Okay, I think we're live. Hi, everyone. Thank you for being here. I'm Brian Harbour. I cover Restaurants and Food Distributors, Morgan Stanley. Real quickly, for important disclosures, please see morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Now we're going to talk about US Foods. So, Dave Flitman, CEO, Dirk Locascio, CFO. Thank you guys for being here. Much appreciated.
Thank you, Brian.
Thank you. Maybe, you know, just let's begin real quick. Last week, so you said you were no longer going to pursue a transaction with PFG. Maybe, you know, make some comments just on the drivers behind that. You did reaffirm, of course, all short-term, long-term guidance, but, you know, how does this affect any aspect of your strategy or your market approach, you know, going forward?
First of all, it doesn't affect it in any way. This was a distinct and separate piece of work. We wanted to take a look at it to see if, you know, there was industrial logic there and if it made sense in any way. There were really three key components to why we wanted to take a look, and it had to do with potential synergies. Obviously, regulatory was a consideration. Importantly, from the beginning, this had to make sense for our shareholders. What you saw last week was the culmination of that. What I will tell you is, you know, we had a point of view going into those discussions, around synergies, and that was affirmed through the process. At the end of the day, we decided it wasn't the right thing for our shareholders.
So we, in fact, never did make an offer. But back to our business, the core strategy is intact exactly as it was. Importantly, you saw us announce just a new tuck-in acquisition on our earnings call. We haven't deviated from the core strategy, continue to grow the top line, take share in independents, healthcare, and hospitality, which we've done for a long time, and leverage that to, you know, double-digit bottom line growth and industry-leading earnings per share growth. And that will continue.
Makes sense. Do you think the bigger M&A opportunities are more limited at this point in this industry?
I don't know that that's true. I mean, obviously the details matter, around that. But importantly, you know, what you see in the big three is about just a shade more than 1/3 of the market. So it remains a very highly fragmented industry. And importantly for our strategy, it's always been about tuck-in M&A. We've done five of those in the last two 1/2 years. There's a whole bunch of those that we'll continue to take a look at. And importantly for us, it's about, you know, finding the right opportunity, a well-run company. Importantly, independent mix is important for us. But it also helps us scale in markets that we already have a position in. And as you look at those five acquisitions that we've done, that was the answer for all of them.
It helped us take miles out of our distribution network and/or added an increment of capacity, to help us in those local markets, and there's a lot of opportunities there ahead.
Okay, got it. Maybe let's shift to demand, you know, top line drivers. I guess just a bigger picture question. Obviously, you serve a very broad swath of, you know, the U.S. food service market. So, you know, how are you feeling about demand? Then there's, you know, certainly mixed signals here, but how are you feeling about demand right now? How are you feeling about demand as we sort of go into next year at this point?
I think importantly for a while, all of us have seen foot traffic challenged, you know, more than two years in this industry. Importantly, we've continued to execute our strategy and deliver our outcomes. I'm hopeful for next year, you know, foot traffic will see a rebound. I think at the heart of it is, you know, consumer confidence, which has been challenged really since COVID. I think we'll need to see interest rates come down, as a boost to that. I'm hopeful what may happen here, you know, as the month progresses. Importantly for us, you know, we talked about on our call, September was the strongest month of the third quarter for us, and we saw that continue into October, overlay the government shutdown. We talked about choppiness.
For us, importantly, you know, we've got about 8% of our revenues directly linked to government business, whether it's through the military or other government institutions. So that was at the root of the choppiness. But importantly, since the shutdown is over, we've seen that growth recover to levels where we exited the third quarter. So we're actually quite encouraged that the government shutdown didn't have any long-term lasting effects.
Yeah.
Once it was over, we're seeing the rebound.
Good. Okay. Yeah. Well, you know, I mean, data would also suggest that independents are doing better than chains. Also, I mean, we know very clearly that full service tends to be doing better than quick service on average. I mean, do you have any views on why that is or what's driven that?
I think it's a trend that's continued for a long time. I don't think it's new that independents have been taking share, a decade or longer. I personally believe that's going to continue. I just think the independents lend themselves more to what diners are looking for, which is more an overall experience in dining. It ebbs and flows, and it's not that there aren't some chains that are strong and are going to do well, but I just think the game will continue to be won by independents, which is why we've got such an intense focus on it.
Yeah.
I mean, I certainly value prop. I think has been, you know, a question for restaurants too. I mean, do you think independents have done a better job protecting their value prop in some way?
I think they have, and it is about that experience. I think what independents have is a very loyal local customer base, where they've got relationships, they tend to live close by, and I think that's at the heart of why the independents hold up very well, particularly in tougher economic times.
Yeah.
Are you also seeing your, some of your full service customers, doing a little bit better currently?
We are. I mean, we've got a big focus on casual dining, full service casual dining. Bar and grill is big for us.
Yeah.
Those have been hallmarks of our focus with independents for a long time and on a relative basis, they're holding up well.
Okay. The targets that you laid out, you know, last year, so 2%-4% case growth over time, 3%-5% in healthcare and hospitality, 5%-8% with independents. What, you know, what are sort of the puts and takes of getting to those in the coming year? Which, you know, which of those pieces would you say, you know, you have the most confidence in?
I think when we laid out those targets on investor day, the independent targets was predicated on a normalized 2% foot traffic growth year-over-year , which we haven't seen since we laid those targets out. But importantly, we've got 18 consecutive quarters of taking market share. And when that foot traffic comes back and rebounds, and it will, we're going to be very well positioned there. Healthcare is a little more agnostic to the economy and the ebbs and flows of that. You've seen us take share for 20 consecutive quarters there. I think that will continue. Hospitality, that consumer linkage is, it feels a bit more like restaurants, you know, in terms of how that ebbs and flows. But importantly, we continue to grow that faster than the market. And we've made some shifts in our targeting in hospitality.
Historically, we've been over-indexed a bit to lodging.
Right.
We've gone more down to entertainment and those sort of venues. And I think that will play out well for us in time.
Yeah. And I mean, those are the two segments where you probably have some pipeline visibility too, because it tends to be kind of contracting business. Do you, is that still, you know, robust that you sort of look at?
Very strong in both healthcare and hospitality.
Yeah. Okay. Got it. Maybe explain the rationale just for moving to, you know, the fully variable sales force compensation structure and how, you know, you're kind of managing that changeover?
Yeah. I could talk a long time about this. We've gotten a few questions about it, as you can imagine, since we announced it. So first of all, that was something I was contemplating since I joined US Foods three years ago, in fact. And for me, it was about having the company in the right position, ramping up the execution as we had. And, importantly, we felt like this was the right time to lean into that change. But there's a few important pieces that I think might've been missed when we first communicated it. First of all, we've been working on it all year. It wasn't a new thought. We've been thoughtful about what that needs to look like and the shape of the comp plan.
And secondly, and probably most importantly, and I think what's underappreciated, we're moving from a 50/50 fixed and variable to a 100% variable.
Right.
No one enters our company today at a 50/50 mix. Everyone starts at 100% base, and then there's a click-down process that eases those individuals into that commission plan.
Yeah.
And it's based. It's a very individualized conversation and ramp based on whether they have industry experience or not, whether they've sold before or not, importantly, whether we seed them with new business or not. So it really is a tailored approach. So you think about this move then. It's going to be very similar. So there's not going to be a date certain where we're going to say, now hear this, and everyone's on 100% commission. There'll be a similar click-down process. And importantly, in the meantime, we talked about this a bit on our call. We've got four pilots going on around the country, and those pilots are nothing more than running the new comp and the old comp, to give visibility to the sellers around what that will look like if they don't change their behavior. We haven't changed anyone's pay.
We're having those individual conversations. We may or may not learn some things that might tailor our approach to when we take it company-wide next year. But importantly, when we do take it company-wide, it'll be a similar process to the pilots. We'll give them some lengthy visibility to what their comp might look like in the new plan before we make any changes. And then we'll ease people into that click-down process. So the reality is it may take us a couple of years to get the majority of our sellers onto 100% commission.
Yes.
For me, that's okay because it's more important that we start moving that direction than it is that we get there by a date certain, if that makes sense.
That, that does. Yeah. I mean, presumably you think this will unlock sales, but I mean, is there any other?
Yeah.
Behavioral change that this causes or will cause in your view?
I think the way we've tailored it, we've simplified the commission plan. You know, it's largely going to be based on gross profit per drop as it has been historically for commissions, but there's some kickers in there around independent case growth, importantly, our exclusive brands and also Pronto acceleration. So it lines up perfectly with our strategy, right? Our sales force will be selling in the way that is consistent with what, how we want to drive growth.
Mm-hmm.
And importantly, it'll be simple and they'll all understand it.
Okay. And so it seems that, you know, some of the other initiatives like Pronto are [audio distortion] . So you think this will be an accelerant to those sales drivers that you laid out in 2024 as being key to your plan, right?
Right. I'm confident we'll look back on this in a few years and view it as kind of the final unlock to accelerating our growth.
Yep. Okay. Do you have to hire different people at all? Does it change how you hire people?
It may attract a different type of seller through the course of time. But importantly, we've got a home for all of our sellers that are with us today. Let me give you one example. I've used this and it's helped resonate. Even as we move to 100% commission, we may have some sellers that have a very large territory and a ton of customer relationships, but they don't grow.
Yeah.
That's why these individual conversations are so important. That person, very important to the company, may not fit in a 100% commission plan. We may move them more to a base plus a variable pay component versus a 100% commission plan. That's why we've got to be thoughtful about having these conversations and making these changes.
Yeah. Okay. Makes sense. I mean, you know, food inflation has come back in a few different pockets. You know, has there been any change in customer buying behavior due to that? I mean, are you, is that potentially an accelerant for private label, as we, you know, work through that?
I think, and Dirk, you can chime in here, but I think we have seen our private label accelerate really since COVID when you think about all the costs. And, you know, these are great products and importantly, they're cheaper for our customers and save them money, and it helps them in many ways. And so yes, I think that's part of why we've seen the acceleration in the past couple of years. We're real excited about our private label penetration and where it can go.
Yeah, you know, let me shift to the cost side a little bit. You know, even in this year it's been, I think it's fair to call it, still a variable sales environment, but you've actually probably over-delivered on the cost side, and certainly on the bottom line. What's made the most difference in that? I guess what's kind of high on your list for 2026 when you think about the cost side?
Really, it's any year we have things that we're working on across supply chain productivity, admin productivity, and then the indirect spend. So it's the non-people, non-cost of goods, spend reductions. And it's all going toward our goal of 3%-5% productivity per year. And so I'll just use a few examples this year. So one of them that we've talked a lot about is our Descartes routing system. So that will be fully deployed here by the end of the year. We've driven last quarter a little over 2% improvement in cases per mile. And that is one where we think there's more opportunity still in the next few years. When you put it in as a new system, you only want to turn the dial so much to start with, so you don't change the customer experience all that much.
So in that case, it's been a productivity improvement, but also the actual on-time performance to customer has improved as well. So that's been a driver. UMAs, which is our standardization of our supply chain operating system, continues to deploy to more markets. That's been a positive for us. Our indirect spend that I mentioned is on track to deliver $50 million. You know, we continue to, in sort of the admin or back office, selling type of things, those that make most sense to be, for field accountability, we're moving those into the field, those that have scale across the network, considering to scale those, leverage technology.
There's not one thing, but really, whether it's that, whether it's gross profits, or the things that drive market share, each of them have a portfolio of activities that we're working and think of it as different stages of the maturity cycle.
Yeah. What, I mean, do you think you've delivered on sort of just vendor, you know, management, some wrap-up?
Sounds good.
Yeah.
Is there, you know, more of that that comes next year as well?
Yes, there is. So there will be some that comes the next two years, across all three years of the plan. As we said earlier this year, we seem likely to exceed our $270 million target that we outlined. This is one where the team's done an excellent job. They've over-delivered on the initiative or the vendors that they've worked with to date. And this is one where for vendors it really is a win-win that we see between us and them. With our gaining share, it helps vendors drive their and grow their volume. We're looking for things that we can do to simplify the way we interact with them. And so vendors there as a result are willing to compensate us more for that. So we think there'll be more there also.
You know, this is one where, we've done this multiple times since I've been here, so there's always, further opportunity. You continue to get smarter on how you can, improve the process over time.
Mm-hmm. Remind us where we are in Descartes rollout?
It'll be fully deployed here by the end of the year, across all of the markets.
Was your comment that, you know, even once it's fully deployed, there's sort of ongoing optimization, presumably like the software kind of gets smarter as it learns, you know, your routing?
It does. It has some AI capability in it, and I think, importantly, there's the opportunity to have more dynamic routing than we've ever had. It was more event-driven where we had to drive it episodically throughout, you know, a quarter or throughout the year, and importantly, this helps us drive continuous optimization, so I think we will, now that we've got it fully deployed, continue to yield benefits.
Okay. Did you mention the kind of the 3%-5% annual productivity savings? Anything else within that bucket that drives that, or did we basically talk about the main things, but anything else that?
Those are some of the biggest. I mean, there's a variety of things, you know, places where we put tech technology in that, that streamlines, sort of what people have to do that allows us to, operate those processes more efficiently. So there's not, and most of these, you know, a lot of times we'll get asked, what are the two or three big, big levers? And distribution is typically not two or three big levers. You know, there's a number of different activities. But the, the thing that we don't do after productivity is say, Dirk, I just need you to work harder versus how do we work smarter through either technology, process improvements, or better insights?
You, I mean, this year, you know, you're slated to over-deliver on bottom line versus your plan. What, you know, what could cause that to continue as we go into next year? I guess that's maybe the overarching question.
It's really, you know, the thing that you're seeing us do again this year for really kind of the third straight year is execute our self-help strategy. I mean, this is, there's not a lot new. Like I said, some of the initiatives that continue to mature through the process, but it's that balance of gaining share, especially with independent healthcare and hospitality, drive gross profit expansion, faster than OpEx. And so that's what'll continue to drive the next two years. And, you know, we're highly confident that we can deliver against this long-range plan and for, you know, a number of years to come.
I do really think, Brian, people underappreciate the amount of self-help and the line of sight that we have to that over the long term.
Through the course of this year, we've talked about new initiatives that have come on. As we go into 2026 and 2027, you'll hear more new things through the course of time. It just speaks to the length of that runway that we've got.
Mm-hmm. Okay. Do you still see good, I guess not just on the sales side, but good labor availability? Hiring has sort of been, you know, status quo, no real issues on that side.
Yeah, no issues finding labor.
Yeah.
We're back to pre-COVID levels of turnover with drivers right on top of it, and selectors. So labor availability has not been a problem for the last year or so for us.
Okay. Got it. Maybe just on the tech side, what, I probably have to ask this, this is 2025, but what are sort of the best uses of AI in your, in your business today? Where are you seeing, you know, real benefit from that?
I think the last comment, as you made those last couple of words are important. That's the way we approach it. What are the real benefit things that we can deliver in the business? And it's really to aid growth and to help drive productivity, all while aiding and improving the customer experience. So I'll give you a few examples. On the growth side, in our last earnings call, we talked about that we put a new AI-powered search engine in place for MOXē, which is our digital platform. It's getting customers better search results, which is converting into more sales from those items that they've searched in the past. It also frees up time for sellers so that the sellers aren't answering those questions. The other piece that we're doing in that case is continuing to power our product recommendations, availability, inventory ordering, all with AI-powered engines.
Some of them from things we buy, some of them our internal team develops. And then productivity is using it against labor planning, against our order guide that we talked about, which is our proposal process for local sellers and taking something that used to take local sellers roughly three hours to do that now takes them about 20 minutes. And so we let the machine do where it can help, but the seller still has the final steps and ownership of that process. So we're really looking for those things that can deliver against true benefit in the near term as opposed to, you know, what can be the great idea in five to seven years.
One of the things that the internal development team is part of my group. We work together with our digital team, but we, you know, a key part of success for us has been getting the AI development team very close with the business teams. And the AI team, some of our job is to help the business team with things that they didn't even know they needed and was capable. And that really has been a big unlock over the last year to year and a half for us.
Yeah, and so it sounds like those are things you're seeing today, right? You're seeing actual time freed up for some of these people. You're seeing better search recommendations.
We are, and I think, you know, just like we, you know, we all know and see, is, you know, much of sort of the latest generation is what, a year, a year and a half old. So I'm sure the things that are coming to life over the next one to one and a half years will be more meaningfully advanced from there, and already just even what our teams can do, as far as stitching together different models that allow you to be more accurate, provide more effective outcomes, is light years ahead of where it was, not very long ago.
Yeah. Are there also things sort of from the corporate side that, you know, like from, from your seat, does it sort of speed up processes? Does it reduce the extent to which you have to hire people?
There are some pieces there. I'd say, you know, we're earlier in the stage there. There are some pieces within, again, some of the software tools we have that have some AI capabilities embedded. And that's one where similarly, I would expect that it'll have meaningful benefit as we go forward over the next couple of years.
Okay. How has warehouse automation gone? You know, the one facility on there.
I mean, we're excited about it. It just started up, in July in Aurora. We've got about 50% of our volume in the Chicago market going through that facility. We'll continue to ramp it up. Obviously, with any new technology, there's a learning curve, but we're excited about what that means for the company for two reasons going forward. First of all, there's obvious productivity and efficiency gains that we'll get from implying that, using that technology. But secondly is the customer experience. So you think about the selection process now, people in the night warehouse making product selections, palletizing product, putting it on trucks, fraught with errors, right? Human intervention. This takes a lot of that away. You think about product that doesn't get selected properly or put on the wrong pallet, delivered to the wrong customer. Those sort of errors go away with automation.
So not only will we see a productivity benefit, I think our customers are going to see a better quality and service experience as well.
Yeah. So you've seen essentially lower error rates.
Exactly.
So far. Is the reliability good? Is it, you know, what you'd expect?
Mm-hmm.
Okay. Maybe just a few, you know, kind of capital allocation questions. So, I mean, you know, leverage has come down. You're sort of within range. I mean, should we expect buybacks are kind of the main swing factor next year, more or less?
Sure. Well, we're quite pleased with where leverage is. I expect it'll likely drift a little bit lower, but more through earnings growth versus debt pay down. Because as you pointed out, our capital structure is strong. So really it's, and we're investing in the business at record levels. So we're definitely not starving the business there, at all. And so then you're right. It's, and that's one of the things we like about the combination of the tuck-in M&A and the share repurchases is with the tuck-in M&A, you never know when that phone call is going to, on the other end, result in, yes, we're willing to have a discussion and we're ready to sell or not. And, you know, if not, we'll continue to buy back our shares.
And, you know, we still believe, compared to where our stock should be and will be in the next few years, that it's a good use of cash. And also, you know, within, we're only, you know, a couple of years, almost three years into our capital return policy that, you know, another year of that will be a good use of our cash.
And how would you characterize the M&A environment right now, aside from big M&A, which we know like for smaller things?
No, I think it's robust. And I think, importantly it is in our sweet spot, which is those tuck-ins, hence the, you know, the Chautauqua's announcement we made on our earnings call, the one in Las Vegas. That's our fifth in the last two and a half years. Importantly, given the fragmented nature of the industry, you know, we're kind of fishing where the fish are. And I think importantly that local market density that I spoke about earlier, is really the targeted play that we have with the tuck-ins. So I think we've got a long runway of doing those in the right deals that make sense for us.
Like that, using that as an example, I mean, you're already in that market, right? So is this, you know, sort of adding certain customer exposure? You're running out of space with your existing facility?
It wasn't a facility play. This was a marketplace. So you think about what we do in Vegas. It's equally split between independents and we have a relatively high share in the casino business in that market. And that's where Chitakis played. So it was the right overlay for us in that market. Made total sense. Now, others that we've done have been more capacity play. We're always thinking about whether we expand or put steel in the ground versus, you know, an acquisition target. So it could be either. It just happened to be this was more of a market play for us in Vegas.
Okay. Got it. And other sort of like CapEx buckets, is there any sort of step changes you see, whether it's tech, new capacity, fleet, you know, over the next couple of years, anything you'd call out?
No, I would say, so fleet stays pretty steady. We target an age plus growth, of the fleet. So, you know, we spend on that. Same with a lot of the aspects of maintenance, whether it be buildings and/or, technology. Buildings and tech can have it flow a little depending on where different projects are, throughout their life cycle, within that particular year. But overall, I think we'll stay at a similar to where we have been as far as the split of how we spend it. In most years, it tends to be pretty distributed of, roughly 1/3 , 1/3 , 1/3 of fleet, buildings, and technology.
Okay. Got it. I have a couple sort of like bigger picture things. I mean, if I think like over the next five years, you know, is there anything you see as more of a structural change in your industry or any like bigger trends that you're watching specifically?
I think technology.
Not just tech. Sort of, you know, if I think about, you know, food distribution, where your customers are going, you know, anything you think will be a bigger structural change?
Nothing that I would call out, Brian.
What, do any of your customers ask about sort of adapting to GLP-1s? Or like, how can you help? You know, hey, we want like max protein on our menu. Anything, has that occurred at all?
We have those conversations with customers. I think importantly for us, you know, the high quality fresh product is a third of everything that we sell today. So we're well positioned for any shifts in culinary desires driven by GLP-1. We really haven't seen a, you know, a negative volume impact. I think, you know, all the data says people still go out to eat. Yeah. They may take some of that home with them, but they're still going out for that meal and that dining experience with friends or family. Yeah, that'll continue.
And that's one of the places our chefs and our menu design team will work with customers regularly on helping them, whether it's profitize on a menu, whether it's, you know, how to add new dishes, or if you have certain proteins that are inflationary and other deflationary, how you do, you know, menu swap outs. And this is just another flavor of how they would do that.
Have you had to help customers adapt to tariffs on certain products? Or is that something you've had your salespeople work on?
I think importantly for us, tariffs is a relatively minor impact. We import, you know, mid-single digit kind of volume. But importantly, it lends itself to things like our private label, right? To the extent there are, we can think of tariffs as just another inflationary impact on our customers, which really plays into our business model and what we do to help our customers every day get more efficient, save time in their kitchens, take these great quality products in there and save them money.
Yeah. Okay. Is there any changes in sort of the competitive environment that you've noted lately or think will happen in the near term?
Haven't really seen anything. We get asked that question a lot. I think at the heart of it is it's such a fragmented industry, Brian, that it's very competitive all the time and things may ebb and flow in a certain market from time to time, but there, you know, you step back, big picture, I don't see the competitive dynamic shifting.
Yeah. Right. It's more market by market.
It is.
Okay. I was going to finish with my lightning round questions. I think we've sort of covered these, but just to have it officially in the right. So, demand outlook relative to recent trends, how do you expect consumer demand over the next 12 months: accelerate, stable, decelerate?
I think stable to accelerate, and I think, as I said earlier, you know, consumer confidence, interest rates, key unlock to that. I think going forward, and we'll see what happens, but I'm bullish.
Okay. Cool. And on the margin side over the next 12 months, would you expect margins to face more tailwinds, more headwinds, balance of the two?
I'd say for us, it'll be more tailwinds, but really driven by our self-help, more of the same of what you've seen the last few years. Again, as Dave mentioned earlier, we think the competitive environment stays pretty neutral. So that, that probably is really all our own self-help continuing to come to fruition.
Okay, and on capital allocation, you kind of covered your priorities, but any of those buckets moving up or down in importance as we go into the next year?
No, all are important. We're going to continue to invest, across all three. And as I mentioned earlier, we're investing in record levels of CapEx for maintenance and growth of the business. And we think it's very good use of our cash.
Okay. And two sub-questions. CapEx for technology, increase, stable, decrease?
Stable to increase.
Okay. And how, and lastly, focus on portfolio optimization, you know, acquisitions or footprint rationalization, increase, stable, decrease?
Stable.
Okay. I think that does it then. We'll leave it there. Thank you guys.
Thank you, Brian.
Thank you, Brian.