Earnings Call Transcript - USFD Q2 2024

Operator, Operator

Thank you for standing by. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. Thank you. I would now like to turn the call over to Mr. Mike Neese, Senior Vice President of Investor Relations. Please go ahead.

Mike Neese, SVP of Investor Relations

Thank you, Carrie. Good morning, everyone, and welcome to U.S. Foods second quarter fiscal year 2024 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. 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 2024 to the same period in our second quarter fiscal year 2023. 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 statements. 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. Thank you. I'll turn the call over to Dave.

Dave Flitman, CEO

Thanks, Mike. Good morning, everyone, and thank you for joining us. Before we turn to our second quarter results, I would like to thank everyone who joined our Investor Day in June. It was a great event, and we were excited to share our story, future goals, and our ambition to become the undisputed best in our industry, the safest, the fastest growing, the most profitable, leading digital, and the best place to work. Importantly, we laid out our financial algorithm for 2025 through 2027, which includes growing sales at a 5% CAGR, increasing adjusted EBITDA at a 10% CAGR, expanding adjusted EBITDA margin by at least 20 basis points per year, and growing adjusted diluted EPS 20% annually. We also expect to deploy more than $4 billion of capital over that same period and anticipate approximately half of that will be deployed towards share repurchases. We remain excited about our path ahead. During today's call, I will share several of our accomplishments from the second quarter and update you on key initiatives across each of our four strategic pillars. Turning to Slide 4. In the second quarter, we delivered record EBITDA, driven by a combination of top-line growth and margin expansion as our gross profit grew significantly faster than our operating expenses. Our team's success this quarter further emphasizes the strength of our operating model and our ability to control the controllables. This balance of top-line growth, gross profit expansion, and cost productivity led to significant adjusted EBITDA and EPS growth, along with a record adjusted EBITDA margin of 5%. Importantly, these results are underpinned by our strong capital structure. We also continue our disciplined approach to capital deployment. As we announced at our Investor Day, our Board authorized a $1 billion share repurchase program in early June. Dirk will provide a status of our repurchases in more detail. We do expect to be more aggressive buying back our shares over the balance of this year. Let's turn to broader industry trends and the health of our markets. Restaurant foot traffic remained pressured during the second quarter and was down approximately 3%. Despite the current headwinds facing our industry, our team captured profitable market share and target customer types, as we focused on executing our playbook. Specifically, our independent restaurant share increased for the 13th consecutive quarter, and our share gains improved sequentially each month throughout the second quarter. Our strategy is exceeding, as evidenced by our volume growth and share gains. Our team's work remains guided by our four strategic pillars. And I will discuss our progress on each of them over the next few slides. Turning to Slide 6. Our first pillar is culture. Keeping our associates safe is paramount. During the second quarter, our injury and accident rates were 19% better than the prior year and were our best results since 2020. We remain focused on improving our safety performance as we strive to achieve zero injuries. We published our 2023 sustainability report in the second quarter, highlighting progress in our three key focus areas: products, people, and planet. None is more important than our people component as we seek to make a positive impact on the lives of our associates. For example, in supply chain, we have our leadership, excellence, and accelerated development program, which we refer to as Lead. Through this program, we focus on leadership fundamentals for our operations leaders. Since its inception, 970 associates have participated in the program. I would encourage you to read our sustainability report on our website to see the tremendous progress we have made on our journey and our exciting initiatives and future goals. Turning to Slide 7 and our second pillar service. We strive to provide the best delivery and service experience to our customers, and we made year-over-year progress during the second quarter on both on-time delivery and in-full service levels. We also improved distribution productivity again this quarter. Our new Descartes routing technology is now live in eight markets. By year-end, we expect to roll out to an additional 18 markets and have approximately 50% of our routed miles on Descartes. This great work, combined with additional benefits from our market-led routing initiative, delivered a 3.7% improvement in cases per mile during the quarter. Additionally, turnover reduction, flexible scheduling implementation, and process standardization continue to help improve our overall productivity. Finally, as JT highlighted at our Investor Day, U.S. Foods holds a leadership position in digital commerce in the foodservice industry. While that's exciting, I am even more enthusiastic about where we are taking MOXe and VITALS through our continued technology investments and use of artificial intelligence. Driven by our ambition, we will continue to bring additional value and better user experiences to our customers through our digital platform. And to highlight one functionality enhancement, we recently optimized our delivery tracking function, utilizing artificial intelligence within the Where's My Truck feature for MOXe customers to track their truck and delivery time. Over the past few months in our pilot markets, we've improved our delivery window accuracy by 40%. We've seen a significant reduction in delivery-related customer service calls in those markets as a result of the better customer experience. This solution will be implemented in all markets by the end of the year. Let's now turn to our growth pillar on Slide 8. We remain laser-focused on accelerating profitable growth and gaining market share with our target customer types. Our 5.7% independent case growth was driven by a combination of new accounts and growth from our recent acquisitions. We remain highly confident that we will exceed our 1.5 times market growth goal for restaurants for the full year. Our Pronto small truck delivery service continues to gain traction and is live in 40 markets. Pronto caters to hard-to-service customers in high-density urban areas with later cutoff times and next-day delivery requirements. Our newly launched Pronto penetration service is a differentiator that fills in non-routine delivery days for existing independent customers, which further expands our short wallet. Earlier this year, we successfully launched two pilot markets, and the early results are positive, with much stronger independent case growth. We have four additional markets planned for later this year. Pronto is now on track to generate nearly $700 million of annualized sales this year. Turning to Slide 9, our profit pillar. Our proven operational playbook, merchandising excellence work, and team-based selling approach increased adjusted gross profit by 8% in the second quarter to $1.7 billion. We also continue to make progress in growing our private label brands, which grew approximately 100 basis points year-over-year to more than 52% penetration with independent customers. Our continued focus on private label penetration represents a pathway to profitable growth for U.S. Foods. These high-quality innovative products enable competitive pricing for our customers while also improving our margins. Great companies are constantly adapting and looking for ways to become more efficient, continuously driving productivity and reinvesting a portion of those savings to fuel future growth. As we continue to identify ways to become more efficient and take steps to streamline our corporate and field interactions, we took additional cost actions this quarter. We now expect to achieve $80 million in expense savings in 2024 and $120 million on an annualized run rate. These changes underscore our commitment to achieving our 3% to 5% annual productivity target while more effectively serving our customers. Finally, as we announced during our Investor Day, given the lack of synergies, we believe CHE'STORE would benefit from focused investment under new ownership. We are still in the process of exploring strategic alternatives and will provide updates as appropriate. Throughout the process, we remain fully committed to supporting the CHE'STORE business, our associates, and our customers. Before I hand it over to Dirk, I would like to acknowledge one of our drivers, Jason Buck, who works in our Knoxville distribution center. One of our cultural beliefs at U.S. Foods is delivering excellence, and Jason embodies this belief every day. Jason joined U.S. Foods in 2004 and has been named a Driver of the Year twice. He also runs our weekly driver skills course with all new drivers and plays a lead role on our local safety team. Importantly, Jason's efforts contributed to the distribution center exceeding its on-time service metrics during the deployment of our card routing platform. I thank Jason for all he does to deliver excellent service to our customers and ensure a safe work environment for our Knoxville associates. As we approach Labor Day, I also want to thank all our associates for their hard work, their commitment to our safety culture, their relentless focus on providing superior customer service, and for making U.S. Foods a great place to work. Let me now turn the call over to Dirk to discuss our second quarter results in more detail and our 2024 guidance.

Dirk Locascio, CFO

Thank you, Dave. Good morning, everyone. Turning to our results, we were largely consistent with our expectations with continued top-line growth and further margin expansion, leading to record adjusted EBITDA and adjusted EBITDA margin. We delivered this record profitability through our balanced approach to drive top and bottom line growth despite the softer operating environment. Starting on Slide 11. Second quarter net sales increased 7.7% to $9.7 billion, driven by total case volume growth of 5.2% and food cost inflation of 2.9%, while mix was a headwind of 40 basis points. We drove case growth faster than the market and captured share gains in the second quarter, including our 13th consecutive quarter of market share gains with independent restaurants. Our independent restaurant volume grew 5.7%, including 250 basis points from acquisitions. Healthcare growth remained strong at 6%, hospitality growth improved to 2.1% as we successfully onboarded new business. Adjusted EBITDA grew 13.2% from the prior year to a quarterly record $489 million from a combination of profitable volume growth, strong gross profit gains, and disciplined expense management. In addition to strong EBITDA dollar growth, our adjusted EBITDA margin expanded by 25 basis points to an all-time high of 5% as adjusted gross profit dollars grew over 200 basis points faster than adjusted operating expenses. Finally, adjusted EPS increased 17.7% to $0.93. We continue to grow adjusted EPS at a faster rate than adjusted EBITDA and expect that trend to continue while deploying more of our strong cash flow to our repurchases. Turning to Slide 12. We once again expanded adjusted gross profit per case faster than adjusted operating expense per case, resulting in further adjusted EBITDA per case improvement. Adjusted gross profit per case grew by $0.22, or nearly 3% over the prior year, primarily driven by our cost of goods sold initiatives and disciplined pricing. The COGS initiatives delivered $50 million for the first six months. For the full year, we expect approximately $70 million in savings. We are well on track to achieve over $220 million in COGS savings from 2022 through the end of this year from our strategic vendor management work. Adjusted operating expense per case increased $0.04, or less than 1%, driven primarily by increased labor costs, partially offset by continued distribution productivity improvements from routing efficiency gains, turnover reduction, process standardization, as well as actions to streamline administrative processes and costs. Growing our gross profit per case 5.5 times faster than our operating expense per case led to a record adjusted EBITDA per case of $2.27, up $0.16, or 7.6% from the prior year. We continue to drive strong leverage throughout the P&L with a combination of profitable volume growth and continued progress on gross margin and operating expense initiatives. We expect continued adjusted EBITDA per case expansion as we execute our initiatives while also consistently meeting our customers' needs. Moving on to Slide 13. We have generated strong cash flow year-to-date, including $621 million of operating cash flow and $467 million of free cash flow, driven by increased profitability and disciplined working capital management. However, this was lower than the prior year as we had more working capital benefit in the first half of 2023 due to the inventory reduction benefits from the replenishment optimization initiative that Bill Hancock discussed during our Investor Day. Excluding the working capital impacts, operating cash flow was modestly above the prior year. Our durable stream of cash flow enables us to invest in the business and return capital to shareholders. We invested $156 million in cash CapEx for the first six months, mainly focused on products to support growth including information technology, property and equipment, as well as maintenance of our distribution facilities. On June 1, 2024, the Board authorized a new $1 billion share repurchase program. Under this new authorization, we repurchased $21 million in June 2024. In the third quarter to date, through August 7, we have repurchased approximately $61 million. We have approximately $918 million remaining in the authorization. Since the inception of our buyback program in November 2022, we have repurchased 10 million shares for a total cost of $425 million. Rounding out capital deployment, we have completed three acquisitions over the past 18 months and will continue to be opportunistic in selectively pursuing accretive tuck-in M&A. We are currently focused on integrating these acquisitions and will lean in on more share repurchase for the remainder of 2024. Turning to Slide 14. We remain well within our 2 to 3 times net leverage target with a strong balance sheet as we ended the quarter at 2.6 times leverage, which is a 0.4 turn reduction from the same period last year. This includes paying $220 million for IWC and $41 million for share repurchases in the second quarter, which were both funded through operating cash flow. We're also pleased to report two positive developments related to our credit ratings. Our corporate credit rating was upgraded one notch by Moody's to BAA2 and S&P revised their outlook on U.S. Foods to positive, each reflecting the continued execution of our long-range plan and expectation that the initiatives outlined at our Investor Day will drive further earnings growth and credit metric improvement. Now turning to guidance on Slide 15. Given our strong first half of the year and outlook for the remainder of 2024, we are reiterating our fiscal year 2024 net sales, adjusted EBITDA, and adjusted diluted EPS guidance. Moving to modeling assumptions, for 2024, we continue to expect total case growth of 4% to 6%. We are updating our sales inflation assumption to a range of 1% to 2%. Despite the operating environment, we continue to grow top line, gain share, expand our margins, and deploy our strong free cash flow against our capital allocation priorities. We are well positioned to deliver on our 2024 financial targets and remain committed to our new 3-year long-range plan.

Dave Flitman, CEO

Thanks, Dirk. We continue to execute our strategy, gain market share, and improve profitability. We delivered double-digit adjusted EBITDA growth and record adjusted EBITDA margin of 5%, while gaining share in our highest margin customer types. Our strong business model serving independent restaurants, health care, and hospitality, which are among the fastest growing and most profitable customer types in the foodservice industry, combined with the execution of our strategic initiatives, supports our ambition to be the undisputed best in our industry. We have a long runway of profitable growth in front of us, including delivering our 2025 to 2027 growth algorithm, which includes a 10% adjusted EBITDA growth CAGR. We remain laser-focused on improving the business to generate profitable growth while executing our capital deployment priorities. With that, Carrie, please open up the line for questions.

Operator, Operator

Your first question will come from Edward Kelly with Wells Fargo.

Edward Kelly, Analyst

Could you elaborate on what you're observing in terms of end demand, possibly broken down by customer type? I'm curious about how the quarter progressed and specifically what you experienced in July. Additionally, how are you feeling about the 2% to 4% organic case volume target for the year? It seems you might need some acceleration in the second half.

Dirk Locascio, CFO

Well, I'll take that last part of that question, Ed. First, I think we're confident in that 2% to 4% case growth and reiterated our full guidance for the year, as Dirk just outlined. So we're confident in that. But as you point out, I think the macro is a little softer than we expected coming into the year. But what you've seen us do is control the controllables very well, which is what we always say we're going to do. We can't control the macro, but we can control our ability to drive growth on the top line, which we continue to do in the second quarter and also into July, to your point, despite what's going on in the macro. Things around the macro will ebb and flow, but our ability to drive our initiatives and make this thing as strong as it can possibly be is completely within our control. We've seen lower foot traffic, as we pointed out, down 3% in the second quarter. I think the back half of the quarter was a little slower than the first half, and that trend kind of continued into July. Health care remains very strong. You saw robust growth there. In hospitality, as we said last quarter, we were onboarding new business. You've seen us tick up in our case growth there. We expect that will continue into the third quarter and into the back half. So that's kind of how we see it. We're not counting on the market helping us in the back half to achieve what we said we were going to achieve, and we'll continue to execute our playbook.

Edward Kelly, Analyst

Just as a follow-up, Dave, can I just ask you on any adjustments that you are making to the business in this backdrop? I know you're controlling what you can control, but today, you talked about some cost action that was incremental. Curious on like the selling side, if there's any fine-tuning that you make there and a tick back drop. Just any additional color there?

Dave Flitman, CEO

Yes. I think we modified our TM compensation plan going into the year. We're pleased with the progress we're making there and how that's playing out. As you recall, we variabilized more of that to incentivize our sellers to drive more aggressive growth and also incentivized them to grow our private label brands. As you heard, we were up 100 basis points year-over-year with independent restaurants with our brands. I think at the root of that is our continued ability to bring innovation and great products to the marketplace, supplemented with those compensation plan changes. To your point on the expense side, I said since the day I got here, we were going to drive 3% productivity, and we've been ramping that up through the course of the last 18 months, really driving that aggressively in the first half of this year. That fits with what we said we were going to do and the operating environment that we're in. So I'd point to those adjustments, and I think you can expect more of the same. On the sales side, we're continuing to be committed to growing our sales headcount in low to mid-single digits despite what's going on in the macro.

Dirk Locascio, CFO

What you really continue to see from our results is continued top line growth, especially in our target customer types, continued focus and execution on gross profit expansion, and cost management. It’s really across all three of those and that balance is what makes us feel good about the results that we have and expect to continue to generate.

Jeffrey Bernstein, Analyst

Great. Dave, I just wanted to follow up on your comments about the market share gains. I know you've talked about, I guess, 13 consecutive quarters and I think you actually said your share gains improved each month of the second quarter. Just wondering if you could provide some color behind that data. Just wondering how you measure that. whether you think you're at all vulnerable to maybe slowing independent sales growth? I know your largest peers are more aggressively hiring and compensating their salespeople. I'm just wondering how you think about that independent case growth market share gains going forward with, again, the competition getting a little bit more aggressive? And then I had one follow-up.

Dave Flitman, CEO

Yes. As we've been stating for a while, the data that we use to judge our market share is the Sarkanda, formerly NPD data, third-party independent data that looks across the industry. So it's not our data. When I tell you that we're gaining share and through the accelerated in the quarter, that's supported by the Sarkanda data. I keep saying we're going to control what we can control. We can't control the macro. Even though that foot traffic was down sequentially each month in the quarter, you just heard us say that we ramped up our share gains throughout the quarter. I expect that will continue. Our team is laser-focused on driving growth. While penetration may be a challenge when foot traffic is down, our ability to generate new accounts has not been inhibited at all by what's going on in the macro. We still have a relatively small market share position with current restaurants. I like our team all the time, three out of every four cases are ours. So don't worry about the macro; we will continue to drive that growth. I am confident those share gains will continue.

Jeffrey Bernstein, Analyst

And then just you mentioned about the private label being up 100 basis points now. I guess to independent customers now 52%. Do you see increased demand, I don't know whether you're pushing more of that or whether the customers are asking more of that; seemingly, it's lower cost to them, higher margin to us. So I'm wondering how you incentivize that it would seem like that will be a big opportunity with some of your smaller independent competitors not really having a platform like that. How do you accelerate that type of environment to benefit you and your customers?

Dave Flitman, CEO

A big combination of great products, and we pride ourselves on our Scoop process, but more broadly, the way we bring innovation to our product line with our exclusive brands, which we've been doing for the better part of a dozen years now. We believe we’re the leader in innovation. We bring great quality products to market that help our customers be more efficient in their kitchens. It’s a great time for that need given the inflation that’s been absorbed in some of the foot traffic challenges as they're looking to have these great products at a bit lower cost position. You couple that with the changes we made to the TM incentive plan this year to incentivize them to drive the brand growth more. I don't see any near-term ceiling to our ability to penetrate the market with our exclusive brands.

Dirk Locascio, CFO

In the last couple of quarters, you've heard us talk a lot about since vendor supply has stabilized, and we've increased the focus again with our sellers; we're now seeing that growth. As Dave said, we expect that to continue.

Mark Carden, Analyst

So to start, just another question on the sales force and essentially controlling the controllables. How trending, just given some of the softening in traffic, does this shift to more variable compensation act as a double-edged sword in any sense? If not, what have you been able to do to weather the headwinds quite well?

Dave Flitman, CEO

Yes. I think we do a great job of onboarding new TMs. In fact, I had the opportunity to talk to our latest class on Tuesday this week; we had an incoming class of 50. We get asked a lot with what's going on in the marketplace, what challenges we've faced finding great sales talent. We are not having problems finding great sales talent. That's why I'm confident that we'll continue to hit that low to mid-single-digit headcount growth as we've committed for the full year. It's really about how we onboard our sales talent and give them a portion of business; this route splitting is very important. We outlined a couple of quarters ago. We see these new sellers with some business that they can grow from. Ongoing training throughout their first couple of years here is not a one-and-done situation. It's not that we put them through an intense training program and throw them on the street and let them find their way; we continue to nurture them. It really depends on where that sales talent comes from. We hire operators, competitive reps, and from outside the industry with strong sales background. It depends on what their experience is, whether they bring a book of business or not, in terms of how quickly they ramp up their productivity. We know exactly who they are with all the various cohorts that come in what those classes look like to ensure we give them the support they need, including some pretty intense product training, which our suppliers help deliver in the local markets. We've got a great plan. Retention is not a challenge. We’re continuing to ramp up our salesforce.

Mark Carden, Analyst

Great. And then turning to hospitality for a second. How are you thinking about hospitality growth in the back half of the year? I know you guys have some new business that’s been onboarded in the process of being onboarded. But just when you think about the broader macro, how do you think the balance of those two dynamics?

Dirk Locascio, CFO

Mark, it's Dirk. I think when you think of the broader macro, to your point, it's facing some of the same headwinds that restaurants are facing. However, back to the point of controlling the controllables, we bought the business we want to onboard, and we continue to have a strong pipeline of net new business that we're expecting and planning to onboard. Our expectation is the continued strengthening of growth there with hospitality. We've got a lot of differentiation in health care and hospitality, and we think that growth rate will be able to accelerate.

Lauren Silberman, Analyst

So I wanted to ask about the promotional environment. I think there are some concerns that we're seeing an increase in promotional activity as distributors fight for case growth and new customer acquisition. Obviously, you guys are seeing strong market gains in your key segments. Are you seeing any increase in promotional activity? How does that usually play out in more challenging economic backdrops?

Dave Flitman, CEO

Yes. I think we've seen increased promotional activity, which is not uncommon at any point, given the various cycles that the different companies have in terms of when their year-end is and all that. But probably a little bit more intense given the macro backdrop. But again, Lauren, I would just point to our results. I don't think that's impacted our ability to drive growth. We have our own promotional activity that we bring to market from time to time, and we're not immune to that; we know how to navigate the market for those times. But it's out there. I don't see that intensity inhibiting our ability to execute what we need to get done in any way.

Lauren Silberman, Analyst

And a follow-up and somewhat related gross profit growth per case, obviously, very strong. Can you unpack the drivers? How much of that is company-specific versus benefits from inflation? With the promotional activity kind of increasing, any thoughts on it being a risk or a headwind as you think through the back half of the year?

Dirk Locascio, CFO

So almost all of that is company-specific from our initiatives. Inflation did tick up, but it's still within that historical level that drives a very small gain. We will still take it, but it is a very small gain. Cost of goods, smart pricing, effective logistics management are among the things that contributed to it. We've discussed $50 million in year-to-date gains from our cost of goods work. We continue to believe that's why gross profit is so durable and why we expect to continue to grow gross profit per case and grow it faster than we grow operating expenses per case. We feel good about the durability and the strength of that.

John Heinbockel, Analyst

Dave, I want to start by asking you to address the rollout of Descartes and MOXe. You mentioned achieving 50% by the end of this year, but how do you see that playing out in 2025? Where do you envision that journey heading? As we implement more of this in 2025, considering the potential for 3% to 5% productivity gains, do you think there will be a sweet spot where we hover closer to 5% for a while before tapering off? Is that a fair assessment?

Dave Flitman, CEO

We will have the card fully rolled out by about this time next year. I would say the 50% at the end of this year is more likely by late Q2 or early Q3 next year. That combined with the great work we've done historically with the routing process has led to that 1% improvement per mile. We would expect that to continue as we ramp up the card, and we'll continue to find new ways with that new system fully implemented across the company to drive further gains. I'm confident that, as I noted in my prepared remarks, that MOXe is part of the process standardization work that we've got going on across the company. We will have that broadly rolled out in the middle of next year to the second half of next year, being thoughtful about that. In each rollout, we're learning, so it would make sense in that process standardization. You’re right; part of this 3% to 5% productivity improvement is not just taking costs out but driving process standardization and consistency to ensure that we’re doing it right the first time and not adding a burden to the system with inefficiencies that drive costs up. We're excited about it. We believe we can pour destiny there, and this 3% to 5% is fully in view.

John Heinbockel, Analyst

What are your thoughts or the Board's views on the timing of buyback front-loading? I'm considering the idea of buying early within a year, perhaps funding it by front-loading before receiving proceeds or just as the leverage ratio decreases to the low 2s. Would you be open to taking on some debt if you believe these shares are significantly undervalued? What do you think about that?

Dave Flitman, CEO

We certainly believe our shares are undervalued. We are excited that the Board authorized a new $1 billion buyback program. As you heard Dirk say this morning, we are leaning in more heavily on share repurchases. That’s why we gave a little bit of color on that accelerated ramp-up already in Q3, and you’ve started to see that. We believe we’re undervalued and we will buy our shares back appropriately or ramp that up through the course of time.

Kelly Bania, Analyst

This is Kelly Bania from BMO. Just wondering if you could unpack a little bit the drivers of the independent case growth, the contribution you're seeing from new sales reps, penetration versus new account growth and any geographic differences. I’d also like to tag on to that just the investment that you're seeing across the industry in terms of sales force headcount. We know obviously what that is with the public competitors and maybe that's accelerating a little bit. But what are you seeing across the private competitors on that front? I appreciate it could widely vary, but what maybe have you seen historically? Are you seeing any difference? Any color there would be helpful.

Dave Flitman, CEO

Sure. The first part of your question there, Kelly, was around unpacking growth. Overwhelmingly, our growth is coming as it has been for quite some time now from new account generation and customer growth. We expect that to continue, especially in a slower foot traffic environment. Our ability to drive new account generation and hold on to our business to the fullest extent and drive that loss number now, that's where we’re squarely focused. Really haven't seen anything play out geographically, where we're having challenges or greater areas of strength. To your question on the sales force, as I mentioned earlier, the productivity ramp of those new sellers varies greatly depending upon their background. We have targeted those headcount additions where we believe there's great market growth and penetration opportunity. Any geographic change we've seen there is really probably more driven by where we've added headcount versus where we haven't. No change; I don't think we've seen any impact on our ability to attract sellers or growth based on anything going on with the private competitors.

Kelly Bania, Analyst

I was wondering if I could also just maybe follow up. We talked about restaurant traffic down 3%. That sounds consistent with what we've heard from others. But can you just talk a little bit more about what you're seeing in restaurant cohorts or different types of restaurants as well as the pace of new restaurant openings and what you're seeing in the growth there?

Dave Flitman, CEO

I wouldn’t say the foot traffic challenges we see are particularly isolated. I think some of those that have reported this week have spoken to challenges in QSR, fast casual. It seems that the challenges in foot traffic have been pretty broadly spread across most of the cohorts; maybe the higher end is holding up a little better than others, but even that's been challenged a little. I wouldn't point to any significant area of strength or more challenges based on what's going on.

Alex Slagle, Analyst

Couldn't see the OpEx per case growth really flattening out, and you talked about the indirect spend reduction forecast, which was a pretty big jump, I think, from the last outlook. I just wanted to dig into that a little more. What changed in your views, and where's that coming from?

Dirk Locascio, CFO

Alex, this is Dirk. So I'm assuming you're talking about the increase of the $80 million in savings. That's a combination of people and non-people-related costs. It really is not different than what you’ve heard us talk about over the last few quarters as we're continuing to see efficiencies, a combination of using technology, simplifying the interactions between field and function. If we're not getting value in some of the functional resources redeploying or, in some cases, reducing those. It fits into this balance that I highlighted earlier on one of the other questions about top line growth, GP expansion, and then cost reduction to manage productivity. We continue to attack this $1 billion-plus spend pool and are continuing to see more initiatives come online to generate savings. We'll give an update more concretely as we move further into here, but good progress continues.

Alex Slagle, Analyst

And a follow-up on the routing, I guess. It seems like you're doing good work with the existing system in place. I guess there are additional enhancements coming just in terms of what you're doing with the process — just in this initial — just in the existing systems kind of before you even get to see the separate benefits from the deployment of the new routing technology. Just trying to understand, like, is there more to come here of the benefit of all the process changes that will come on top of that as we have the new system rollout. Just a little more on that.

John Heinbockel, Analyst

Yes. I think, Alex, the way to think about that is we've been delivering routing improvements for the better part of the last couple of years. Until we initiated the card rollout, that was largely driven by what you just pointed out, the process changes and improvements as we've gotten better at that. Now we're overlaying new technology and a new system that we believe is going to take it to the next level. I am confident we’ll continue to optimize the process going forward and learn more about the new technology. This technology overlay is going to be what fuels future productivity improvements with routing once we get that fully deployed.

Dirk Locascio, CFO

I think, Alex, the other thing is on the routing, to Dave's point of it being a driver for the last few years. What we've been pleased with is it’s not a once and done situation. It is a standardized process. You see markets each week and each month continue to add additional opportunities that get executed against. The piece on the technology on Descartes, as I mentioned a couple of quarters ago, when you put it in place, there's some improvement. But as we get it in place and optimize it more, we expect further benefits from that. So a long way of saying we think there's still plenty of opportunities for further savings, which typically results in a better customer experience as well.

Brian Harbour, Analyst

Dirk, just on your inflation outlook, do you expect it to, therefore, kind of come down a bit in the second half? Could you give more color on that? And just I don't know if there are any product mix dynamics that kind of affect that. If you could talk about that.

Dirk Locascio, CFO

Sure. When we think about the inflation, we also consider the impact of mix in there as well. In the second quarter, you see a little more moderation; proteins were the biggest piece that turned more inflationary, but we haven't seen that continue. Overall, what we feel good about is whether it ends up at 1 or 2 or a little above or below that is very manageable and modest, and we’ll be able to effectively hedge our way through that.

Brian Harbour, Analyst

We've talked a bit about kind of your operating expenses. Was there anything you kind of pulled forward? Anything that you think was more impactful in the second quarter that drove the pretty good performance in operating expense.

Dirk Locascio, CFO

Nothing specific that I would call out. A good portion of it is the different cost actions that we've taken over the past six months or so, combined with significant supply chain productivity which we referenced on the call today. We do not — and I think when Dave talked earlier in terms of this 3% to 5% productivity, it’s not just to be able to say that’s how we’re operating and how we’re holding the teams accountable or focusing, but also smartly keeping an eye on managing the business. Continued growth and further margin expansion.

Peter Saleh, Analyst

And congrats on a nice quarter, guys. I wanted to ask about MOXe if you guys could give us maybe an update on the adoption of that platform. If you're still seeing the incremental case count growth or ticket growth from customers using MOXe, I think previously, it said 1.5 more cases per customer. And then just lastly on that, is MOXe helping to drive any of the private label penetration as you do more suggestive selling through the app?

Dave Flitman, CEO

Yes, we're very excited about MOXe. We’ve been 100% hold-out across our independent restaurants. We’ve continued to ramp that up in our chain business. It’s now in 75% of our national chain business; we expect to ramp that up between now and the end of the year. Yes, as we said during Investor Day, on average, customers are buying 10% more. We have great algorithms within MOXe. One of those is our ability to sell our private label brands and make product recommendations. Yes, we believe that, coupled with some things I commented earlier relative to the focus we have in our brands and how we incentivize our salesforce, all of that is working together to support that growth.

Dirk Locascio, CFO

No, I didn't; I was more color commentary. We’ll give some more specifics as we get further into the year. We are continuing as initiatives to make progress with real concrete savings and are well on our way toward our target.

Andrew Wolf, Analyst

On the outperformance in the market, particularly, I want to focus on with the independent restaurants. Are you gaining — are the sales team gaining any lines per stock or any additional penetration in that? Or is it all really just mainly almost all driven by new customer wins — net new customer wins?

Dave Flitman, CEO

It's overwhelmingly, Andy, new customer wins, but penetration is an important part of our algorithm. Some of that is currently overridden with the foot traffic. So it’s hard to get a handle on that exactly, but certainly, we're working hard to drive penetration with our customers.

Andrew Wolf, Analyst

And Dirk, I think you said the COGS savings year-to-date are $50 million, and $70 million for the year. So it’s like a $20 million back half. Is that just a timing thing on initiatives? What is going on with that increment being a little less than the first half?

Dirk Locascio, CFO

It is; it doesn't hit equally. But as you may remember from our Investor Day, we talked about $260 million-plus for the new long-range plan. We have a lot of work going on and expect a lot of value to continue to come. The important thing is that even in this environment, we’re continuing to grow. We’re continuing to expand gross profit, and we’re continuing to drive productivity, which is not something that a lot of companies are doing right now. This hasn't anything to do with the driver of the customer. This is our ability to predict when the route will get to the customer. We’ve applied some significantly enhanced capabilities using artificial intelligence, machine learning to predict that, and those increased capabilities are allowing us to be more accurate in telling the customer when we think that truck will get to their stops. This is really an increase in our capability. It’s just a good example of using it; it gets used a lot in a lot of places, but where we're using it for real practical things to improve our results. There are plenty of those real concrete places that we continue to do work on that will be evident in the coming quarters.

Operator, Operator

Your final question will come from Fred Wightman with Wolf Research.

Fred Wightman, Analyst

I wanted to touch on Pronto. It looks like the expected contribution came up pretty meaningfully versus what you talked about before. So I'm wondering if you could just dig into that and maybe where you're seeing the most opportunity?

Dave Flitman, CEO

We're excited about Pronto. As we said at Investor Day, we've recently started to roll that out with existing independent customers, which is largely a non-cap opportunity because at this point, we’ve only sought new business with Pronto. We’ve proven the model there, and now we've started to roll that out more aggressively for new customers, but importantly, for our existing customers. I think all of that is at the root of our acceleration on the top line here. I don't see any reason why over the midterm that can't be a $1 billion-plus business for us.

Fred Wightman, Analyst

And then just thinking about the sales guidance came out a little bit in case changed, and the total dollar sales number was unchanged. So I'm wondering if the case trajectory is maybe towards the lower end of the prior range or how should we think about that?

Dirk Locascio, CFO

Foot traffic does play a little bit. The primary change is if you look at that small change; it's a couple of hundred million dollars in savings. Ultimately, when you think of the range that we have, it doesn't really change the broad outlook for sales for the year.

Operator, Operator

Your final question will come from Jake Bartlett with Truist Securities.

Jake Bartlett, Analyst

I wanted to ask again about the cadence throughout the quarter. You mentioned your market share gains improving but also restaurant traffic decelerating. How did your case growth trend throughout the quarter? When I look at the guidance of 2% to 4% for independent or organic case growth, it doesn’t suggest a move towards the middle of that acceleration from the second quarter levels. Your question is about the cadence, and I hope you can comment on recent trends and whether that should give us confidence in acceleration for the back half of the year.

Dave Flitman, CEO

Yes. As we commented, foot traffic slowed, I would say our case growth generally followed what was happening with foot traffic, but we continue to drive growth in the quarter and importantly, drove outsized share gains. Those trends continued into July. We have a lot of confidence in that case growth guidance. As Dirk highlighted here, our ability to drive that outcome, both in terms of share gains and the work we've got going on to generate new business should help us continue to hit the guidance that we gave you for the full year. So the all other is, as you’d expect, it’s a school, it can be some government retail, etc. So we’re simpler today, and we’re thoughtful in the way we pursue that business. That’s not a key area. We'll be opportunistic in growth there, but our main areas are coming from independent health care and hospitality, again, opportunistic.

Dirk Locascio, CFO

Sure. Our update earlier indicated we estimate sort of 2% to 3% growth coming from M&A overall. We continue to expect case growth to range from 4% to 6%.

Operator, Operator

That concludes our Q&A session. I'll now turn the conference back over to Mr. Dave Flitman for any closing remarks.

Dave Flitman, CEO

Thank you very much. Thanks for joining the call this morning. We continue to control the outcomes we control. We're confident in our future, and we're also confident in our new long-term algorithm. Thanks a lot. Have a great day.

Operator, Operator

Thank you for your participation. This does conclude today's conference.