Earnings Call Transcript - USFD Q1 2022

Operator, Operator

Thank you for standing by, and welcome to the First Quarter 2022 Earnings Call. At this time, all participants’ lines are in listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Snehal Shah, Senior Director of Investor Relations. Thank you. Please go ahead, sir.

Snehal Shah, Senior Director of Investor Relations

Thank you, Suzanne. Good morning, everyone. Welcome to our first quarter earnings call. On the call today, we have Bob Dutkowsky, our Executive Chair; Andrew Iacobucci, Interim Chief Executive Officer; and Dirk Locascio, our Chief Financial Officer. Additionally, like last quarter, Bill Hancock, our Chief Supply Chain Officer, will join for our Q&A session. We will take your questions after our prepared remarks conclude. During today's call, unless otherwise stated, we are comparing our first quarter results to the same period in fiscal year 2021. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2021 Form 10-K 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 to the presentation slides posted on our website. Except that we are not providing reconciliation to forward-looking non-GAAP financial as indicated there in. I’ll now turn the call over to Bob.

Bob Dutkowsky, Executive Chair

Thanks, Snehal, and good morning to everyone. Before we dive into the quarter and the progress on our plan, I want to spend a few minutes on the two announcements we shared earlier this week. We're pleased to have reached an agreement with Sachem Head and bring an end to the proxy contest. The board welcomes Scott Ferguson, David Toy, and Jim Barber as new Independent Directors and looks forward to their insights and input as we focus on the continued execution of our long-range plan. As we do, our Chief Commercial Officer Andrew Iacobucci has agreed to step into the Interim CEO role as the Board conducts a search for a permanent successor to Pietro Satriano, who left the company. On behalf of the entire board, I want to thank Pietro for his dedication and leadership to US Foods over the last 11 years and for guiding the company through the pandemic. We will work with urgency on the search for a permanent CEO successor but take the time needed to find the right person. Andrew joined US Foods in 2017 and has been integral to our efforts around driving profitable market share gains and optimizing gross margin, which are two pillars of our long-range plan. He has also worked extensively with Bill Hancock on our supply chain efficiency initiatives in the third optimization pillar. He is a proven leader, and the Board and I are confident that the business is in great hands with Andrew at the helm. In my new role as Executive Chair, I look forward to working alongside Andrew and the rest of the management team to ensure that we build on our momentum and maintain our strong execution of our strategic initiatives. On today's call, Dirk will discuss our first quarter results, capital structure, and macroeconomic environment before Andrew walks you through the progress we're making on our long-range plans as well as our outlook. And as Snehal mentioned, Bill Hancock will join for the Q&A session. Finally, I want to thank all of our associates for their focus and commitment to serving our customers and driving US Foods performance. With that, I'll turn it over to Dirk.

Dirk Locascio, Chief Financial Officer

Thanks, Bob, and good morning. As we outlined a few weeks ago, we delivered strong sales and adjusted EBITDA growth in the first quarter, which reflects the early progress we are making on our initiatives to drive profitable growth, expand margins, and improve operational efficiencies. Both our results and progress underscore our confidence in our ability to deliver 2022 and our balanced long-range plan. Our industry is resilient and is in the midst of a strong recovery. The work we've done over the past few years has positioned us well to drive continued growth as we leverage our scale and innovation. We will also continue to benefit from new talent we have added to better serve customers and optimize cost, specifically to the supply chain team. By delivering against our plan, we have a clear opportunity to create significant value for shareholders through earnings growth and a disciplined approach to capital allocation, which after investing in the business, is focused on debt reduction, return of capital to shareholders, and opportunistically pursuing tuck-in M&A. I'll spend a few minutes on our first quarter results and capital structure, although I won't go into as much detail as normal since we previously released our preliminary results on April 21. We're very pleased with the strength of our first quarter financial results. Q1 adjusted EBITDA was one of our best quarters relative to 2019 since the pandemic began and demonstrates the early progress of our long-range plan initiatives and our commitment to returning to and then surpassing 2019 results. Q1 net sales were $7.8 billion, which was an increase of 24% over the prior year. Total case volume increased 4%, and food cost inflation was 17%. Within volume, we had 9% independent case growth, 64% hospitality growth, and 1% health care growth. Our year-over-year case growth was negatively impacted roughly 400 basis points by the mid-2021 exit of the grocery retail business we temporarily added during the pandemic. As you'd expect, January volume meaningfully slowed due to Omicron, and then we saw a significant improvement in February and March. So far, during the second quarter, we've seen continued improvement in demand. As a reference, our independent case growth in recent weeks has been trending up mid-single digits compared to 2019. Hospitality case growth has continued to improve as well and in recent weeks has been mid-teens below 2019. As hospitality and health care improved from a macro recovery perspective and our expected new business is realized, combined with the accelerated restaurant case growth, we expect legacy volume to strengthen to 2019 levels later in this year. We produced very strong gross profit dollar growth again this quarter. Our adjusted gross profit dollars increased 24% from the prior year, which was more than the 20% increase in adjusted operating expense dollars. We progressed on many of our long-range plan initiatives that did and will enable share growth, increased gross margins, and drive OpEx efficiency, which Andrew will talk more about shortly. The progress of our initiatives, as well as benefit from food cost inflation, resulted in a 40% increase in adjusted EBITDA and a 40 basis point increase in adjusted EBITDA margin compared to prior year first quarter. And finally, our adjusted diluted EPS increased to $0.36 per share. The macro environment remains a challenge for our industry and our customers. Thankfully, Omicron is largely in the rearview mirror, and severe COVID cases have declined significantly. Omicron played out in Q1 largely as expected from both the volume and cost impacts. And with summer approaching, we expect demand recovery to continue. Moving to labor: the labor market is better than it was in 2021; however, it remains challenging. We continue to hire across our network to address staffing needs resulting from expected continued volume growth. With labor, the primary challenges retention, which is definitely not unique to us. Turnover is higher than it's been historically, and we've taken several actions to address this, such as limiting hours worked for new hires to ease them into the job, and retraining our frontline supply chain managers and supervisors on effective employee management engagement practices and processes. We're also finishing the deployment of our new selection technology in our warehouses and revising processes, leveraging our continuous improvement team to make the jobs a little easier. Retention remains a key focus for us. Moving to productivity: we are making progress as Q1 was better than Q4, and we remain focused on getting back to 2019 levels, along with increasing retention. Food cost inflation continued in the quarter with year-over-year inflation of 17.3% and sequential inflation of just under 3%, which is relevant to our entire industry. The sequential inflation is similar to last quarter and lower than the two quarters before that which is a positive. Inflation is fairly broad-based across most categories, and we have been successful in passing it through to customers. The experts don't seem to have a consensus on how inflation plays out over the balance of the year. Hopefully, the lower sequential inflation is a signal of stabilization. Supply challenges that remain for our industry more broadly don't appear as though they'll be resolved in the near term, but rather it is expected more likely later this year or into 2023. We haven't seen an impact on our demand at this point and are committed to helping our customers manage through this inflationary environment. Higher fuel costs is another form of inflation facing our industry. Fuel is not an insignificant cost for us. However, it's not nearly as significant as some of the other costs we incur. As a reference, we spent approximately $125 million in diesel fuel for outbound deliveries in 2021. We mitigate some of the fuel cost risk through locking in costs on a portion of our fuel, which right now is about a quarter of our estimated diesel fuel needs through Q1 of 2023. We also recover a portion of the increases through fuel surcharges to customers. We typically offset approximately 40% of our total fuel cost changes through customer fuel surcharges, and those surcharge amounts vary based on diesel fuel costs. This all means fuel cost is important; however, likely isn't going to be the single item that makes or breaks a year, and any impact is likely temporary as fuel costs normalize over time. The macro environment has its challenges. However, our business and our industry have strong recovery tailwinds. We are pleased with the strength of our Q1 results. And we expect that our continued progress on our strategic initiatives, combined with the macro recovery, will lead to further improvement in Q2 EBITDA and a strong fiscal year 2022. We are reaffirming our fiscal 2022 earnings guidance that we provided in February. I talked at Q1 on Slide 6, discussing our capital structure. We reduced our net debt dollars and leverage compared to both first quarter and fourth quarters of 2021. Our net leverage was 4.3 times at the end of the first quarter, which was a 3.2 turn reduction from a year ago and a 0.3 turn reduction from the end of 2021. Leverage reduction is one of the four components we outlined as part of our capital strategy I noted earlier. We continue to make progress toward our leverage goal of 2.5 times to 3 times net leverage and are committed to achieving it. In summary, I'm pleased with the progress in Q1 and optimistic about our balanced long-range plan, which Andrew will discuss next. Andrew, over to you.

Andrew Iacobucci, Interim Chief Executive Officer

Thank you, Dirk. It's a pleasure to be here with everyone this morning. I'm honored to take on the Interim CEO role and look forward to collaborating closely with Bob, the management team, and our associates to advance our business and build on our first quarter success. Over the past five years, I've led our merchandising operations and more recently our broader commercial team, which has provided me with deep insights into our customers and operations. As Bob pointed out, I have concentrated on driving market share and optimizing gross margins during that time, working closely with Bill Hancock and the supply chain team. This has given me valuable perspective on our team, capabilities, and future opportunities. I am genuinely excited about our market position and our potential to capitalize on what's ahead. My focus as interim CEO will be to ensure we maintain a relentless execution of our plan while sustaining our momentum. Now, let's review the progress we're making to drive profitable growth, expand margins, and enhance our operational efficiencies. I'm now on Page 8, which revisits the long-range plan we presented in February. We expect this plan will generate $1.7 billion of adjusted EBITDA in 2024 and is balanced across three key areas: profitably increasing market share, optimizing gross profit, and improving operational efficiency. This plan builds on our solid track record prior to COVID, particularly in terms of market share and gross margins, and emphasizes operational efficiency improvements driven by several significant changes since COVID. First, we have brought in a considerable amount of new talent, including the heads of supply chain, IT, and our newly established program office, all of whom are excellent additions to our team. In the supply chain, three-quarters of the leadership team are new, bringing valuable outside experience. Second, we launched a new operating model in April 2021 with excellence teams dedicated to driving standardization and focusing on underperforming markets. These teams are staffed with our best talent and have played a crucial role in our success. Third, we initiated customer prioritization or tiering last year to offer differentiated services to our top customers while eliminating waste and inefficiencies in our operations. This tiering strategy has proven effective in other industries, and we're starting to see its benefits. Collectively, these changes represent a significant shift from our operations in 2018 and 2019 and reinforce our confidence in the long-range plan. Moving to Page 9, we will discuss initiatives to grow market share. Pages 9 through 11 are organized similarly, featuring a recap of our long-range plan goals for this area at the top left, Q1 progress at the bottom left, and key initiatives for the next three years on the right. Our goal is to grow 1.5 times the market with restaurants, anticipating about $290 million of incremental EBITDA over the three-year plan. Our progress in the first quarter was encouraging, marked by market share gains among key customer types and a 9% increase in independent case volume. Let me highlight some key initiatives that will continue to propel our three-year market share plan. We aim to drive market share growth by delivering a more differentiated service and fresh experience, which our research indicates is a significant opportunity. We're using our customer prioritization framework to enhance service and reduce waste through our routing initiative. In 2021, we dedicated ourselves to improving quality control processes for fresh products, and we are now focused on activating this quality promise with our customers. Early results in our test markets are very promising. On the larger customer side, our pipeline is currently similar to the new business we've acquired in the last two years, driven partly by our service model and technology. For instance, our new Vitals technology assists hospitals in managing their menus and overall costs, resulting in a 5% improvement in their operating budget in many cases. Additionally, our omnichannel strategy will continue to support market share growth in the coming years, with plans to open four to six new CHEF'S STOREs this year. Now, let’s move to Page 10 to review our recent results and future initiatives for optimizing gross margins. This pillar is expected to contribute approximately $325 million of EBITDA growth over the long-range plan. As shown on the bottom left, we have made solid progress on all aspects of the plan, including pricing, exclusive brand penetration, freight, and managing inflation. We continue to succeed in adjusting terms with select less profitable large customers, thanks in part to a more favorable industry structure. New customers are joining us with margins much closer to those of independent restaurants, and there remains ample opportunity to increase private brand penetration. In terms of costs, we are optimizing our vendor relationships to align our terms with our scale. Regarding freight, we have made strides in optimizing vendor allowances and carriers, contributing to our first quarter results and leveraging our scale to benefit from backhaul opportunities. Freight income per case exceeded 2019 levels in Q1 for the first time since the pandemic began. Next, let's turn to Page 11 to discuss highlights of improving operational efficiency. This pillar is anticipated to contribute about $235 million of EBITDA growth over the long-range plan. In the first quarter, we achieved progress by increasing our operating leverage, with OpEx growing slower than gross profit, enhancing selective productivity from Q4, and implementing our warehouse selection technology at more facilities, on track for completion by early Q3. We are currently in Phase 1 of our routing optimization initiative. Customer order patterns have changed significantly during the recovery, and we are in the midst of eliminating wasted miles from our routes while ensuring on-time deliveries, as indicated by our industry-leading net promoter scores. Although we are still in the early stages, our leading markets are seeing nearly a 10% improvement in cases per mile compared to the same period in 2019. Later this year, we will start the remapping component of Phase 1, ensuring our customers are served by the most efficient distribution centers. We will also begin Phase 2 later this year, replacing our current routing platform with dynamic routing technology, which will further reduce wasted miles and enhance customer experience. Our continuous improvement efforts are centered on standardizing processes, including work planning, execution, and creating optimal environments for our associates and leaders to drive safety, service, and cost improvements. Amid a competitive labor market, we are advancing our network plan, analyzing automated solutions for both brownfield and greenfield projects. We will begin testing brownfield prototypes later this year while concurrently pursuing greenfield solutions. In conclusion, our results affirm our strong initial progress in implementing our long-range plan. I want to extend my gratitude to all our associates for their ongoing dedication to our business. Despite persistent challenges in our industry, we achieved one of our strongest quarters since the pandemic began, reflecting the outstanding execution by our team. I am excited to lead this great company during this interim period and am confident about our plan and future prospects. Operator, please open the line for questions.

Operator, Operator

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

Lauren Silberman, Analyst

I wanted to ask about how you see the opportunities to narrow the margin gap to your closest competitor. So the initiatives that you've laid out across gross margin and OpEx. I guess, one, how much of that margin gap do you see as addressable? And two, what do you see as low-hanging fruit or more near term versus longer term?

Dirk Locascio, Chief Financial Officer

Sure. Lauren, this is Dirk. Good question. So we're absolutely focused on understanding our competitors, their performance, and benchmark. We're actively working, as we talked about, to further expand our margins. I think the key drivers of that are the things that Andrew has talked about and we've talked about in our long-range plan, whether it's the cost of goods improvement, the logistics improvement, or the supply chain efficiency items we've noted. It's really the key levers there that we've talked about. We're focused on balancing expanding the margins and maximizing our EBITDA dollars. We think that, especially during this time when the industry is in a state of recovery, that balance of expanding margins and profitably growing share is critically important. Overall, our plan may or may not look exactly like competitors; the large industry still collectively holds a small share for both of us, and there is a lot of room to run. We would expect to significantly grow EBITDA over this period, creating significant shareholder value with a lot of it coming from improved margins.

Lauren Silberman, Analyst

I just want to follow up on inflation. It seems like you are having a lot of success managing that inflation. What are you observing in the consumer environment or more broadly to determine if you might choose to postpone any of the inflation you are experiencing?

Andrew Iacobucci, Interim Chief Executive Officer

Thanks, Lauren, it's Andrew. Thanks for the question. Yes, we are paying very close attention to the impact of inflation in our world. We're seeing it everywhere, not just obviously in our industry. So far, we are not seeing any meaningful impact on demand. We also are, I think, being buoyed by what continues to be a post-COVID recovery and the pent-up demand that comes with that. But we are expecting it to continue, and we are continuing to monitor it very closely. We are also taking pretty aggressive steps to manage and help our customers, that is, manage through this difficult time. Our chefs have spent a great deal of time with our customers, helping them understand how to rebuild their menus to get away from heavily inflation-impacted categories, rejigging their recipes in the process and also looking at opportunities to engineer their menus to pass along that inflation to the customers. These efforts have had a significant positive impact on our customers.

Operator, Operator

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

Edward Kelly, Analyst

Bob, I wanted to ask you a question just to start. Change looks to be coming right because you're embarking on a new CEO search. I'm just curious, what's the Board looking for in an ideal candidate? What's important in that decision? And then things look to be in capable hands of Andrew at the moment. Does anything change in terms of implementation of the strategy that's out there?

Bob Dutkowsky, Executive Chair

Thanks, Ed. So I'll answer your questions in reverse order. First off, one of the reasons the Board has so much confidence in Andrew taking over is he was integral in the building of the long-range plan. Our view right now is we just want to execute against the plan that's in place. The strategy is sound, and the planned metrics are sound, and the first quarter validates that we're on the right track. So in the short term, I wouldn't look for anything other than Andrew focusing on execution of the strategy and the plan that's in place. The second question about the ideal candidate: We've already formed the search committee. The search committee has already engaged, and it's a top priority of the Board and mine to find the next good leader for this company. The person needs to have some industry experience, leadership experience, and C-suite experience is an important element that we'll look for. But at this moment, it's an open palette in terms of the person that will step in. We have some very experienced directors on the search committee, and we're excited to bring in the next great leader of this company.

Edward Kelly, Analyst

And then just one quick follow-up for Dirk. Both your peers raised guidance this quarter, Dirk, albeit they have one quarter to go. You reiterated it despite, I think, what was probably a little bit better than expected Q1 results. Any thoughts or has anything changed about your expectation for the remainder of the year?

Dirk Locascio, Chief Financial Officer

Thanks, Ed. So as I said earlier, we're pleased with Q1 and the progress. Our expectation still is to be at the high end of the range, assuming we don't have another Omicron-like wave. For us, it's early in the year; we're one quarter in. Also, it's a relatively lower earning quarter relative to other quarters. There are still some macro uncertainties, and we have three quarters left, while others have just one quarter. So there's nothing to read into our confidence. We remain very confident, and we'll adjust as appropriate going forward, but we're bullish on the momentum.

Operator, Operator

Our next question comes from the line of Jake Bartlett from Truist Securities. Your line is now open.

Jake Bartlett, Analyst

Mine is about a little more detail, if you could, about just the cost buckets within operating expense. I think going back to the 2018 Investor Day, you mentioned that 15% was administrative, 55% was supply chain, and 30% selling. I wonder if you can just give us an updated buckets now. And then also any other detail within that supply chain of how much is labor or any other detail just as we kind of assess your ability to cut some of those costs?

Dirk Locascio, Chief Financial Officer

Sure, Jake, good question. So our overall percentage isn't all that different than it was a few years ago, so those are still good proxies to use. The only additional piece I would add within supply chain is we do spend more on delivery than we do on warehousing. So the lion's share of those costs are people costs, and then it is delivery that is bigger. In supply chain, historically, I talked earlier about using 2021 as an example of how much we spent on fuel. I think that's just important because that is a piece that is not labor that helps you tease that part out there. This part is meaningful but not nearly as significant as other expense buckets, and it would likely normalize over time.

Jake Bartlett, Analyst

And just a quick follow-up. You gave us the expected savings over the next few years in gross margins and operating efficiencies. Which would you say come first? Just any clarity on kind of what's the most low-hanging fruit? Is it on the gross margin side or on the operating expense efficiencies that you're targeting?

Andrew Iacobucci, Interim Chief Executive Officer

Yes, Jake, thanks. It's Andrew. Thanks for the question. Look, we've built this plan quite intentionally to be balanced across all three pillars. What I think is most encouraging about our first quarter is that we saw really strong improvement across all three. Our plan is to continue to drive all three in equal measure. I would not say there is a first among equals on this list, and we are working very closely together to ensure that that balance continues.

Operator, Operator

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

Alex Slagle, Analyst

Just wanted to ask about the resiliency of your business and sort of if you could frame the landscape for independent restaurants and your exposure to this category in the event of a material slowdown in consumer spending. I'm curious how things have changed since past big downturns in terms of the capabilities these operators have, leveraging what US Foods offers now, and the position of your business has even more important and in-demand suppliers given the broader issues getting product and reliable service and to the extent you think that share gain there could help offset the potential slowdown in spending.

Andrew Iacobucci, Interim Chief Executive Officer

Yes. I think to answer the last part of your question first, that is a big opportunity regardless of the environment that we're in. As Dirk mentioned, it's a large market we play in and quite fragmented, and we continue to see opportunity to grow market share, and we'll pursue that. As far as the resiliency goes, we've seen some data from Technomic and others that show that consumer spending even during downturns tends to stay quite consistent. What you see instead is a change in the mix of their spending behavior. Food out of home tends to stay at a relatively consistent level. The good news about our business is we've got such diversification across all segments in our industry. That diversification puts us in a very good position to manage through if there is a change in those demand behaviors. The other thing I would say is that COVID has taught us a lot about moving nimbly into where the market is moving. We are well positioned to take advantage should we see a slowdown.

Operator, Operator

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

Nicole Miller, Analyst

A couple of quick ones. So there have been some hires that you mentioned, and that was helpful to review that. And obviously, a new CEO can influence some tone and tenor. But that being said, can you just talk about where everybody sits today, how they interact day-to-day? Is everybody together under the headquarters facility? How is that coming together?

Andrew Iacobucci, Interim Chief Executive Officer

Yes. Thanks, Nicole, for the question. We are in the process of returning to work in a hybrid fashion. So physically, we are together on a regular basis throughout the month. The team, in terms of the coherence and working-together attitude of the organization, has seen a real step-up with the new additions. We've had strong improvements to our IT with the addition of John Tonnison; as well as our Chief Supply Chain Officer, Bill Hancock, and then the program office, I mentioned. All three have made very significant impacts, not only on their functions but also on our cohesiveness as a team. Bill has made significant supply chain additions, and he has an extensive network from his time in retail and tire distribution that he's tapped incredibly effectively. Every single hire he has made has meaningfully improved our capabilities in those areas. We are very excited about the team and its ability to move forward.

Bob Dutkowsky, Executive Chair

And Nicole, this is Bob. I'll just add you've seen that we added two supply chain deeply rooted supply chain skills to our Board, Jim Barber and Quentin Roach. Both of them bring extensive skills, experience, and an extensive network, and we're excited to have that additional capability at the Board level to enhance Bill's efforts around the supply chain.

Nicole Miller, Analyst

Maybe switching gears to capital deployment. This is an excellent plan. At least on paper, we can put all the pieces together, right, and thinking specifically about capital deployment and the deleveraging effect of the plan. But at which phase do you start to think about share repurchase and dividend with a permanent CEO or after Phase 1, 2, or 3? How are you thinking about that?

Dirk Locascio, Chief Financial Officer

Sure. Thank you. Good question. As you know, we have four very clearly defined capital priorities that I talked about earlier, and one of them is share repurchase. Our near-term is really focused on investing in the business for growth and delevering, and we're making very good progress. We expect to reach that range of 2.5 times to 3 times leverage next year. Over the course of this year, we will evaluate different options for returning capital to shareholders and would expect to talk further about that later this year and into early next year. We're excited about the opportunity. We have strong growing cash flow in our business that allows us to really deploy that capital in different ways, including back to shareholders.

Nicole Miller, Analyst

And then just a final one. This is more of a curiosity. On the Cash & Carry business, what trends are you seeing there? I'm trying to think through, does that business go up because of recession? Is there any signal with that business, that piece of business?

Andrew Iacobucci, Interim Chief Executive Officer

Yes. Thanks, Nicole, for the question. We saw a sizable bump in that business during the early and mid-stages of COVID. That was driven by a combination of factors, and it's a cost-effective option for many of our customers. In the event of a slowdown, we expect that to become a more viable option for our customer base, and we anticipate it to be very resilient in whatever macro environment we're playing in.

Operator, Operator

Next question comes from the line of Jeffrey Bernstein from Barclays.

Jeffrey Bernstein, Analyst

Regarding the market share opportunity, which seems to be the first area that contributes to the other aspects of EBITDA expansion, I'm curious about your perspective three years down the line. It appears that the current circumstances as we navigate through COVID present a substantial market share opportunity. Could you share how you prioritize your strategies for gaining new accounts, deepening relationships with existing clients, potentially acquiring smaller competitors, or even shutting them down? What do you see as the primary opportunities to enhance market share growth?

Andrew Iacobucci, Interim Chief Executive Officer

Yes, Jeff, it's Andrew. The short answer is we want to look at both penetrating existing customers as well as driving new. When we balance these two priorities, we see very strong growth and market share performance. The more we can build share of wallet with existing customers, those are very profitable cases given that we're not stopping the truck anymore, and the marginal cost to deliver is very low. We need to always be on the lookout for new opportunities to grow our business through new customers. One of the most promising aspects of our Q1 results is that we saw both of those in balance in Q1.

Jeffrey Bernstein, Analyst

And in terms of the smaller competitive set, I mean it seems like we're hearing about all the challenges of the best years or so of the biggest players. I'm just wondering about the ability for the small and midsized players to survive and thrive through this period, and it would seem like they would be under significant pressure. I'm just wondering if that's something you can see whether there's any industry data that would demonstrate that.

Andrew Iacobucci, Interim Chief Executive Officer

Thanks for the question. We don't have a clear sense of that, obviously, Jeff. Our shared data tells us how we're doing relative to the market, but it doesn't give us specifics around where it's coming from. We have seen a pretty strong balance in where we believe that growth is coming from, from both smaller players and our larger competitors. It's been very, very balanced.

Dirk Locascio, Chief Financial Officer

What we see with large customers is that their importance has increased over these last couple of years, raising the necessity of having a scaled, solid, reliable distribution partner. This has opened doors for a lot of growth toward our larger national customers and even independents; the resilience and ability to manage through less than ideal vendor supply situations is very beneficial. We talked about in Q1 that we gained share with our target customer types, and we have early indicators that our growth with independents remains strong.

Jeffrey Bernstein, Analyst

And just lastly, you gave good color from a commodity inflation standpoint and an outlook there. Just wondering if I can get your thoughts from a labor standpoint. I think you mentioned that the environment is improving. I'm just wondering whether there's any quantification in terms of shortages or maybe basket inflation that you might be seeing or the turnover or hiring? Any kind of metrics you can provide to demonstrate that maybe things have topped out and you're starting to see some improvement?

Bill Hancock, Chief Supply Chain Officer

Yes, Jeffrey, this is Bill. In our industry, the best way to offset the labor challenges is to get more productive, and we've done that from the fourth quarter into the first. We're seeing consistent month-over-month improvement. Turnover is the biggest headwind any company has right now in terms of driving additional productivity. Our continuous improvement efforts are focused on onboarding associates, scheduling them appropriately, and enhancing the technology they interface with. We finished the proof-of-delivery device deployment for our drivers, which helps onboard them faster and improves productivity. We are seeing stabilization in labor markets. The challenge is with Class A drivers; that challenge is not going away for anyone anytime soon, which is why we're investing in training our own and building our pipeline. We are offering new jobs to folks that don't have a Class A today. We'll put them through a school and offer them a full-time job right after that so they can join the team.

Operator, Operator

Next question comes from the line of Brian Mullan from Deutsche Bank.

Brian Mullan, Analyst

Just a question on vendor management. The presentation talks about optimizing terms in line with your purchasing scale. I'm just wondering if you could build on that a little bit. It kind of makes it sound like your current terms with vendors are not in line with where they should be today, but I'm not sure if that's right or what the magnitude is. So if you could just speak to the magnitude of that opportunity and maybe what the timeline is to start to realize the benefits.

Andrew Iacobucci, Interim Chief Executive Officer

Yes, thanks, Brian. It's Andrew. We see it more as a hygiene play to ensure that we're examining our cost of goods. With all the supply disruptions and demand volatility we've experienced, we have a different mix of products than in the past. We also believe there's an opportunity to ensure that we really focus on our cost of goods in these new categories and segments to be consistent with where we believe we should be. There is a bigger opportunity here to find win-win opportunities for both ourselves and our supplier community. It's more in the spirit of partnership that we enter these conversations to find ways to make ourselves a lower cost to serve and in return achieve a much better cost of goods.

Brian Mullan, Analyst

And just a follow-up on another initiative, the routing improvements. It looks like it expanded from a pilot to enterprise-wide implementation. Just give a little bit of history there. When do those pilots start? What did you see that encouraged you to move forward enterprise-wide? And then just a sense of the magnitude of that opportunity and the timeline until when you feel like it's fully deployed and you're seeing the full benefits?

Bill Hancock, Chief Supply Chain Officer

Yes, as Andrew mentioned earlier, this is Bill. It’s a two-phase project. The first phase focuses on our current routing system to identify inefficiencies. As we gained market share during COVID, customer patterns shifted, revealing areas of waste in our routing. This phase aims to eliminate those unnecessary miles. Our leading markets have experienced a 10% or greater improvement in cases per mile compared to the same period in 2019, and we believe there’s more potential for improvement. The remapping initiative is set to begin in a couple of months, and we anticipate having it fully implemented by the end of this year, ensuring new customers are assigned to the most efficient distribution center.

Operator, Operator

Next question comes from the line of Peter Saleh from BTIG.

Peter Saleh, Analyst

I want to come back to the conversation around the hospitality business. I guess at least in the first quarter, I think that's still down in terms of case volumes, maybe 15%, to 20% versus pre-pandemic. Can you give us a sense of how many of your customers pre-pandemic have reordered? Is this just a function of lost customers or just smaller basket sizes from the customers that are ordering? Trying to understand how that segment recovers back to pre-pandemic levels.

Dirk Locascio, Chief Financial Officer

Peter, I think that you're right; it's down in the mid-teens and we've seen continued improvement there. You probably remember that this business was down 70%, 80% right after COVID, so it's taken longer but is seeing steady recovery. Leisure returned a little sooner. The encouraging thing is seeing business travel return. Many airlines, cruise lines, etc. have had positive comments about both leisure and business requests. We feel good about the trajectory. We're seeing not so many fewer customers, but rather operators who are working to get their staffing levels right so they can open all dining venues and expand hours. I expect that to continue improving, and it appears the demand remains robust along with the macro perspective.

Peter Saleh, Analyst

And then just on the private label mix. Can you provide an update on where you are today? Are you seeing any more shift as your restaurant partners try to avoid some of the higher inflation? Are they considering more private label brands? What’s the dynamic going on there?

Andrew Iacobucci, Interim Chief Executive Officer

Yes. Thanks, Peter. It's Andrew. Our private label mix is roughly where we were in 2019. We've seen a nice recovery back to that. We had significant supply issues during the pandemic that resulted in consolidating some of our private label offering. We are seeing that coming back very quickly, and we are indeed seeing the trend that you anticipated: as a result of inflation, there is even greater value in our private label brands than before, driving a strong move into those brands. Additionally, supply difficulties throughout the pandemic have made our customers much more willing to try alternatives than before, which has been a great enabler of conversions.

Operator, Operator

Next question comes from the line of John Heinbockel from Guggenheim Partners.

John Heinbockel, Analyst

Let me start maybe for both Andrew and Bill. How far can you push the envelope on existing warehouse automation from a cost and disruption standpoint? Secondly, it's much easier with greenfield to put in, in the first place. What do you think the network looks like, I don't know, three to five years from now? Maybe there will be fewer, but you also want to stay close to your customers. How does the network evolve?

Bill Hancock, Chief Supply Chain Officer

Yes, John, this is Bill. Great question. When we think about automation, it really is a dual path: both brownfield and greenfield. We believe our biggest opportunity is to retrofit existing facilities versus greenfield. Our first brownfield testing will come online by the close of this year, and we look forward to sharing additional results later on. On the greenfield side, that work is happening in parallel. We've identified focus markets where we feel we will experience capacity constraints in the years to come and creates opportunities for investment in a greenfield site. We will ensure an automated solution every time we invest in those.

John Heinbockel, Analyst

And then secondly, right, you talked about fresh leadership. Maybe some sense of fresh market share versus nonfresh, right? I know one of the challenges has been perception-wise, taking share from specialty operators on product quality. So talk about getting over that hurdle and where your share is and how fast that business can grow.

Andrew Iacobucci, Interim Chief Executive Officer

Yes. Thanks, John. You're hitting on a major opportunity for us. As I mentioned earlier, we took much of 2021 to focus on getting our produce quality consistent day in and day out. We have implemented significant processes and technology enablement that, I believe, have put us on par with the best out there. We have started a customer activation pilot in a few of our markets, and early results have shown strong improvements. We have slightly lower share in produce but slightly higher in the center of the plate. There’s significant opportunity to grow our produce business, and both will benefit from a relentless focus on quality. Providing consistent high-quality product day in and day out is crucial for customer loyalty and a great way to onboard new business.

Operator, Operator

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

Kelly Bania, Analyst

I wanted to ask about the long-range plan. Clearly, this was outlined in February, and it sounds like you're happy with the early progress. With a lot of leadership changes, I'm just wondering if you can comment: Should investors take comfort that this plan is the best route forward for the company? Is there broad support for the long-range plan? Does it need to be more aggressive, or is it just a new leadership to execute that at the highest level? Any comments there?

Bob Dutkowsky, Executive Chair

Sure, Kelly, it's Bob. I'll try to answer that question. The long-range plan took almost a year to come together. We waited until we got outside the impacts of COVID, where we felt comfortable to articulate it. It was a very iterative, bottoms-up plan. Consequently, its impact is rooted all the way down through the organization. However, we will remain flexible to adjust it as the markets and dynamics change. As Dirk described, the fuel issues today weren't on the radar when we were building the plan, and we've adjusted. We'll continue to adjust to the market realities. We're comfortable that the plan gives us the flexibility to adapt. Now we have some new voices in the boardroom that can influence and add value to the formation and execution of the plan. We're comfortable we will remain very agile, but we believe the fundamental pillars of the plan are the right ones to grow this business and create shareholder value.

Kelly Bania, Analyst

And maybe just to follow up. The new operating model sounds like it's been in place for over a year now. Can you help us understand how that's been working? Any examples, any tweaks along the way as you've received feedback? How does that new operating model compare to the industry if there is any standard or norm?

Andrew Iacobucci, Interim Chief Executive Officer

Yes, Kelly, thanks for the question. The core adjustment in our new model was to create excellence organizations on both the commercial and supply chain teams. They are seasoned pros from the field, who understand how it operates. They facilitate identifying, documenting, and deploying best practices across the country. For example, we've seen strong market share growth as a result of our recipe, which focuses attention on where growth is in the market, allowing us to direct our sellers' focus toward the menu types that are growing in their area with relentless execution. Bill, would you like to comment on the supply chain side?

Bill Hancock, Chief Supply Chain Officer

Yes, Kelly, when you think about this new operating model, you pull that expertise from the field, identify what market is the best at a specific function, and replicate that across the organization. For example, in our assortment work, we identified our market that's most efficient, leading to a 15% reduction in SKUs across the network. This has significantly improved our supply chain efficiency and reduced spoilage and redundancy.

Operator, Operator

Our next question comes from the line of Mark Carden from UBS.

Mark Carden, Analyst

It sounds like there's been minimal demand disruption to date with inflation. Do you guys think this is more due to consumers simply wanting to get out more now that COVID restrictions have softened? Or is it still more of a factor of pent-up demand from restaurants just not having enough labor to operate at desired capacities?

Andrew Iacobucci, Interim Chief Executive Officer

It's Andrew. Thanks for the question, Mark. I think it's more the former than the latter. We're seeing a strong desire from consumers to get back to normal in many aspects of their life, and dining out is a big part of that.

Mark Carden, Analyst

As a follow-up, how is the current environment impacting demand for some of your specialized consulting services? Could these be materially accretive to margins, or is the bigger benefit just coming from customer loyalty?

Andrew Iacobucci, Interim Chief Executive Officer

It's both; it's probably more on the customer loyalty side. We have done incredible work over the course of the pandemic identifying challenges our operators face and deploying support quickly. Examples abound, whether it's Ghost Kitchens, navigating the CARES Act, or tools around managing inflation. These are industry-leading in their value and speed of implementation, and it's a significant part of our market advantage that we will continue to leverage.

Operator, Operator

The next question comes from John Glass at Morgan Stanley.

John Glass, Analyst

My question goes back to comments a couple of questions ago about operating performance and best practices. Is there a big operating performance difference among regions or among sites? In other words, when you look at the system, are there regions that are lower, and therefore, it can be brought up to the system average? And maybe inside of that, can you just talk about SG&A and their margins? Where are they relative to when you purchased them? And is that an opportunity still?

Andrew Iacobucci, Interim Chief Executive Officer

Sure. Thanks, John. We haven't noticed systematic differences, but we certainly see opportunities to improve. There's a pro distribution in any large group, and we are identifying the strongest performers and replicating what they do well....

Dirk Locascio, Chief Financial Officer

The SG&A for Food Group, their EBITDA margins were a little lower than the broad line when we first acquired them. That business is performing well considering the current environment. From the northwest and west, it's been slower to recover, but we expect continued recovery. Food Group has been the number one or number two in share, and we hope to build on that. Our integration from a system perspective is complete, and synergies are on track for the $65 million we've discussed. We've achieved over $40 million last year. Overall, I'm pleased with how progress is going on those key strategic assets.

John Glass, Analyst

And where are you on this pricing tool implementation? It sounded like there was some activity-based pricing such that you could charge customers differently depending on how much labor and trucking is required. Where are you rolling that out? Is that the right way to think about this pricing tool?

Andrew Iacobucci, Interim Chief Executive Officer

Yes, John, we are on track for deployment starting later this year and into early next, and we're feeling great about the capabilities it will provide us.

Operator, Operator

Next question comes from the line of Andrew Wolf from CL King.

Andrew Wolf, Analyst

Can you provide some more color around the better pricing and terms you spoke about earlier in the call? I think you said with existing large customers, new large customers, presume that's change or maybe others. Why is this happening now, and how durable do you think this is?

Dirk Locascio, Chief Financial Officer

Sure. This comment is geared more to larger customers. We’ve talked about this for several quarters; it’s working closely with those customers. In some cases, we are increasing charges, but it also involves adjusting delivery frequency and aligning more on our private brands. Demand and capacity in the industry are very different now than three or four years ago. We think it's durable, and it has built stronger collaborative relationships between the two teams, leading to mutually beneficial success.

Andrew Wolf, Analyst

I just have a slight follow-up, a different question though. If I did my math right, it looks like mix contributed maybe a couple of percent or 3% to sales. I want to check that. It’s interesting that in an inflationary environment, where there's a contribution from mix. I presume it's due to restaurants getting more confident in adding more fancy items. Could you give us some color on that? Also, normally, in an inflationary environment, we see mix go in the other direction. It’s a confounding trend.

Dirk Locascio, Chief Financial Officer

You're right that it's about 3% and it relates to our independent case growth. We're seeing this case growth outpace our business because our marketing strategy is real, and we are growing faster than the market on that. I think Andrew mentioned earlier that we haven't seen systemic trade-downs. Demand remains robust; that's what's driving much of the mix benefit.

Operator, Operator

There are no questions at this time. I will now turn the call back to Bob Dutkowsky.

Bob Dutkowsky, Executive Chair

Thank you, operator. Let me just quickly summarize. Thank you for your interest and your questions this morning. I would summarize on a couple of points. First, we're pleased with the quarter we just announced. But much more importantly, we're excited about the opportunity to continue to drive our long-range plan. We believe our strategy is correct, and this quarter just begins to validate that our actions will deliver shareholder creation and shareholder value. That's what we're focused on as we move forward. A large thanks to my colleagues at US Foods for their great work, and thank you again for your time this morning.

Operator, Operator

This concludes today's conference call. You may now disconnect.