to our improvement in case growth. Our organic independent case volume also accelerated throughout the second quarter with June growing at approximately 3% and July continued the approximately 3% growth rate. During the second quarter, we grew net accounts approximately 4% over the prior year, which was our strongest growth rate since the fourth quarter of 2023. As a result of continued acceleration in our net accounts, we expect to build further momentum in our independent growth rate through the back half of the year. Additionally, healthcare and hospitality continue to help drive our overall volume growth with approximately 5% and 2.4% case growth, respectively. Turning to our chain business. Restaurant foot traffic as reported by Black Box improved sequentially throughout the second quarter versus the first quarter, but remained down 1.1% from the prior year. We continue to be disciplined in optimizing our chain portfolio to improve profitability. In the second quarter, our chain restaurant volume declined 4%, primarily driven by a strategic exit, which negatively impacted our total chain volume growth by approximately 300 basis points. We've recently onboarded several new business wins and expect our chain volume performance will improve in the back half of the year. Additionally, in the first quarter, we divested Freshway, a small produce processing business that provided us with higher volume, but with lower margins. The divestiture resulted in nearly a 50 basis point impact to our total case growth in the second quarter. Regardless of the operating environment, we remain guided by four strategic pillars: and I will highlight key elements of our progress over the next several slides. Moving to Slide 5. Our first pillar is culture. We remain committed to our goal of zero injuries and accidents for our associates. In the second quarter, our injury and accident rates were 21% better than the prior year. And over the past two years, we've improved our safety performance by 35%. Our team has made great progress in creating a strong safety culture, but we have more work to do. This past May, we published our 2024 sustainability report highlighting our progress in the three focus areas of products, people, and planet. I am proud of the work we accomplished in 2024 to further align our approach to sustainability with our strategy and our operating model. We have reduced our Scopes 1 and 2 greenhouse gas emissions by 16% since 2019 and are nearly halfway to our goal of reducing these emissions by 32.5% by 2032. Turning to Slide 6, Our second pillar, service. Our focus on service is one of the many reasons that our customers choose US Foods. Our ability to deliver service excellence is driven by our initiatives to improve reliability, enhance operational efficiency, and provide a best-in-class customer experience through our MOXe digital platform. We improved routing productivity again this quarter as we continue the Descartes rollout across our distribution network. We are now live or in active deployment in 65 markets representing approximately 90% of routed miles and remain on track to be fully deployed by year-end. We delivered more than a 2% improvement in cases per mile over the prior year and nearly 6% over two years via our routing initiatives. And in the second quarter, we achieved our best cases per mile performance in our company's history. Our routing initiatives helped to drive greater delivery efficiency while enabling a better customer experience. As we discussed last quarter, an important element of our service is our Operations Quality Composite or Ops QC, which measures our ability to deliver products to our customers without errors. During the second quarter, we made steady progress on Ops QC resulting in nearly 28% improvement from the prior year. Over the past few quarters, we have also implemented new inventory control processes, including scanning technology which reduces manual inputs and results in fewer errors. We continue to sequence new opportunities to improve our service and reduce costs for our customers. We also recently completed an independent Net Promoter Score study where customers provided their feedback and views regarding digital technology leadership in our industry. The results show that US Foods MOXe platform has a distinct advantage over the competition. We also have the highest customer digital adoption in the industry. Significantly, more US Foods customers use MOXe for all of their self-help needs, including purchasing, delivery tracking, and bill payments, which is a testament to our online leadership versus our competition. As we remain focused on enhancing our technology leadership, we drove record independent restaurant e-commerce penetration of 78% and total company of 89%. We are on track to hit our goal of 95% penetration by 2027. Turning to our growth pillar on Slide 7. We remain focused on accelerating profitable growth and gaining market share with our three target customer types. We have continued investing in our Pronto small truck delivery service and are now live in 44 markets with plans to add a few more this year. We are nearly complete in launching Pronto legacy across the company, but still have plenty of growth opportunity ahead by adding more trucks within our existing markets. In addition to Pronto legacy, we have expanded Pronto penetration to 15 markets to further grow our share of wallet with our existing customer base. We continue to see a double-digit percent uplift in overall case growth with customers in the program, and we will be in a total of 20 markets by the end of 2025. Given the success of both Pronto legacy and penetration, the overall program is on track to deliver over $900 million in sales this year and we now believe it will reach $1.5 billion in sales by 2027, up from the $1 billion that we've previously discussed. Beyond Pronto, we remain committed to investing in the business to fuel growth and enhance operational efficiencies. I'm excited to announce that we began limited shipping from our first new semi-automated facility in Aurora, Illinois last month. This 310,000 square foot distribution center is a state-of-the-art facility that will enable us to be more efficient, accelerate productivity, improve our Ops QC metric, and inventory accuracy, and further reduce accidents and injuries. Finally, we broke ground on a semi-automated expansion in our distribution center in Austin, Texas, which will effectively expand our capacity in another high-growth market. Targeted investments in semi-automation will support our growth initiatives and help us accelerate our supply chain excellence work while delivering strong capital returns for the business. Moving to Slide 8, our profit pillar. Our consistently strong execution drove adjusted gross profit growth during the second quarter and the first six months of the year. Second quarter adjusted gross profit was $1.8 billion, up 5% from the prior year, driven by volume growth, improved cost of goods, more disciplined inventory management, and increased private label penetration. Our strategic vendor management initiative has delivered more than $50 million in year-to-date cost of goods savings. And for the full year, we expect to drive more than $110 million. As we realize these benefits, we are reinvesting a portion of those savings to help accelerate growth. And we now have line of sight to exceed our 2027 long-range plan commitment of $260 million. Private label penetration with our core independent restaurants grew by more than 80 basis points to over 53%. These margin-driving high-quality innovative products enable us to deliver significant value as we help customers offset inflationary pressures with lower costs. Before passing it to Dirk, I'd like to highlight one of our distribution centers and associates. Last month, several US Foods military veteran associates from our Manassas, Virginia Distribution Center, and I took part in a wreath-laying ceremony at the Arlington National Cemetery, Tomb of the Unknown Soldier to honor the sacrifices of our nation's service members. We are proud of our veteran workforce and remain committed to recognizing the leadership, integrity, and service that our military community brings to US Foods. And we are committed to increasing veteran new hires through our Mission 2030 recruitment initiative in which we intend to hire an additional 3,000 military veterans by 2030. I thank our Manassas team, our veteran associates across the company, and all veterans for their service. Let me now turn the call over to Dirk to discuss our second quarter results and our updated 2025 guidance.

Dirk J. Locascio, CFO

Thank you, Dave, and good morning, everyone. Our second quarter results demonstrate the consistent execution of our strategy and continued progress on our self-help initiatives. We delivered top line growth and margin expansion, combined with accretive share buybacks which resulted in strong double-digit adjusted EBITDA and adjusted EPS growth. Starting on Slide 10. Second quarter net sales increased 3.8% to $10.1 billion driven by case volume growth of 0.9% and food cost inflation and mix impact of 2.9%. We increased volumes with our target customer types of independent restaurants, healthcare, and hospitality. Despite a dynamic macro environment, we grew independent restaurant organic volume 2.3%. Healthcare continues to perform well and grew 4.9%, while hospitality grew 2.4%. Shifting to our financial performance. We delivered strong earnings growth and margin expansion. I'm pleased to report that adjusted EBITDA increased 12% from the prior year, achieving a quarterly record of $548 million. This growth was fueled by consistent progress of our initiatives aimed at driving profitable volume growth and sustainable gross profit gains coupled with disciplined operating expense management. As a result, adjusted EBITDA margin expanded by 40 basis points, achieving an all-time high of 5.4%. Finally, adjusted diluted EPS increased 28% to $1.19 per share. Our strong adjusted EPS growth is powered by our earnings growth, combined with accretive share repurchases and continues to significantly outpace adjusted EBITDA growth. We expect to maintain this trend as we deploy our robust and growing cash flow to invest in the business to drive profitable growth and execute additional buybacks. Turning to Slide 11. We again drove operating leverage gains through the execution of our initiatives, including strategic vendor management, private label penetration, and a new initiative targeted to reduce inventory losses. Adjusted gross profit per case improved $0.32 or 4% compared to the prior year. A large part of the performance is driven by the success of our in-place strategic vendor management initiative to improve cost of goods sold. As Dave highlighted earlier, we now have line of sight to exceed our 2027 long-range plan commitment of $260 million. We have made significant improvements in more effectively managing inventory on hand in recent years, while at the same time, improving customer service levels. To that end, we've made great strides on a new initiative to eliminate waste and reduce write-offs. The focus here is on reducing losses from products that can't be sold due to damage or spoilage through improvements in process and insights. As a result of our actions, we expect to reduce inventory losses by over $30 million in 2025 and believe there is further savings opportunity in 2026. Adjusted operating expense per case increased $0.09 or 1.6%. We continue to offset a considerable portion of operating cost inflation by driving productivity improvement in both operations and administration through eliminating waste in our supply chain and instituting greater process discipline across the business. As previously communicated, a key element of our expense management where we are driving results is our indirect spend management initiative. As a reminder, indirect spend is a $1 billion-plus bucket of addressable spend. We are on track to generate $45 million in total savings this year, which is about $15 million above last year. As a result of the strong execution of our strategy, adjusted EBITDA per case increased $0.25 or 11% to a record high of $2.52. Moving to Slide 12. US Foods continues to generate strong cash flow funding record capital investment to maintain our business, support growth, and drive attractive returns while also delivering on our commitment to return capital to shareholders through share repurchases. Year-to-date, our operating cash flow increased by $104 million to $725 million, driven by earnings growth. During the second quarter, we significantly accelerated the pace of share buybacks, as we repurchased $250 million of shares. Overall, we bought a total of 3.6 million shares for $273 million so far in 2025 and have $800 million remaining on our $1 billion program authorized in May of this year. Finally, we ended the quarter at 2.6 times net leverage, down from 2.8 times at the end of last year and well within our stated 2 to 3 times target range. Our debt structure is strong, and we have no long-term debt maturities until 2028. Now turning to our guidance and modeling assumptions on Slide 13. Given our year-to-date performance and outlook for the remainder of the year, we are updating our fiscal year 2025 guidance. We continue to expect net sales growth to be in the range of 4% to 6%. Due to our solid progress this year and our ability to deliver balanced profitable growth and enhanced margins, we are raising the low end of our guidance for adjusted EBITDA and adjusted diluted EPS. We now expect adjusted EBITDA growth of 9.5% to 12% and adjusted diluted EPS growth of 19.5% to 23%. We also now expect interest expense to come in slightly lower at $300 million to $315 million. I'm pleased with the progress we have made this year on execution within our business. As we navigate the dynamic macro environment, we continue to grow our top line, gain share, expand our margins, and deploy our strong cash flow toward our capital priorities, and we remain committed to achieving the financial targets in our long-range plan. With that, I'll now pass it back to Dave for his closing remarks.

David E. Flitman, CEO

Thanks, Dirk. As we close this quarter, I am encouraged by the progress that we've made in driving strong profit growth, executing our self-help initiatives, and the ongoing opportunity we have ahead to drive significant value for our stakeholders. We operate in a large, fragmented, resilient, and growing industry with our focus on independent restaurants, healthcare, and hospitality, which are the fastest-growing and most profitable customer types. And food away from home continues to steadily increase a multi-decade trend that we believe will continue. US Foods is a national leader with significant sustainable advantages and the only pure-play US-focused broadline foodservice distributor with national scale. We will remain disciplined with our capital allocation strategy, which will enable us to be a consistent double-digit earnings compounder for many years to come. Before we move to Q&A, I want to address the recent speculation about a potential transaction with Performance Food Group. Many of you know that as part of our commitment to generating long-term profitable growth and creating shareholder value, US Foods regularly considers accretive tuck-in M&A and evaluates potential strategic opportunities. We believe that a combination with PFG has the potential to create significant value for both companies and our collective stakeholders while enhancing competition in the foodservice industry. We approach PFG to work with us to explore the merits and opportunities of a combination. To date, PFG has declined our invitation to do so. Let me provide some thoughts about the strategic rationale of a potential transaction based on our knowledge of foodservice, both companies, and where the industry is going. We believe a combination would bring together the best of both companies, resulting in meaningful economies of scale, expanded growth opportunities, complementary geographic reach, operational efficiencies, and a differentiated go-to-market offering based on service excellence, industry-leading digital capabilities, and a strong customer-centric sales force. We believe customers would further benefit from the broader product offering, our strengthened ability to compete in the marketplace, and increased efficiencies. We believe the combination will result in a thriving inspired culture supported by investment in the development of associates. Finally, we estimate a combination would generate meaningful multi-year synergies and significant opportunities for profitable growth and shareholder returns. Our ask of PFG is simply to work together to further understand the merits and opportunities of a potential combination. At this time, we have no further information to disclose on this topic and will not be taking any questions regarding our outreach to PFG. Regardless of the outcome, and I want to be crystal clear about this. I remain highly confident in US Foods' future and our ability to deliver our long-range plan and financial algorithm. As a reminder, we expect to deliver a 5% sales CAGR, 10% adjusted EBITDA CAGR, at least 20 basis points of annual adjusted EBITDA margin expansion, and a 20% adjusted EPS CAGR through 2027. With that, Jordan, please open up the line for questions about our results.

Operator, Operator

Your first question comes from Lauren Silberman from Deutsche Bank.

Lauren Danielle Silberman, Analyst

I wanted to try to follow up a bit on your last comments, Dave. You've talked about a preference for more tuck-in acquisitions rather than anything transformative. Obviously, PFGC would be pretty transformative. But can you just talk about any changes to your philosophy on M&A given the openness to engage with performance?

David E. Flitman, CEO

Yes. Really, no change to our philosophy, and I would probably, Lauren, just leave it with my prepared remarks. And in that, I stated that the company, from time to time, explores strategic opportunities to create value for all of our stakeholders. And I would just point you to that comment.

Lauren Danielle Silberman, Analyst

On the topic of traffic, chain restaurant traffic across the industry improved nearly 200 basis points quarter-over-quarter. What are you observing from the independent side at an industry level? Did it accelerate at the same pace, or are you seeing less than that? Any insights on these dynamics would be appreciated.

David E. Flitman, CEO

Yes, I think let me start with the chain piece because you asked about that first, the 200 basis points improvement and that accelerated throughout the quarter versus Q1, but it was still down over 100 basis points in the quarter, but we're encouraged by that improving momentum. Independents, according to Circana accelerated, as I mentioned in my prepared remarks, about 100 basis points, slightly less than that. And so it's improving, but not to the extent we'd like to see it. But I'm hopeful that, that will continue to improve, and we've kind of seen the turn in the bottom here. For our results, we accelerated our case growth with independents throughout the second quarter. As I mentioned in my prepared remarks, ended up in June about 3% that carried over to July, and we're encouraged by what we see in the early days of August so far.

Operator, Operator

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

Hilary Lee, Analyst

This is Hilary Lee on for Brian Harbour. I just want to talk about the sales guide and the sales dynamics for the quarter. So you're tracking around 4% year-to-date at the low end of guidance. So what kind of gives you guys the confidence to maybe reach the midpoint or even higher for the rest of the year?

David E. Flitman, CEO

Yes. I'd point to two things. And as we commented, we did have a strategic exit in the chain business early in the second quarter. We have since in the process of onboarding a few new concepts, and we're encouraged to and believe that, that will accelerate in the back half of the year. And then my comments just to the last question on the independent side, we've seen acceleration as we finished the second quarter, we're encouraged by what we see in July and August, and we would expect those volumes to accelerate in the back half of the year as well.

Hilary Lee, Analyst

Got it. And just a follow-up. Inflation seems pretty tempered this quarter compared to prior quarters and from what we've been comparing to what we've been hearing across the restaurant industry. So could you talk about what you're seeing, particularly kind of interested in beef and eggs as we've kind of seen that inflation in those categories go up the past couple of months?

Dirk J. Locascio, CFO

This is Dirk. You're right. It has tempered, so the quarter was less than it was last quarter. You've seen several center-of-plate categories to your point, either moderate or see some sequential deflation, both eggs and beef squarely fit within there. I'd say you see, broadly speaking, grocery continues to see very modest inflation in center of the plate. Overall, as a basket is still seeing a little higher inflation. But as you pointed out, definitely seeing some moderation from where it had been. So well within the range of the 2% to 3% that we all talk about, that we like as an industry and you see it through the first half of the year, we're basically right on between that and the mix with our 3% that's embedded in our modeling assumption.

Operator, Operator

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

John Edward Heinbockel, Analyst

Dave, I wanted to start with your thoughts on expanding the sales force, right? I think you've always said, I guess, mid-single digit 4% to 5%, thoughts on that today, sort of the quality of people you're onboarding. And then I know it's been a bit of a struggle, right, for all of you guys to improve wallet penetration. Is there something that can sort of jump start that going forward? Or that's just going to be a challenge for all of you.

David E. Flitman, CEO

John, appreciate the questions. Yes, we will stay in that mid-single digit. I think I've bracketed around the 4% to 6% sales force growth. And I've been trying to be clear about regardless of what's going on with the macro, we think that is the right number for us in order to be able to support the development and onboarding of those sales reps and feather them into our organization. So we don't anticipate anything changing that. Second question you had there was around the quality of the sellers. I continue to be very excited about the quality of the incoming hires that we've had. We've seen no change or degradation in that. We are able to attract high-quality sales talent into the organization. And I think to your point around penetration, the industry has been challenged for a couple of years. We are just coming off of eight consecutive quarters of Black Box data being down quarter-over-quarter. And so penetration has been a challenge. Independents have not been immune to that. I will tell you that I was encouraged to see our penetration, albeit still pressured, improve from Q1 to Q2 slightly on the independent side. So we think that is a turn potentially and a sign of good things to come. But I would say the thing that we're most excited on the penetration side is Pronto. And as I've stated before, that enables us to compete against the part of the market, particularly the specialty suppliers that historically we haven't had the service model to compete against. And with the uplift in case growth we're seeing as we expand Pronto across the company, that gives me real encouragement around that penetration ramping up in the future.

John Edward Heinbockel, Analyst

And then just as a follow-up, right? I think you talked about UMass and where we are in that rollout and its contribution to productivity. But where are we? And how do you think about that relative to the Descartes contribution?

David E. Flitman, CEO

Yes. Great question. I didn't mention UMass this morning. We have UMass across 37 markets, and we're currently in live deployment in an additional 10. By the end of the year, we expect to be live and complete across more than 60 of our 74 markets. So we haven't forgotten about UMass. With things like Descartes, that has certainly taken priority for us. And as you see, we've ramped that up now to 65 markets covering 90% of our miles. It's really just been a prioritization effort for us, John. But I'm pleased with the progress we've seen in UMass, the consistency in our operating practices that that brings. And I think that means good things for productivity and the quality of product that our customers are going to get in the long term. So we're moving it all ahead.

Operator, Operator

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

Kelly Ann Bania, Analyst

Dave, the performance for the quarter, year, and recent quarters has been strong from a profitability standpoint. There are some investor concerns regarding revenue growth and case growth, as well as potential risks related to overly aggressive expense reductions. Could you address this and explain why it's not a concern worth worrying about? Additionally, could you provide a timeline for when we might see better alignment between case growth and EBITDA growth in relation to your long-term plan?

David E. Flitman, CEO

Yes, I'd point you to my earlier comments around the expectation that that case growth would continue to accelerate in the back half of the year. We've got line of sight to that happening. I feel really good about it. And I think, Kelly, for the past 18 months or so, given the industry pressures, our ability to drive the double-digit EBITDA growth and hit our algorithm in the new long-range plan should give investors confidence that as the volumes come back in the industry and we continue to accelerate our growth on the top line, it's really going to mean very, very good things across the P&L. I'm not personally concerned. Obviously, I'd like to see the top line be stronger. We're working on that aggressively, and I have an expectation that we will do just that.

Dirk J. Locascio, CFO

And Kelly, I want to add that the main factors driving our margin expansion are not solely related to a reduction in operating expenses. We are experiencing solid productivity that is helping to offset some cost inflation. Additionally, we have various initiatives in place across gross profits, such as managing the cost of goods, focusing on customer mix, promoting private label products, and improving inventory management, all of which are contributing to our success. It isn't just one factor at play, and this clearly reflects the collection of initiatives outlined in our long-range plan, which is why we are confident in our ability to continue achieving these results.

David E. Flitman, CEO

And the last thing I would say there is I came in day one, two and a half years ago talking about the importance of 3% to 5% productivity. You see us delivering that. And as Dirk says all the time, we are doing this in a very healthy and sustainable way for the business.

Operator, Operator

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

Alexander Russell Slagle, Analyst

Congrats on the momentum here. I wanted to ask on the net new independent account growth, how that's been accelerating. I know that's a key driver and source of visibility and confidence for you just hitting the independent case growth targets. And you had talked about the new GenAI automatic order guide, and I know that was rolled out a couple of quarters ago and was driving some of the acceleration in March and April, and I imagine that's continued. But I wanted to get a sense for just how fully your sales team is already learning how to fully harness some of this and the learning curve there. I know it sometimes takes a little bit, but just wanted to kind of understand what that learning curve looks like and the potential benefits ahead as they start to figure that out and get the muscle memory and use these tools better and really set in and maybe just a little bit more color there and what gives you confidence?

David E. Flitman, CEO

Yes, sure. Alex, and thanks for the questions. On the net new generation, we're excited that we had the highest level since the fourth quarter of 2023 and as you hear us say all the time, the lifeblood of our growth is that net new account generation. So it's clear our teams are very focused on that. And as we continue to take market share and onboard new net new customers, that also informs my confidence in the future of us continuing to ramp up that growth. So I feel very, very good about that. Our sales team is intensely focused on that, and we'll remain focused on that well into the future. And to your point on the generative AI stuff, we continue to deploy that across the company. The automated order guide we spoke about continues to get very good traction, and we're making that very easy for our sellers to adopt and just help make it easier to create the right recipes for our customers to drive that growth around their proposals, and it's being well adopted and well accepted by our sales force. So we continue to expect good things there. We continue to deploy AI across not only the sales part of the business but also internally around our replenishment organization, the way we do labor planning, AI is here to stay, and we are embracing it fully to drive profitability, growth, productivity, and efficiency for our teams.

Alexander Russell Slagle, Analyst

Got it. And I had a follow-up on the cost of goods vendor management initiative. And you talked about reinvesting a portion of the savings this year to further accelerate the growth. Is there an example of what that means and how we should think about that?

Dirk J. Locascio, CFO

Overall, Alex, we regularly reinvest a portion of the savings back to customers, typically through promotions or incentives. This is the primary way we pass some of those savings on. It's not a new practice; we have consistently done this as we achieve savings.

Operator, Operator

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

Edward Joseph Kelly, Analyst

Dave, I wanted to ask you to take a moment to assess the current state of the industry. You seem to be implementing a lot of self-help initiatives, which contributes to your confidence in your three-year outlook. However, the industry has been experiencing some softness. Has your perspective on the industry changed at all in light of this? Or do you attribute the situation purely to macroeconomic factors? Does this prompt any thoughts regarding transformational mergers and acquisitions or even smaller acquisitions? I'm curious because many of us are wondering if you can achieve the case volume targets you outlined for the next three years.

David E. Flitman, CEO

Yes, I believe we can achieve that growth with one caveat. We made it clear at the Investor Day that the 5% to 8% independent case growth, if that’s what you're referring to, was based on a historical 2% traffic growth in the industry. While we are excited about what appears to be a stabilization in the industry and improvements in Black Box, the industry is still facing challenges and pressures. I would describe the situation as soft but stable right now—softer than we would like, but at least it’s not getting worse. I attribute this to macroeconomic factors that have been exerting a lot of pressure for some time. Recently, tariff impacts have also played a role. While this impact is minor for our company and customers, it significantly affects consumers and has contributed to the pressure weighing on the industry. I remain confident in the resilience of the industry, as I mentioned in my prepared remarks. I believe there will come a day, hopefully soon, when we return to standard growth levels. In the meantime, we continue to capture market share, support our customers, increase productivity, and ensure we are delivering efficiently and cost-effectively, positioning ourselves to leverage our share gains for future top-line growth.

Edward Joseph Kelly, Analyst

All right. And then just one quick follow-up. Healthcare, hospitality. Sequentially, a touch slower, not a big deal. But just kind of curious as to what the underlying momentum of demand looks like there, what the pipeline looks like on the new business side and how you're thinking about the back half?

David E. Flitman, CEO

Yes. Pipeline remains strong in both of those. Healthcare, we continue to take share, very solid numbers. Hospitality has followed a little bit more like the local customer piece of it. And recall that historically, we've been over-indexed a bit to lodging. And so as you see some of those consumer pressures less travel, those sorts of things, we've had a little bit of impact there. But the pipeline remains strong, and we've shifted our focus, as we've talked about before, a bit away from lodging to drive growth in other segments that are growing inside of hospitality. So we've got a solid pipeline, and we expect growth and share gains to continue in both of those.

Operator, Operator

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

Jeffrey Andrew Bernstein, Analyst

Great. My first question is about the growth in independent cases. I believe you mentioned that you're up around 3% in June and July, and you hinted at some early thoughts for August. I'm curious if your recent comments about stability might suggest some volatility instead. What is your confidence level regarding the potential acceleration in the second half? Unlike chain onboarding, it seems challenging to have clear visibility into independents since they are such small players. So, how confident are you that you can achieve further acceleration in the independent segment? And I have one follow-up question.

David E. Flitman, CEO

Yes, we do have confidence, Jeff, and believe line of sight to new customer onboardings and all that. While they're not as large in any one area as a potential chain onboarding by region and by market, we do understand what our pipeline looks like. That's informing the confidence as well as what I previously mentioned around our share gains and our continued focus on net account generation. So feeling good about my commentary there.

Operator, Operator

Your next question comes from the line of Karen Holthouse from Citi.

Karen Ann Holthouse, Analyst

It's great to hear that there is a little bit, I think, more strength in private label penetration year-over-year than we've seen, growing 80 basis points, still kind of at 53% mark. Do you think we're getting maybe past that kind of COVID snapback era where it was a little bit harder to kind of build on strength and maybe how you're thinking about that from here?

David E. Flitman, CEO

Yes. Karen, thanks for the question. We're excited about our private label penetration, which has been ramping up consistently for the past 12 to 18 months. And to your point, there was a real lull coming out of COVID. Supply was challenged for everything. And when manufacturers came out of COVID, they weren't as interested in producing our brands as they were their own. And during that period of time, obviously, our sales force lost confidence in selling our private label products just because we couldn't get them. That's been behind us for quite some time now. I'm really pleased with the ramp that we've seen in private label business, both with independents and in the rest of our business. And importantly, I see no near-term ceiling to what that can be. We've got really good momentum. Our sales force is excited about our products. And I give our innovation team a lot of credit. We've got an exciting Scoop launch planned for this fall. Our products in the spring are getting really good traction. We'll continue to innovate those products and bring great new private label brands to market.

Operator, Operator

Your final question comes from the line of Rahul Kro from JPMorgan.

Rahul Krotthapalli, Analyst

My question is on the Descartes, like how iterative can the productivity gains get once this is deployed across the remaining markets and especially as you continue to add new accounts is 2% and ongoing productivity gain estimate we can think about? And I have a follow-up.

Dirk J. Locascio, CFO

Well, it's very early. So we're not going to get into specific economics at this point. But as we've talked a lot about, we're excited about having this live and ramping it up over the coming months. And there will be learnings that come out of this that we will apply from Austin. But hopefully, as you can appreciate when you're multiple weeks in here, you're still in the early ramp-up phase. But this is something that we do expect to improve both the quality experience for the customer, for our associates as well as the productivity. So more to come as this gets in place for longer.

Operator, Operator

There are no further questions. I will now turn the call back over to David Flitman for closing remarks.

David E. Flitman, CEO

Thanks, everyone, for joining us today. We're excited about our continued consistent execution in the business and the momentum that we have. We will be an earnings compounder for a long time to come. Thanks for joining us today. Have a great week.

Operator, Operator

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