Earnings Call Transcript - USFD Q4 2022

Operator, Operator

Thank you for standing by. At this time, I would like to welcome everyone to the US Foods Q4 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. Thank you. Adam Dabrowski, Director of Investor Relations. You may begin your conference.

Adam Dabrowski, Director of Investor Relations

Thank you, Cheryl. Good morning everyone and welcome to US Foods fourth quarter and full year fiscal 2022 earnings call. Speaking on the call today, we have Dave Flitman, Chief Executive Officer; Andrew Iacobucci, Chief Transition Officer; and Dirk Locascio, Chief Financial Officer. We will take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. During today's call and unless otherwise stated, we're comparing our fourth quarter and full year results to the same period in fiscal year 2021. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2022 Form 10-K that will be filed later today for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in those statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices of this presentation slides posted on our website that we are not providing reconciliations to forward-looking non-GAAP financial measures as indicated therein. Thank you for your interest in US Foods, and I’ll now turn over the call to Dave.

Dave Flitman, CEO

Thanks Adam. Good morning, everyone, and thank you for joining us today. I am thrilled to be here as the new CEO of US Foods. I joined this great company because of its strong reputation, significant future growth opportunity, strong culture and talented team of 29,000 associates. I look forward to working with our team to build upon our accomplishments from last year in executing our long-range plan. Since I joined in early January, I've spent much of my first month touring our distribution centers in six of our larger markets across the country, listening to customers and associates and diving deep to understand the US Foods business more thoroughly. While on the road, I met some talented and dedicated associates, many of them long-term veterans at US Foods. In Oklahoma City, for example, I met Randy Koller who's been a delivery driver for our company for more than 29 years. Randy expects excellence and teams up to lead our safety backing courses and is a popular driver trainer. He's so good that he's been named a local driver of the year four times. His customers constantly rave about his professionalism and the extra mile with which he goes to serve them, which I was able to witness firsthand while riding with him on a seven-hour delivery route. Associates like Randy are one of the many reasons I am proud to be part of this great company. I also look forward to meeting many of our investors and analysts soon. I plan to spend my first three months formulating my views about our strengths and opportunities in further detail, after which I expect to begin sharing more specific thoughts. That said, I'm certainly starting to form some early opinions and perspectives at the six-week point. One early and important conclusion I've drawn is that US Foods long-range plan and the pillars within it are broadly the right areas of focus to ensure success. I would expect that any changes I will have in the near-term would be adjustments aimed at accelerating execution versus any wholesale overhaul of the plan. Earnings growth from a combination of margin expansion and profitable volume growth outlined in our long-range plan is a good mix. The team has made great progress this past year. However, much opportunity remains especially in supply chain. I expect that my more than 35 years of experience in distribution businesses across multiple industries will position me very well for the incredible opportunity to lead US Foods and to help build upon and accelerate the tremendous progress the company has made this past year. Let me share some key highlights of that progress. First our team has been intensely focused on executing the US Foods long-range plan and it is shown in our results each quarter. Throughout 2022, we grew profitable share, further optimized gross margins and improved operational efficiencies. We drove market share gains in each of our target customer types. We expanded gross margins with significant and durable gains in gross profit per case, while managing through a very challenging operating environment where US Foods and the broader industry face supply chain staffing and turnover challenges. While the progress we made against our operating efficiency pillar is somewhat masked by a challenging macro environment, we have advanced critical initiatives in a number of areas which Andrew and Dirk will highlight shortly. Second, we drove continued growth throughout the year, thanks to the great work of our associates. Our fourth quarter results clearly demonstrate strong execution with adjusted EBITDA increasing 34%, attributable to a combination of accelerating year-over-year case growth and continued margin expansion. Our progress in 2022 gives me immense confidence in our trajectory. Lastly, we remain focused on creating value for shareholders and allocating our capital prudently by continuing to invest in the business, reducing leverage to our target range, returning capital to shareholders through our share repurchase program and opportunistically pursuing accretive tuck-in acquisitions. Andrew will walk through some of these progress points in more detail. Before I turn the call over to him, I want to thank him for stepping in as Interim CEO last year for his leadership to get the business on a strong trajectory heading into 2023, and for the support he's providing me, as I onboard. A mark of a great company is its ability to deliver on its commitments. Essentially doing what you say you're going to do. US Foods did exactly that in the first year of our long-range plan. We finished 2022 with a strong fourth quarter, building on our achievements in the first three quarters and exceeding the high-end of our adjusted EBITDA guidance for 2022. My expectation is that we will continue to build upon that momentum in 2023. With that, let me turn the call over to Andrew to share a bit more on our progress.

Andrew Iacobucci, Chief Transition Officer

Thanks Dave. And let me say how terrific it is to have Dave on board. My colleagues on the executive leadership team and I look forward to working with him, as we continue to build on our strong results in 2022. Now, turning to our fourth quarter highlights. We delivered strong financial results again this quarter, capping off the year with strong market share growth and margin expansion and in-turn significant earnings growth in a challenging macro environment. Net sales for the fourth quarter grew 11%, compared to the same period in 2021. Year-over-year volume growth strengthened from Q3 to Q4, which we see as a positive for US Foods and our customers as their recovery continues. Adjusted EBITDA grew 34% for the quarter representing an acceleration from our Q3 growth rate despite essentially zero sequential inflation in the fourth quarter. Our adjusted EBITDA margins also increased 70 basis points from the prior year, as we gained further operating leverage. I cannot thank our associates enough, for their incredible work to drive progress against our long-range plan. A year ago we set out to deliver $1.3 billion in adjusted EBITDA in 2022 and we exceeded the high-end of our guidance, thanks to their dedication. Turning to our customer experience, we continue to gain share in target customer types via our differentiation strategy and customer focus. We further leveraged our omnichannel capabilities for profitable growth by CHEF'STORE, Pronto and US Foods Direct in addition to continuing to strengthen our core digital customer platform by expanding customer usage of MOXē. We also made progress on our supply chain operations in the fourth quarter. The positive trends we saw in Q3 turnover continued in Q4, with driver turnover nearing pre-COVID levels and warehouse turnover showing sustained improvement. We aren't yet where we want to be, but we are encouraged by the continued progress and strong evidence that the actions we are taking are yielding results. As mentioned on our Q3 call we piloted flexible employee scheduling and seven-day delivery in one of our key markets. The results to-date have exceeded our expectations with significant reductions in turnover, positive employee feedback and improved safety results. We are continuing the pilot at that location and are adding two additional locations in Q1. Assuming we replicate these outcomes in these additional markets, we expect to significantly expand the flexible scheduling portion of this initiative in 2023. As we have done in the past few quarters, we continue to strengthen our inbound logistics capabilities, resulting in further improved financial results and third-party partner collaboration. This work is well ahead of plan and a significant contributor to our strong results in 2022. We continue to improve our capital structure and prudently allocate capital during the fourth quarter. Each of these actions reinforce our commitment to being responsible stewards of shareholder value, which Dirk will discuss in more detail shortly. Turning to page six, we are pleased with the significant progress we have made against all three pillars of our long-range plan. Starting with our first pillar, profitable market share growth. We exceeded our volume goals relative to the market for the full year 2022. In fact, we outperformed the market by nearly 150 basis points as our restaurant volumes, excluding our targeted exits, increased by approximately 1%, while the latest survey from our third-party provider showed a market decline of roughly 0.5%. Specifically within restaurants, our independent case growth was 4.3%, while the third-party estimates that the market declined by 1.2%. Our focus on growing with the right customers is yielding sizable benefits by allowing us to serve those customers more effectively and create longer-term relationships. This focus on our target customer types grows EBITDA dollars and expands our margins. We opened six CHEF'STORES in 2022 and are working to increase the number of openings to at least eight in 2023, which means we will have a robust network of nearly 100 CHEF'STORES by the end of the year. We are quite pleased with our market share gains in 2022 and expect further share gains in 2023 as we leverage our differentiated sales support strategy our industry-leading MOXē platform and our omnichannel options, as well as other sales growth initiatives. Moving to the margin optimization pillar, we implemented a number of initiatives to improve gross profit per case regardless of market conditions. Those achieved excellent results in 2022. Our three key focus areas are the same I talked about last quarter and have been significant contributors to our results on the year. First, our team very effectively managed significant inflation earlier in the year and some commodity deflation later in the year through our established pricing and procurement processes. We also optimized margins with a number of customers to better reflect the increasingly challenging cost environment facing our industry. Second, we achieved our stretch goal of collaborating with vendors representing approximately 40% of our spend to improve our cost of goods and anticipate an additional 20% of spend to be addressed in 2023. And third, our inbound logistics team focused intensively all year on working with vendors to ensure improved process and economics aligned with the market. We also achieved $70 million of total synergies in 2022 related to our Food Group acquisition, which is above our previously stated $65 million target. These initiatives along with a number of others together delivered the strong gross profit per case we saw in 2022 and we expect to build further on that performance in 2023. We made progress on operational efficiencies despite a very challenging macro environment. Our routing optimization resulted in significant miles reduction and drove cases per mile well above 2019 levels, despite case volume being lower than 2019. Our work on retention and employee engagement also yielded benefits as we saw continued improvement in turnover and consequently productivity in the second half. We further improved productivity through a combination of network-wide initiatives and targeted optimization efforts in select markets with the greatest opportunities. US Foods is advancing critical initiatives that drive our long-range plan and we'll execute against all three pillars with a goal of further enhancing the customer experience and our operational foundation as well as continuing to build on our progress into 2023 and beyond. We've made significant progress throughout 2022. And while we are pleased with our progress, it's important to acknowledge that much opportunity remains here and we expect to build on our second half momentum in 2023.

Dirk Locascio, CFO

Thanks Andrew and good morning everyone. Let's turn to page eight. We are extremely pleased with our accomplishments during the fourth quarter and in fiscal 2022 and how that translates into our financial results. In the fourth quarter, adjusted EBITDA grew 34% from the prior year to $350 million. Along with strong EBITDA dollars, our adjusted EBITDA per case remained strong and was consistent with Q4 of 2019. Adjusted diluted EPS increased 45% over the prior year fourth quarter to $0.55. Net sales were $8.5 billion in the fourth quarter, an increase of 11% over the prior year. Total case volume increased 2.6% from the prior year and food cost inflation was approximately 8%. Independent case growth was nearly 6% over the prior year. We continued our strong gross profit growth through the fourth quarter, which we are pleased with as there was essentially no sequential inflation in the quarter. Our adjusted gross profit dollars increased 16% from the prior year and, as a result, we generated strong adjusted gross profit per case. OpEx remained elevated. However, we saw continued improvement in turnover during the quarter, signifying further improvement from Q3 results. The improved turnover and impacts from our other initiatives drove increased productivity in the fourth quarter. We still see significant opportunity in our supply chain operations. For the full year 2022, net sales were $34 billion, a 15% increase with a volume increase of 2% and cost inflation of 13%. Adjusted EBITDA was $1.3 billion, an increase of more than $250 million, a 24% increase over the prior year and above our full year guidance due to a strong fourth quarter. Adjusted EBITDA margin also expanded 20 basis points over the prior year and our adjusted EBITDA per case was above 2019. Adjusted diluted EPS was $2.14 per share, an increase of 38%. We made good progress against all pillars of our plan in 2022 and are excited about our potential in 2023. Let's look at volume on Page 9. Independent cases increased 6% over the prior year in Q4, which is an acceleration from the 3% we reported last quarter. Hospitality grew 19% and healthcare grew 6%, offset by a 6% decline in chain volume. Our chain decline was largely driven this quarter by the strategic exit of a small number of less profitable and more complex customers, consistent with what we shared in Q3. So far in 2023, we are continuing to see volume improvement over the prior year and have not seen signs of softening demand. Year-over-year case growth across almost all customer types was stronger in Q4 than Q3. Additionally, we delivered share gains in target customer types again this quarter. Our keen focus on profitably growing these customer types and opportunistically growing others is resulting in profitable growth, strong gross profit and EBITDA margin expansion. For the full year, we exceeded our goal of growing case volume excluding strategic exits by 1.5 times the market for restaurants and 1 time for all other categories. I will focus for a moment on growth relative to 2019. Fourth quarter independent case growth was nearly 5% above 2019. We still have embedded COVID recovery tailwinds, as healthcare cases were 4% below Q4 of 2019 and hospitality was 11% below 2019. For all other categories, the decline was primarily related to the strategic exits discussed. As we move into 2023, we will no longer compare results against 2019. Moving to Page 10. We made continued progress in the fourth quarter to further strengthen our capital structure and reduce leverage. We reduced our net leverage compared to both the end of fiscal 2021 and Q3 2022. Our net leverage ratio was 3.5x at the end of the fourth quarter in line with our guidance, which was a 1.1 turn reduction from a year ago and a two turn reduction from Q3 of this year. During the fourth quarter, we prepaid an additional $200 million of term loan, meaning in fiscal 2022, we reduced net debt by approximately $220 million. Leverage reduction remains a focus area of our capital allocation strategy. I am pleased with the progress we've made this past year to strengthen our capital structure and deliver on our priority of leverage reduction. At the same time, we announced US Foods' first share repurchase program for $500 million and repurchased $31 million of shares in the fourth quarter of 2022 and January 2023. Turning now to our guidance for 2023. We expect continued increases in volume and earnings through the execution of the three pillars of our long-range plan to grow market share, expand margins, and improve operational efficiencies. We expect to grow volume at 1.5 times the market for restaurants and grow at market for remaining customer types. We also expect to deliver $1.45 billion to $1.51 billion of adjusted EBITDA and $2.45 to $2.65 in adjusted diluted earnings per share in fiscal 2023. The higher end of the EBITDA range assumes continued solid macro demand improvement, while the lower end assumes a mild volume slowdown in the second half. We also expect continued EBITDA margin expansion in 2023 as we increase gross profit per case above 2022 and achieve more OpEx efficiency through improved turnover and initiatives. We're also providing guidance on interest expense and total CapEx. As we continue to significantly increase earnings and reduce total debt in 2023, we expect net debt to be below three times leverage by year-end, inclusive of any share repurchases. In summary, US Foods made very strong progress against our long-range plan in 2022 in terms of advancing capabilities, achieving record adjusted EBITDA, and strengthening our capital structure and capital allocation. Everyone at US Foods is focused on building on the momentum we created in 2022, and our progress to date is largely thanks to these efforts. 2022 was just the beginning. We are focused on creating a best-in-class experience for our customers and associates and generating significant value for our shareholders. With that, I'll pass it back to Dave for his closing remarks.

Dave Flitman, CEO

Thanks, Dirk. In closing, I couldn't be more excited to be here, and I look forward to significantly building on the progress our team has made against the company's long-range plan. Our strategy is working and we will remain focused on driving profitable share gains, expanding gross margins and improving operational efficiencies to accelerate our progress in the year ahead. We are winning. I am proud of the work our associates have done to accomplish the results we achieved in 2022, and expect we will continue to build on that great work in 2023 to serve our customers better and position the company to deliver compounded shareholder value over the long term. With that, Cheryl, please open up the call for questions.

Operator, Operator

The first question is from John Heinbockel of Guggenheim Securities. Please go ahead. Your line is open.

John Heinbockel, Analyst

So let me start guys with maybe more strategic question. I think the independent case growth this quarter was the best since 2018, right? So if I think about that maybe address capacity in the warehouses, how much you're running up against capacity in certain places capacity with the sales force, right? I think is there a need to invest in either one right to grow at the rate that you want to grow at the next couple of years?

Dirk Locascio, CFO

Good morning, John, this is Dirk. I'll start and then Andrew may add in. But I think, just to start with, your question on the capacity one of the things and the reason our focus really a reason our focus is on independent health care and hospitality is actually from a capacity, we can get much more capacity out of our buildings, because you have customers that are largely using the same SKUs you already have in your warehouse. And so from that perspective, we don't see any issues there. Now that's part of with other customer types why we continue to opportunistically grow. We want to make sure that we're putting the right customers in our warehouses. And then when the right time is there, we will continue to add capacity. We opened sort of a facility this year in Sacramento California, and in New Orleans. But again, we're going to be really smart with that capital. And I think, as far as sales, we have continued and will continue to add sellers. Andrew, do you want to?

Andrew Iacobucci, Chief Transition Officer

We plan to keep expanding our sales force as they are crucial for customer relationships. Our focus will be on areas with significant growth potential to enhance that expansion. Additionally, we are pleased with our use of team-based selling, particularly the specialized chefs in every market who have contributed to our growth, and we will continue to utilize and expand this approach as needed.

Dave Flitman, CEO

Yes. And this is Dave. I'll just piggyback on to what Andrew said. I've had the opportunity to witness that team-based selling approach in several of our markets with our food-fanatic chefs and our restaurant operations consultants. I believe that is a real differentiator for us as Andrew said, and we'll continue to invest in that.

John Heinbockel, Analyst

And then maybe as a follow-up for Dirk, right? I know you talked about the 1.5 times the market. But maybe some color on when you think about top line maybe more granularly, right? And case growth versus where you exited the fourth quarter inflation thoughts for 2023, right? Do you think inflation and case growth are equal contributors in 2023? Just sort of some color trying to bridge the top line to the EBITDA guide.

Dirk Locascio, CFO

We believe that as inflation stabilizes, we will see continued growth driven by case volume, which we expect to remain strong across our target customer segments, along with opportunities in other areas. With the momentum we gained in 2022, we are well-positioned for growth with the right customers and to continue gaining market share. We are optimistic about this outlook. From an inflation standpoint, we noted that this quarter has shown a year-over-year decline, and in the fourth quarter, we experienced some sequential deflation, particularly in center-of-the-plate items. While groceries continue to show some modest quarter-to-quarter inflation, it remains quite stubborn. Therefore, we don't anticipate significant inflation over the next year. Our primary focus remains on what we can control, like increasing our market share and advancing initiatives that enhance our overall revenue with the right customer base.

John Heinbockel, Analyst

Okay. Thank you.

Jeffrey Bernstein, Analyst

Great. Thank you very much. And congrats to Dave on the new position, and Andrew, great job during the transition.

Dave Flitman, CEO

Thanks a lot.

Andrew Iacobucci, Chief Transition Officer

Thanks, Jeff.

Jeffrey Bernstein, Analyst

Sure. I had one question and then one follow-up. The question, Dave, I guess is on the market share gain opportunity. We hear a lot about opportunities to further penetrate existing accounts, adding new accounts. And as you mentioned, maybe further tuck-in M&A. Just wondering from your seat and your perspective and background like how would you prioritize the focus going forward among those three opportunities, or do you see even further opportunities beyond that in terms of specifically gaining market share relative to large and small peers? And then I had one follow-up.

Dave Flitman, CEO

Sure. I want to emphasize that our team has consistently gained market share in the latter half of last year. As mentioned in our prepared statements, we have strong momentum. Our focus remains on the three customer segments we discussed: independent restaurants, hospitality, and healthcare. I've observed a clear focus during my field visits, and the momentum is encouraging. I want to point out that this is profitable volume growth, and we have the right focus in these segments, which offers significant potential for organic case growth. Regarding M&A, the industry is still very fragmented, and we will opportunistically seek tuck-in acquisitions that could enhance our presence in certain geographies or expand our product offerings. I'm very excited about our potential for continued organic growth.

Jeffrey Bernstein, Analyst

Understood. And then just to follow-up. I think you mentioned in your commentary around 2023 guidance. EBITDA margins continue to expand, which I think has been a key area of focus for investors, as Dave, I'm sure you've already probably heard. And I know US Foods is often compared to your largest peers. I'm just wondering what do you think is a realistic target whether it's short or long-term in terms of specifically EBITDA margins where they could go to healthy levels versus what would you say is just unrealistic? Just trying to get a gauge just because it's been such a popular topic of conversation over the past number of years? Thank you.

Dave Flitman, CEO

Yes, I appreciate the question. It's early days for me. I'm six weeks in. I've got a good sense of the focus that we have. I'll tell you 100%. Our team is focused on this and focused on accelerating the results in our business. There's a lot of differences between us and our competitors in terms of the P&L and how that's constructed and all that, but our focus is continuing to expand those margins in a way that makes sense for us and provides the efficiency that we need for our customers. And as excited as I am about the momentum, you also heard me say that there's tremendous upside opportunity in this business everywhere I look, we talked about growth already, productivity and efficiency. We've got good momentum but there's tremendous upside to go and our team is laser-focused on it. I would expect continued expansion of profitability through the course of time.

Jeffrey Bernstein, Analyst

Great. Thank you.

Mark Carden, Analyst

Good morning. Thanks a lot for taking my questions. And Dave congrats on the new position. So to start and I know it's still early. But joining on to US Foods, it's an organization that's structured in a bit of a more centralized fashion relative to performance. So I'd love to get your take on some of the opportunities and challenges you see with building and implementing strategies just given the difference in backdrop.

Dave Flitman, CEO

Yes. I mean you're right to point that out in the difference. But I'm not really hung up on any particular organization structure. I think ultimately our success comes down to people and having the right processes in place and executing extremely well. Our team is clearly focused on that. Obviously, I'm making assessments on things like people and organization structure and all that sort of stuff and I'll have more to say about that in time. But as I highlighted, I don't expect any wholesale changes. I think we've got the right focus and really good momentum. You start playing around with organization structure, you tend to do a lot of internal navel-gazing and lose a lot of efficiencies and get distracted. I don't sense any need to do that here. We've got great momentum. We're going to continue to build on that.

Mark Carden, Analyst

That's great. And then on the solid independent case growth during the quarter, just curious about some of the cadence. One of your largest competitors saw some labor disruptions early in the quarter for service some underground noise just in terms of the consistency did you see bumps in some months relative to others? Your overall take that would be great.

Andrew Iacobucci, Chief Transition Officer

Yes. Thanks for the question Mark. It's Andrew. I think we were pretty much in line with what we expected the quarter played out pretty much exactly as we had anticipated with continued momentum, particularly in independent restaurants. We saw a little bit of bumpiness in terms of the way the holidays fell this past year. But other than that I wouldn't say there was anything there that was of any concern. And indeed, we've continued to see really strong momentum coming into the New Year, where we're at or slightly above our forecast in January. So we really feel good about the stability of that. We've been paying very close attention obviously to that case line to just look for signs of softness. And so far we've really not seen that.

Mark Carden, Analyst

Great. Thanks so much. Good luck, guys.

Dave Flitman, CEO

Thank you, Mark.

Alex Slagle, Analyst

Hey, thanks. Welcome, Dave. And congrats, Andrew, Dirk and team for all the success in recent quarters, moving things forward. I just wanted to ask about CHEF'STORE and you added new locations in 2022 and accelerating it in 2023. I just wondered if you could offer some additional perspective on how that's performing. Just kind of curious with the same-store sales look like relative to 2019? And if you're still seeing the synergistic customer gains as it rolls out to additional markets and allowing you to really leverage the power of combining those two channels and where you see that heading over the future.

Andrew Iacobucci, Chief Transition Officer

Yes. Thanks for the question, Alex. It's Andrew. We feel very good about CHEF'STORE's progress, as we've continued to integrate. The acquisition system integration is basically nearing completion now which will really put us in a great position to drive the growth of that part of our business. In terms of new store openings and how they've sort of played out in terms of our model of driving that top line synergy between broadline and the stores, they're playing out exactly as we had anticipated. We have a great team in place that is busily working through a way to significantly accelerate our rate of store builds. And they've also made some really good progress around time to break even in those new store openings both of which will stand us in very good stead as we look to roll those out more quickly across the business. So generally, I think we're feeling quite good about delivering the synergies that we had planned to, and also feeling good about the continued rollout as we talked about this year, trying to accelerate from six last year to eight or even more this year.

Alex Slagle, Analyst

I just want to follow up on the inbound freight income. It's been a really nice tailwind in recent quarters, and it's all the work you've done optimizing the vendor allowances and carriers. Kind of curious, how much this benefit in the fourth quarter and kind of what relative to what you've seen in previous quarters and to the degree, you think there's still room here to go and most of the low-hanging fruits maybe then picked at this point?

Dirk Locascio, CFO

Sure. Good morning, this is Dirk. Benefit in Q4 was pretty similar to what we saw in Q3, so not a whole lot different than I would call out. I think that the one thing in addition to the strong vendor collaboration, that team has done a really nice job is staying very close to the market and making sure that as market rates are going up and down that we're adjusting our sort of third-party cost, being active at that, they're ahead of or in line with. The team continues to do that this year. So I would expect that, a lot of the bigger gain is there and it's already embedded in our P&L. But with that said, there remains opportunity to continue to convert some cases to us managing them, whether it's our own trucks picking them up or ranging there. So a lot of the benefit there, but still some opportunity ahead and expect a lot of those gains to be pretty durable.

Alex Slagle, Analyst

Great. Thank you.

John Ivankoe, Analyst

Hi. Thank you very much. There are comments made just about significant supply chain opportunities. And obviously supply chain is kind of what drives your entire company, so that's a very big category. A lot of the conversation has been around inbound freight and your ability to manage that much better. But I was wondering, if we could just get a little bit more insight whether it's at the warehouse level or the driver level, your SKU assortment whatever that may be I mean, what major buckets that you see Dave, as you come into the company of opportunities of making it a more efficient business. Thanks.

Dave Flitman, CEO

Yes, John, I appreciate that. As mentioned earlier, we've made significant progress in supply chain management. However, I view this as a considerable opportunity to enhance efficiency and productivity for the company. Achieving excellence in supply chain means ensuring reliable on-time performance at the lowest possible cost, which is clearly our goal. I categorize our ongoing efforts into four key areas. You've heard a lot about most of them today. One of these is the pilot program in the Southeast that focuses on seven-day delivery and flexible scheduling, which has great potential to improve efficiency and decrease turnover throughout the company. For instance, during my visit to that market, I engaged in roundtable discussions with drivers and selectors. One notable conversation was with an experienced warehouse selector who, despite his long tenure working days, chose to switch to a weekend schedule. He explained that his wife runs a catering business and needed his assistance during the week, so this new schedule allows him to support her while balancing his career. I believe we're just beginning to tap into initiatives that will benefit our employees and enhance company efficiency. Additionally, we've discussed inbound logistics, where we see significant potential for improvement and strong momentum. There are two other areas in supply chain management likely to yield long-term benefits. The first is process optimization, which involves standardizing our practices and ensuring consistency in onboarding, training warehouse associates, and executing nightly operations. Finally, we are exploring future opportunities in supply chain management, including transitioning to a leading routing software platform this year, which will offer long-term advantages. I am excited about the momentum and the substantial upside we have ahead.

John Ivankoe, Analyst

Thank you.

Kelly Bania, Analyst

Hi, good morning. Thanks for taking our questions.

Dave Flitman, CEO

Good morning.

Kelly Bania, Analyst

Good morning. I just want to go back to the guidance and the outlook for the year. I appreciate the color on the expected growth relative to the market. But I guess I was just curious if you're willing to comment at all on a specific case growth range embedded in the guidance. We were kind of thinking low single-digit, but if you can just help us maybe think about the broad strokes in terms of the different customer types between independent health care hospitality and all other, as well as I think there was a comment that the low end of the guidance assumes a slowdown in the second half. Can you help us understand the magnitude of what you might be embedding in terms of the potential softness there in the second half?

Dirk Locascio, CFO

Sure. Hi Kelly, this is Dirk. When we consider the guidance for the year, much like last year, we always evaluate how we compare to the market internally. However, due to ongoing macro uncertainty, we are focusing on our growth in relation to the market. Our third-party data indicates low single-digit growth, and we expect to perform above that. You should anticipate that stronger case growth will stem from the positive momentum we have established with our target customer segments, along with the ongoing benefits in the health care and hospitality sectors. While this may not provide a direct answer, it highlights where we foresee continued growth. Regarding your question about the second half of the year, we have factored in a slight slowdown, similar to reductions seen in past recessions. We analyzed various ranges to assess this, and the expected slowdown is minimal. The key point is that our team is concentrating on aspects we can influence, and if the environment remains stable, we aim to deliver results at the higher end of that range.

Andrew Iacobucci, Chief Transition Officer

Yes. And just to piggyback on that I think and Dirk has said this a couple of times we are 100% focused on the things that we can control and regardless of the macro, I have a lot of confidence we will continue to take share in those targeted segments just like we did last year.

Kelly Bania, Analyst

Thank you. As a follow-up, could you share any figures or metrics regarding your staffing and turnover over time? It would be helpful to have some data to assess that progress. Additionally, when do you anticipate returning to normalized levels?

Dirk Locascio, CFO

Sure. From a staffing perspective, we've been mostly staffed for several quarters, so that's not really an issue for us. While there may be occasional staffing challenges in certain markets, overall we are in good shape. If I compare our turnover for delivery drivers, it's currently about one and a half times higher than it was at its worst in 2019. However, as Andrew mentioned, we have made significant progress in getting closer to 2019 levels. For warehouses, we were nearly at double the turnover rate, but we've reduced that by almost half, which is good progress. We're continuing to improve in this area, and the insights shared by Dave and Andrew give us confidence in our path forward. One factor outside of our control is that the labor market remains relatively tight. However, the flexible spending options Dave mentioned are an important tool that benefits both our associates and the business. We appreciate solutions that help both our customers and our associates.

Kelly Bania, Analyst

Thank you.

Brian Harbour, Analyst

Thank you, good morning. I wanted to ask about the impact of exiting certain customers. I know this is an ongoing process, but do you feel that you've moved past most of that impact, or is there still more to do in terms of optimizing the customer base?

Dirk Locascio, CFO

Good morning Brian, this is Dirk. We anticipate that by Q1, we will have addressed most of the remaining customer exits. That said, we are committed to maintaining strong business practices. In any enterprise, it's crucial to continually monitor our customer base. Therefore, we don’t expect any significant restructuring; our focus remains on ensuring growth and engaging with the right customers. You should see this reflected in our gross profit, our market share, and, most importantly, our overall results.

Brian Harbour, Analyst

Okay. Great. Thanks. Maybe just on the debt side. You obviously have EBITDA growth that helps leverage. Do you expect to pay down debt at a similar or perhaps higher rates what you did in 2022? And is that kind of factored into the interest expense outlook?

Dirk Locascio, CFO

We do expect to continue to pay down debt. We haven't been specific. So we would expect to continue to pay down debt and also opportunistically repurchase shares. And those will be depending on the market conditions, but the continued reduction in leverage and being opportunistic with what we think is an undervalued share price are two things we'll continue to focus on. And, yes, we've contemplated a level of that in our EPS outlook.

Edward Kelly, Analyst

Hi guys. Good morning and David, welcome.

Dave Flitman, CEO

Thanks, Ed.

Edward Kelly, Analyst

Question is really for you Dave. I mean obviously you support the plan that has been in place here and that's very good to hear. But as an outsider with your own, sort of, perspective there's probably also things that you see as additional opportunity. And I think you alluded to that when you said about accelerating the execution of the plan. Could you just maybe talk a bit more about what you mean by that? And then how does that, sort of, roll into the goal that the company has had about the $1.7 billion in EBITDA in 2024?

Dave Flitman, CEO

Yes. Let me take the second part of that question first, Ed and then I'll come back to the first part. I haven't said anything about the 2024 target, but that's purely an issue of process and timing for me. I've been spending my time learning the business and digging in and understanding the outlook for this year. I haven't seen anything that gives me reason to believe we're off track for 2024. It's just early days. In fact it's just the opposite. You've heard about my confidence in the momentum in the company. And so back to your first part of your question, for me I like to work with teams to execute, execute well and accelerate momentum. We have so much going on in the company all rightfully aimed at improving the results. If there's one thing, I think, I can help the team do is really focus on the critical view and get them done and do them well and then move on to the next pieces of it. So that's purely what I meant. I'm working closely with the team around that now. Let's work on the needle movers, the right ones as you heard Dirk say that help our business as well as our associates and keep moving ahead.

Edward Kelly, Analyst

Okay. And then Dirk just a follow-up for you. Your guidance implies gross profit per case improving in 2023 versus 2024, but you also mentioned sequentially a little bit of deflation. I think, there's been questions amongst investors about things like procurement gains and lapping those. So I think this is an important issue as we're seeing this inflation. Can you maybe just talk a bit more about your confidence in growing gross profit per case next year and the drivers of that despite that backdrop?

Dirk Locascio, CFO

Sure. Good morning, Ed. So we do feel good about gross profit per case continuing to improve in 2023 above 2022. And I think that it comes back to what we've talked about is that the lion's share of our gross profit per case improvement has been our own four-wall initiatives and the good work that our team has done and really making sure that we're passing those through and reflecting even with customers where we've optimized some pricing reflecting the higher cost operating environment that we're operating in. So we expect it to be pretty durable. Yes, early in the year we'll have some portions of onetime kind of procurement gains that we'll be lapping. But our team through all the good work last year that we've done we feel very good about continuing to have strong gross profit and we think it will be a good durable gross profit as we look ahead.

Edward Kelly, Analyst

Great. Thanks, guys.

Dirk Locascio, CFO

Thanks, Ed.

Dave Flitman, CEO

Thanks, Ed.

Lauren Silberman, Analyst

Thank you very much and I also echo my congrats, Dave. And this is a little bit of a follow-up to a prior question on 2024. But I know it's still early days. How are you thinking about the level of incremental investments that might be necessary as you look to execute the plan and then add your own, kind of, spin on the plan?

Dave Flitman, CEO

Yes, you're right Lauren. It would be premature for me to really think about those investments. Now I think the company is making the right investments. You heard us talk about the things that we're doing in supply chain most of which requires some level of investment. The excitement we have around the sales team and making the appropriate targeted investments there opening of the CHEF'STORES I think we'll continue on the plan that we've had. And then I'll be assessing here over the next few months what I think it's going to take beyond 2023 into 2024 and beyond.

Lauren Silberman, Analyst

Thank you for that. Can you provide any additional insight into what you're experiencing so far this quarter? I understand the industry is generally seeing some improvement, possibly due to Omicron, and I am trying to grasp the underlying trends. Thank you.

Dirk Locascio, CFO

Sure. Good morning, Lauren. This is Dirk. So overall Andrew commented and I commented on in the prepared comments that we've seen demand hold up quite well here through the early part of the quarter and really haven't seen signs of softening. I think overall the momentum that we expected to enter the year with we are seeing that. So really not a whole lot to share beyond that other than builds on our optimism as we continue to enter the year and what we expect to deliver through the year.

Lauren Silberman, Analyst

Thank you. Congrats.

Dave Flitman, CEO

Thank you.

Andrew Iacobucci, Chief Transition Officer

Thanks, Lauren.

Jake Bartlett, Analyst

Great. Thanks for taking the question. Mine was a follow-up on the 2023 guidance. It was maintained for EBITDA and EPS, but you did hit the higher end on the 2022 you're talking about accelerating momentum. So I'm wondering whether there's some offset. It seems like you started a better spot. Are you building in more macro pressure? Just trying to understand maybe how conservative that 2023 guidance might be?

Dirk Locascio, CFO

Sure. Good morning, Jake. This is Dirk. We are very pleased with how 2022 wrapped up, slightly exceeding our guidance, which demonstrates the strong momentum in the business. As we look ahead to 2023, taking into account the macro uncertainty, we've aimed to present a range that reflects potential strength alongside a thoughtful recovery in the macro environment. Progress might still be strong, but it could be slower if the economy faces challenges. The key takeaway is that we feel confident about the momentum as we move into the new year. As the year progresses, we will keep you updated on developments, as expected.

Jake Bartlett, Analyst

Great. I have a question about the drivers of independent case growth. We've heard from others that it's primarily driven by new accounts, while individual account traffic might be declining due to high prices that restaurants are facing. Is this true for US Foods, that the independent case growth is mainly due to new account growth? If so, I'm curious about the potential to build on that growth. It seems that larger players are successfully doing that. I anticipated that it would become increasingly challenging to acquire new accounts as supply chains improved and smaller competitors could serve those accounts better. First, can you clarify what's driving the case growth? Second, what are the competitive dynamics, and do you believe that the larger players still have a significant advantage?

Andrew Iacobucci, Chief Transition Officer

Thanks, Jake, it's Andrew. As we discussed last quarter, we are very pleased with the balanced growth in our Innovations and Development. We are effectively acquiring new accounts while also focusing on deepening our engagement with those accounts. This is part of a systematic approach we've adopted at the market level, concentrating on the menu types that are experiencing the strongest growth. Once onboarded, we dedicate considerable effort to finding ways to increase our share of wallet with those customers. Both strategies are crucial and will continue to be pursued. Regarding our customers, as I mentioned earlier, we are seeing a positive recovery in most of them. We closely monitor this as it can often indicate an impending slowdown, but at this time, we have not observed any signs of that.

Dave Flitman, CEO

And I'll just say, the other thing, I'm excited about is our exclusive brands, and we've been able to penetrate the independent portion of that north of 50%, but I'm excited about our continued momentum there and the team's focus on accelerating that brand penetration. Our customers love it. They're really good, and it makes sense for them as well as the company.

Jake Bartlett, Analyst

Great. I appreciate it.

Peter Saleh, Analyst

Great. Thanks for taking the question, and I want to echo my congrats to the team as well. I just wanted to ask about the seven-day delivery pilot and the flexible scheduling. Can you just elaborate a little bit on the cost benefit of this initiative? And just if it does prove out in the pilot, how quickly do you think you can roll this out to the rest of the system?

Andrew Iacobucci, Chief Transition Officer

Yes, thank you for the question, Pete. It's Andrew. We've learned a few different things from the pilot, which included both seven-day delivery and flexible scheduling. One key takeaway is that we can implement flexible scheduling quickly in many locations where it can provide a benefit. You don’t necessarily need to adopt seven-day delivery to gain significant advantages from flexible scheduling. The choices it offers our selectors positively influence their retention with us. Adopting seven-day delivery, however, requires more effort to adjust schedules for weekend deliveries. The pilot market has shown promising results, and we aim to replicate this in two additional markets currently under testing. Depending on those results, we will consider expanding it to other markets where it can offer considerable benefits, especially in areas with tighter capacity. Both scheduling options are being evaluated together or individually as needed, and we see a genuine opportunity this year to implement flexible scheduling in many of our markets while being more selective about seven-day delivery in others.

Dirk Locascio, CFO

And what we really like about the flexible scheduling part of it is, that it really, as Dave commented earlier, it gives employees that opportunity to find schedules that work for them, which when you have lower turnover, lower hiring costs, that reduces your cost and increases productivity. We've seen, again, the positive employee relations, positive employee feedback and also improved safety results. So, all those things are sort of good reasons to do it, because they help the associate and they benefit the company.

Peter Saleh, Analyst

Great. Thanks. And lastly, Dave, are there any other strategic opportunities that you are focusing on for 2023?

Dave Flitman, CEO

No. I see a lot of low-hanging fruit and continuing to execute well and keeping the team focused on the things that matter in moving the needle. Like I said earlier, there might be an opportunity here to help with that focus and accelerate results, but outside of that I'll have more to say through the course of time, if I see other opportunities.

Andrew Wolf, Analyst

Hi. Good morning and welcome, Dave.

Dave Flitman, CEO

Good morning.

Andrew Wolf, Analyst

I have a question regarding strategic acquisitions. It seems the company has been in a holding pattern during the CEO transition and while launching a plan for 2024. Historically, one of the key aspects of this industry has been generating value for shareholders through acquisitions. Can you share your perspective on this? In your discussions with the Board, do you think the company will eventually return to pursuing acquisitions, or will it be focused solely on the 2024 plan?

Dave Flitman, CEO

Look I think we have the right capital allocation plan. And in order of priority, we'll invest in the company. We'll pay down debt. We'll return capital to shareholders. And finally, we'll be opportunistic on M&A. We're not going to do M&A for M&A's sake. There's going to be value that we need to create either in geographies or portfolio reasons for that. But as you know I mean this is still a highly fragmented industry with Big three maybe having 35% of the market, still highly fragmented, still opportunities for growth through inorganic acquisitions and we'll be opportunistic on that and do the things that make sense where we've got the right valuation.

Andrew Wolf, Analyst

Thank you for that. Andrew, I wanted to ask you about the sales force acceleration. Can you quantify the rate of additions or provide any insights on that? Additionally, where will you be sourcing these individuals from? Are they coming from other food service distribution competitors with an existing client base, or are they individuals from outside the industry who excel in sales or chefs interested in this type of role? A bit more detail on that would be appreciated.

Andrew Iacobucci, Chief Transition Officer

Yeah. Thanks for the question. Yeah, Andrew. I think the way we're thinking about this is we will be targeting to be at or slightly above 2019 levels by the end of the year. And we will be as I say doubling down in markets with particular growth opportunities in doing so. So we are still very much in hiring mode and will continue to be so. And in terms of where talent is coming from, the mix hasn't changed dramatically. We typically look for people with a culinary background as well as folks that have worked in our industry. And that mix if anything is probably tilted a little bit more toward sourcing from people with industry experience. Of late, we've been having we think quite good success attracting really high-quality sales reps from our competition, and we think that's something that is really standing us in good stead, particularly in those markets with big growth opportunities.

Dave Flitman, CEO

I think it's important to remember what Andrew mentioned earlier. The ads have been significant in those markets and there is more growth opportunity ahead. Adding to our headcount and sellers hasn't inhibited our growth, and we will continue to do this where there is a need.

Brian Harbour, Analyst

Dirk Locascio, CFO

Dave Flitman, CEO

Thank you all for joining us today. I'm incredibly excited to be here and the momentum that the company has. I appreciate your time. We'll talk to you all soon. Take care.

Operator, Operator

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