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's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. Adam Dabrowski, Director of Investor Relations, you may begin your conference.
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, 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 the 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.
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 Kohler, 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 local driver of the year 4 x. 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.
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 on page four. 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 gonna 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.
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. Turning to page five, I'll walk through 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, 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 omni-channel capabilities for profitable growth via 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 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 new store 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 omni-channel options, as well as other sales growth initiatives. Moving to the margin optimization pillar, we implemented a number of initiatives to improve a 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. 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 will 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. I'd like to hand it over to Dirk to go over our financial performance in more detail.
Thanks, Andrew, good morning, everyone. Let's turn to page eight. We are extremely pleased with what we accomplished during the fourth quarter and in fiscal 2022 and how that is translating into our financial results. In the fourth quarter, Adjusted EBITDA grew 34% from the prior year to $350 million. In addition to 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 from the fourth quarter through the fourth quarter, which we're quite 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. This is an increase of 15% 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 we are excited about what we can achieve in 2023. Let's look at volume on page nine. 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 6% lower 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. 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 other customer types 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 x the market for restaurants and 1 x for all other. 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, the decline was related primarily 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 third quarter 2022. Our net leverage ratio was 3.5 x 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 0.2 reduction from Q3 of this year. During the fourth quarter, we prepaid an additional $200 million of term loan, which means in fiscal 2022, we reduced net debt by approximately $220 million. Leverage reduction remains a focus area of our capital allocation strategy. I am happy with the progress we've made this past year to further 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 x the market for restaurants and grow at market for the remaining customer types. We also expect to deliver $1.45 billion-$1.51 billion of Adjusted EBITDA and $2.45-$2.65 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 3x leverage by year-end, inclusive of any share repurchases. In summary, US Foods made very strong progress against our long-range plan during 2022 in terms of advancing capabilities, achieving record Adjusted EBITDA, and strengthening our capital structure and capital allocation.
Every one of us at US Foods is squarely focused on building on the momentum we created in 2022. Our progress to date is in large part, 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 creation for our shareholders. With that, I'll pass it back to Dave for his closing remarks.
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.
To ask a question, please press star one. Please limit yourself to one question and one follow-up. The first question is from John Heinbockel of Guggenheim Securities. Please go ahead. Your line is open.
Let me start, guys, with maybe a more strategic question. I think the independent case growth this quarter was the best since 2018, right? If I think about that, maybe address capacity. Capacity in the warehouses, how, you know, how much, you know, you're running up against capacity in certain places, capacity with the sales force, right? I think, you know, is there a need to invest in either one, right, to grow at the rate that you, that you want to grow at the next couple of years?
Good morning, John, this is Dirk. I'll start and then Andrew may add in. I think, just to start with, your question on the capacity, you know, one of the things and a reason our focus is on independence, healthcare, 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 our warehouse.
Yep.
From that perspective, we don't see any issues there. Now, you know, that's part of, with other customer types, why we continue to opportunistically grow. We wanna make sure that we're putting the right customers in our warehouses. 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, again, we're gonna be really smart with that capital. I think, as far as sales, we have continued and will continue to add sellers. Andrew, do you wanna?
Yeah, a couple of things on that, John, on the sales front. We absolutely plan to continue to expand our sales force. They are an incredibly important part of the relationship with the customer. We will really be focusing on areas of particularly strong growth as opportunities to perhaps even double down on that expansion. I should also mention, you know, one of the things that we've been very happy with was the way in which we've been able to leverage team-based selling, and the specialists, the ROCs, the Food Fanatic Chefs that are present in every market have been an important part of our growth trajectory, and we will continue to both leverage those and expand those as appropriate.
Yeah, 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 Fanatics 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.
Maybe as a follow-up for Dirk, right? I know you talked about the 1.5 x the market, but maybe some color on when you think about top line, you know, maybe, you know, more granularly, right? You know, 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, you know, sort of some color trying to bridge the top line to the EBITDA guide.
Sure. We think that So you have the wrap of inflation, but I think we expect more continued growth to come from case volume, and we expect pretty healthy case volume across our target customer types and then again, opportunistically from some of the other types. We think as Andrew touched upon, the momentum we have coming out of 2022, we think sets us up really well for good growth with the right customer types and continuing to gain share as we did last year. We feel good about that. I think from an inflation perspective, as you saw this quarter, sort of on a year-over-year, it continued to work its way down. In the fourth quarter, we actually saw some sequential deflation. We're seeing center of the plate have some deflation.
Grocery is still showing some modest inflation sequentially quarter-to-quarter, and that's remaining quite sticky. I think that's, you know, we're not counting on a lot of inflation over the course of next year. Really, you know, I'll kind of come back to what I've talked a lot about this past year is we're really focusing on what we can control, which is the taking share and really the other initiatives that are driving our overall top line in the right customers.
Okay, thank you.
John.
Your next question is from Jeffrey Bernstein of Barclays. Please go ahead. Your line is open.
Great. Thank you very much. Congrats to Dave, on the new position. Andrew, great job during the transition.
Thanks a lot.
Thanks, Jeff.
Sure. I had one question and one follow-up. The question, Dave, I guess is on the market share gain opportunity. You know, we hear a lot about opportunities to further penetrate existing accounts, adding new accounts, and as you mentioned, maybe further tuck-in M&A. I'm 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? I had one follow-up.
Sure. I, you know, I would just highlight that, you know, the team sequentially through the back half of last year continued to gain market share. As we said in our prepared remarks, we have really good momentum. Our team is focused in, particularly in those three customer segments that we spoke about. You know, the independent restaurants, hospitality and healthcare. I've seen laser focus as I've visited in the field. Really good momentum. I think we have, and I would just highlight that's profitable, volume growth. I think we have the right focus in those segments. I think there's tremendous opportunity for organic case growth.
To your question around M&A, you know, this is still a very highly fragmented industry. We will, through the course of time, look opportunistically for tuck-ins that will either, you know, give us a continued advantage in certain geographies or perhaps add a product or something to our portfolio. We'll be opportunistic about that going forward. I'm incredibly excited about our ability to continue to grow organically.
Understood. 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, you know, where they could go to healthy levels versus what would you say is just unrealistic? Just trying to get a gauge just 'cause it's been such a popular topic of conversation over the past number of years. Thank you.
Yeah, I appreciate the question. You know, these are early days for me. You know, I'm six weeks in. I've got a good sense of the focus that we have. I think it's in the right areas. I'll tell you, 100%, our team is focused on this and focused on accelerating the results in our business. You know, there's a lot of differences between us and our competitors in terms of, you know, the P&L and how that's constructed and all that. 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. 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's laser focused on it. I would expect continued expansion of profitability through the course of time.
Great. Thank you.
Thank you.
Your next question is from Mark Carden of UBS. Please go ahead, your line is open.
Good morning. Thanks a lot for taking my questions. And Dave, congrats on your new position.
Thanks so much.
To start, and I know it's still early, but joining onto US Foods, it's an organization that's structured in a bit of a more centralized fashion relative to Performance. I'd love to get your take on some of the opportunities and challenges you see with building and implementing strategies, just given this difference in backdrop.
Yeah. I mean, you're right to point that out and the difference. But, you know, 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. 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 gonna continue to build on that.
That's great. 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 or service some Omicron noise. In terms of the consistency, did you see bumps in some months relative to others? Your overall take there would be great.
Yeah. Thanks for the question, Mark. It's Andrew. You know, I think we were pretty much in line with what we expected. The quarter played out pretty much exactly as we had anticipated, with, you know, continuing momentum, particularly in independent restaurants. We saw a little bit of bumpiness in terms of the way the holidays fell this past year. Other than that, I wouldn't say there was anything there that was of any concern. Indeed, you know, we've continued to see really strong momentum coming into the new year, where we're at or slightly above our forecast in January. Really feel good about, you know, the stability of that.
We've been paying very close attention, obviously, to the case, lines just to, you know, look for signs of softness. So far we've really not seen that.
Great. Thanks so much. Good luck, guys.
Thank you, Mark.
Your next question is from Alex Slagle of Jefferies. Please go ahead. Your line is open.
Hey, thanks. Welcome, Dave, and congrats, Andrew and Dirk and team for all the success in recent quarters, moving things forward.
Thanks so much.
I guess wanted to ask about CHEF'STORE and, you know, you added 6 new locations in 2022 and accelerating it in 2023, and just wondered if you could offer some additional perspective on how that's performing. Just kinda curious what the same store sales look like relative to 2019 and if you're still seeing the synergistic customer gains, you know, as it rolls out to additional markets and, you know, allowing you to really leverage the power of combining those two channels and where you see that heading over the future?
Yeah. We. 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. The 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.
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 status as we look to, you know, roll those out more quickly across the business. Generally, I think we're feeling, you know, quite good about delivering, the synergies that we had planned to, and also feeling good about, you know, the continued rollout as we talked about this year, trying to accelerate from six last year to eight or even more this year.
Thanks. Just wanted to follow up on the inbound freight income that's been a really nice tailwind in recent quarters and just all the work you've done optimizing the vendor allowances and carriers. Kinda curious how much this benefited the fourth quarter and kinda, you know, relative to what you've seen in previous quarters and, you know, to the degree you think there's still room here to go and or if most of the low-hanging fruits maybe have been picked at this point.
Sure. Good morning. This is Dirk. Benefit in Q4 was pretty similar to what we saw in Q3. Not a whole lot different than I would call out. I think that the one thing, in addition to just strong vendor collaboration, that team has done a really nice job is staying very close to the market and making sure that as, you know, market rates are going up and down, that we're adjusting our sort of third party costs, being active at that, they're ahead of or in line with. The team continues to do that this year. I would expect that, you know, a lot of the bigger gain is there, and it's already embedded in our P&L.
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 arranging there. A lot of the benefit there, but still some opportunity ahead and expect a lot of those gains to be pretty durable.
Great. Thank you.
Thanks.
Your next question is from John Ivankoe of J.P. Morgan. Please go ahead. Your line is open.
Hi. Thank you very much. You know, comments made, you know, just about, you know, 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. I was wondering if we could just get a little bit more insight, you know, whether it's at the warehouse level or the driver level, your SKU assortment, whatever that may be. I mean, what, you know, major buckets, you know, that you see, Dave, you know, as you come into the company of.
Sure
Of opportunities of making it a more efficient business? Thanks.
Yeah, absolutely, John. I appreciate that. Look, as you've heard on the call, we made a lot of progress in supply chain, but as I highlighted in my comments, I see that as a huge opportunity to continue to drive efficiency and productivity for the company. You know, as I think about excellence in supply chain, we need to have predictable on-time performance at the lowest possible cost, and that's clearly what the company's aimed at driving. We owe that to ourselves, we owe it to our customers, and we certainly owe it to our shareholders to be as efficient as we possibly can be. As I think about the work that's going on, I guess I would put it in four kind of key buckets. You've heard a lot about most of that this morning.
This, this pilot that we've had in the southeast, the seven-day delivery and flexible scheduling has tremendous potential to help us continue to drive efficiency and reduce turnover across the company. You know, in fact, I'll just give you one little anecdotal story. You know, when I was visiting that market, I had the opportunity to have some not town halls, but little round tables with drivers and selectors. In the selector roundtable I had, you know, I just started asking them what they thought about the flex scheduling that we had. I had an 11-year warehouse veteran that had been working days who opted to take a weekend schedule. I said, "Well, why would you do that?
You know, you're one of the more senior folks in the warehouse." He said, "Look, my wife has a catering business. She needs help during the week, and this gives me the chance to lean in and help her and do what we need to do and balance my career and helping my wife out on the personal front." I think we are scratching the surface of something here that will also help our employees and associates as well as drive efficiency for the company. The second one, and we've talked about it here, is inbound logistics. We still have a lot of opportunity in that area. Great momentum, strong focus in the company. There's really two others, I think, in supply chain that will pay dividends long term. One is process optimization.
You know, standardizing our approach, being consistent across the company in how we think about anything from onboarding to training warehouse associates, you know, and how we do our work through the course of the evening. The final one I'll point to is some future opportunities in supply chain, not the least of which is, and you've heard about this, the routing software going to a leading platform that we'll execute throughout the course of this year will also pay some long-term benefits. I think there's some near-term things. There's certainly some long-term opportunities for the company. I'm excited about the momentum, but tremendous upside here on supply.
Thank you.
Sure. Thank you.
Your next question is from Kelly Bania of BMO Capital Markets. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking our questions.
Good morning.
Good morning. Just want to go back to the guidance and the outlook for the year. Appreciate the color on the expected growth relative to the market. I guess 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 healthcare, 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?
Sure. Hi, Kelly. This is Dirk. I think, you know, when we think about the guidance for the year, similar to last year, you know, we always will look internally how we compare to the market. Just since there still is some macro uncertainty out there, that's really why we focused on this growth relative to the market. I think when we focus on, you know, the external data that our third party is calling for, it's low single digits of growth than we would expect to be, sort of again, above that. I think what you should expect to see is that stronger case growth come from the good momentum we've built in our target customer types, then just remembering that we continue to have tailwinds in the healthcare and hospitality space.
That's not exactly an answer, but that's really where we expect to see continued growth. I think the to your second part about the second half, yes, we did embed some sort of modest or mild slowdown. You know, think of it as, you know, in past recessions, you know, you're talking about, you know, call it a few point reduction in sort of overall growth rates. We looked at a few ranges and how we thought about that. It's very modest out there, and I think the important part is we have the team internally focusing on what we can control, and that's the part that if the environment stays stable, we are focusing on delivering sort of the high end of that range.
Yeah, just to piggyback on that, I think, Dirk has said this a couple times, we are 100% focused on the things that we can control. 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.
Thank you. Maybe just to follow up, and I may have missed this, but are you able to share any figures or metrics on where you are in terms of staffing, turnover, overtime? Any figures you can share with us to kind of measure that progress? Maybe just broadly, when you expect that to get back to normalized levels?
Sure. Kelly, this is Dirk again. From a staffing perspective, we've been sort of largely staffed for, you know, a number of quarters, so that really isn't the challenge. There's always gonna be a market or two here and there where you have, sort of a staffing challenge, but we've been in good shape there. If I compare, although we haven't shared specific numbers, when we think about sort of delivery driver turnover, that is, you know, sort of, you know, call it about 1.5 x to where it was, sort of in 2019 at its worst, and we've gotten much closer, as Andrew said, now to 2019, so significant progress there. On the warehouse, we were at almost 2x, and we've closed, you know, almost half of that gap. Good progress.
We continue to make progress there, and I think some of the things that you've heard Dave and Andrew talk about, you know, give us continued confidence that we'll get there. I think that the part that, you know, we can't control as much is the macro still remains a relatively tight labor environment. I use flexible spending that Dave talked about, we think is a key unlock, where it's a help for our associates and a help for the business, and those are the things we love, when it really either helps both the customer and the business or the associate and the business.
Thank you.
Your next question is from Brian Harbour of Morgan Stanley. Please go ahead, your line is open.
Thank you. Good morning, guys, and welcome, Dave.
Brian.
Maybe just to ask on, you know, you called out kind of the drag from exiting some customers, and I know that that's always a constant process. Do you think that you're kind of past most of the drag from that, or do you think there's still more work to do just on kind of the customer optimization side?
Good morning, Brian. This is Dirk. We've said that we expect to lap, sort of the remaining exits in Q1. With that said, I think that the thing that we've been pretty consistent is we're gonna continue to sort of have good hygiene. In any business, you would want us to be continuing to look at our base. What I wouldn't expect is any significant, sort of cleansing, et cetera, as opposed to it's really about continuing to make sure we're growing and focused on the right customers. Hopefully, what you see is by us doing that's showing up in our gross profit, it's showing up in our market share, and it's clearly showing up in our results.
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 rate as what you did in 2022, and is that kind of factored into the interest expense outlook?
We do expect to continue to pay down debt. We haven't been specific, we would expect to continue to pay down debt and also opportunistically repurchase shares. You know, those will be depending on the market conditions. 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. Yes, we've contemplated a level of that in our EPS outlook.
Okay, thank you.
Your next question is from Edward Kelly of Wells Fargo. Please go ahead, your line is open.
Hi, guys. Good morning. Dave, welcome.
Thanks.
Uh-
Thanks, Ed.
First question is really for you, Dave. I mean, obviously you support the plan that, you know, has been in place here, and that's, you know, that's very good to hear. As an outsider, you know, with your own sort of perspective, there's probably also things that, you know, you see as additional opportunity. I think you alluded to that when you said, you know, about accelerating the execution of the plan. Could you just maybe talk a bit more about, you know, what you mean by that? How does that, does that sort of roll into, you know, the goal that the company's had about, you know, the $1.7 billion in EBITDA in 2024?
Yeah. Well, let me take the second part of that question first, Ed, and then I'll come back to the first part. You know, I haven't said anything about the 2024 target, but that's purely an issue of process and timing for me. You know, 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 know, you've heard about my confidence in the momentum in the company. Back to your first part of your question. You know, for me, you know, I like to work with teams to 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, it's really focus on the critical few and get them done and do them well and then move on to the next pieces of it. That's purely what I meant. You know, 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.
Okay. Dirk, just a follow-up for you. You know, your guidance implies gross profit per case improving in 2023 versus 2024. You also mentioned, you know, sequentially a little bit of deflation. I think there's been, you know, questions amongst investors about, you know, things like procurement gains and lapping those. You know, I think this is an important issue as we're seeing disinflation. 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?
Sure. Good morning, Ed. We do feel good about gross profit per case, continuing to improve in 2023 above 2022. 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 in really making sure that we're passing those through and reflecting even with customers the way we've optimized some pricing, reflecting the higher cost operating environment that we're operating in. We expect it to be pretty durable. Yes, early in the year, we'll have some portions of 1-time kind of procurement gains that we'll be lapping.
You know, 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'll be good, durable gross profit as we look ahead.
Great. Thanks, guys.
Thanks, Ed.
Thanks, Ed.
Your next question is from Lauren Silberman of Credit Suisse. Please go ahead. Your line is open.
Thank you very much, and I also echo my congrats, Dave. 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?
Yeah, you're right, Lauren. It'd 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 require 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 will continue on the plan that we've had. Then, you know, I'll be assessing here over the next few months what I think it's gonna take beyond 2023, into 2024 and beyond.
Thank you for that. Just on near term, are you guys willing to provide any additional color on what you're seeing quarter to date? I know broadly the industry is seeing some improvement. Some of it's Omicron. Just trying to understand the underlying trends. Thank you.
Sure. Good morning, Lauren. This is Dirk. Overall, Andrew commented and I commented on in the prepared comments that, you know, we've seen demand, kinda 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. Really not a whole lot to share beyond that other than sort of it builds on our optimism as we continue to enter the year and what we expect to deliver through the year.
Thank you. Congrats.
Thank you.
Thanks, Lauren.
Your next question is from Jake Bartlett of Truist Securities. Please go ahead. Your line is open.
Great. Thanks for taking the question. you know, mine was a follow-up on the 2023 guidance. it was maintained for EBITDA and EPS, but you did have a you know, hit the higher end on 2022. You're talking about accelerating momentum. I'm wondering whether there's some offset. You know, it seems like you started at a better spot. Are you kind of building in more macro pressure? Just trying to understand maybe, you know, how conservative that 2023 guidance might be.
Sure. Good morning, Jake. It's Dirk. You know, I think when you think of we're very pleased with the way 2022 ended, again, a little bit above our guidance, which we're pleased with and shows the good momentum in the business. I think when you pivot that to 2023, I think in the order of magnitude, just knowing the macro uncertainty out there, what we've tried to do is really reflect a range that illustrates sort of more strength with a continued macro recovery potentially. Still very good progress, but not quite as quick if the economy slows down. I think the message you should take out of there is very good momentum. We feel good about where we're entering in.
You know, as the year plays out and we see how sort of things play out, we'll continue to update as you would expect us to do.
Great. I had a question about the really the drivers of the independent case growth that you're putting up. We've heard, you know, from others that it's really been driven by new accounts, whereas traffic, you know, and individual accounts might be down just because of the high pricing that for instance, restaurants are having to take. Is that the case with US Foods that the incoming case growth is really being, you know, exclusively driven by new account growth? You know, if that is the case, I'm wondering about, you know, about the ability to kind of build on that new account growth. It seems like the larger players are all kind of accomplishing that.
My expectation was that the market would get a little more difficult to, you know, penetrate new accounts as supply chains eased. Other kind of smaller competitors were able to service those accounts better. Maybe just a, you know, firstly, the answer of what is driving the case growth, and second, just the competitive dynamics and whether, you know, you think that the larger players are still really in the kind of the catbird seat here.
Yeah. Thanks, Jake. It's Andrew. I think as we talked about last quarter as well, we're very pleased with the balance in our IND growth. We're seeing a good mix of driving new account acquisitions as well as focusing on penetrating those new accounts. That's really been part of a sort of a systematic approach we've been taking at a market level to focus, concentrate on the menu types that are seeing the greatest growth, to target those in a very focused way. Then once onboarded, we spend a great deal of energy looking for opportunities to expand our share of wallet with those customers. Both are important and both, I would say, will continue.
As far as what we're seeing, within our customers, themselves, as I mentioned in my remarks, you know, we are seeing, good recovery, in those, in those, customers and for the most part. That's something that, again, we pay very close attention to because it typically will be a, an early sign of a potential looming slowdown. As I said, previously, we really have not seen any sign of that at this point.
I'll just say, you know, the other thing I'm excited about is our Exclusive Brands. We've been able to penetrate the independent portion of that, north of 50%. I'm excited about our continued momentum there and the team's focus on, you know, accelerating that brand penetration. Our customers love it. They're really good, and it makes sense for them as well as the company.
Great. I appreciate it.
Your next question is from Peter Saleh of BTIG. Please go ahead, your line is open.
Great. Thanks for taking the question. I want to echo the 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? 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?
Yeah. Pete, thanks for the question. It's Andrew. you know, we've actually learned a couple different things from the pilot, which actually had both elements to it, seven-day delivery and a flexible scheduling. What we've learned along the way is the flexible scheduling is something we can do quite quickly, pretty much everywhere, that it will be a benefit. In other words, you don't need to go to 7 days in order to be able to get a large measure of the benefits from a flexible scheduling. Just given that, you know, choice that it gives our selectors and the impact that has on their willingness to stay with us.
Seven-day delivery takes a little more work to shift deliveries onto the weekend. That has played out in a very promising way in the pilot market, we are looking to see that replicated in the two additional markets that we're testing as we speak. Depending on how that plays out, you know, we will look to do that in markets where that will deliver meaningful benefit, particularly ones where, you know, capacity might be a little more constrained because those extra two days that it gives those markets takes a great deal of pressure off their ability to serve customers. Both are being looked at in combination or separately as the case may be.
We see that, a real opportunity this year to roll out the flex scheduling portion to a significant number of our markets and likely be more selective with seven-day delivery, elsewhere.
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 costs and increases your productivity. We've seen, again, the positive employee relations, positive employee feedback, and also improved safety results. All those things are sort of good reasons to do it 'cause they help the associate and they benefit the company.
Great. Thanks. Just lastly, Dave, any other low-hanging fruit, that you see, that you're focused on for 2023, strategically?
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, you know, there might be an opportunity here to help with that focus and accelerate results. Outside of that, you know, I'll have more to say through the course of time if I see other opportunities.
Great. Thank you very much.
Thank you.
Your next question is from Andrew Wolf of C.L. King. Please go ahead. Your line is open.
Hi. Good morning and welcome, Dave.
Good morning.
Question for you on strategic acquisitions. You know, I think the company has kind of been in a timeout period, both during the CEO transition phase and, you know, launching a, you know, plan into 2024. You know, historically, one of the highlights of this industry is, you know, creating value through acquisitions for shareholders. Just could you give us a sense sort of where you stand on that? Is that something, you know, either in your interview conversations with the board or just how you feel about it, where the company could eventually or is likely to eventually get back to acquisitions, or is it just straight ahead with the plan through 2024?
Look, I think we have the right capital allocation plan. In an 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 gonna do M&A for M&A's sake. There's gonna be value that we need to create, either in geographies or portfolio reasons for that. As you know, I mean, this is still a highly fragmented industry with the Big Three, you know, maybe having 35% of the market. Still highly fragmented, still opportunities for growth through inorganic acquisitions. We'll be opportunistic on that and do the things that make sense where we've got the right valuation.
Okay. Thank you for that.
Sure.
I wanted to ask you about the sales force acceleration. Is there any way you can quantify, like, either the rate of additions or anything like that? Also where you would be sourcing them from. Are they from other, you know, foodservice distribution competitors, and they're kind of bringing a book of business, or is it folks outside the industry who are either good at sales or chefs who wanna do this type of work or. Little color on that would be great.
Thanks for the question, 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. You know, we will be, as I say, you know, doubling down in markets with particular growth opportunities in doing so. So we are still very much in hiring mode, and we'll continue to be so. In terms of where talent's 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.
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, 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.
I think, Andrew, it's just, it's an important thing to remember. As Andrew said earlier, we've been the ads have been and will continue to be sort of outsized in those markets with more growth opportunities. Headcount and adding seller hasn't been and will not be an inhibitor to our growth. We are continuing to do that where there's the need.
Great. Thanks for that color. Appreciate it.
We have completed the allotted time for questions. I will now turn the call over to Dave Flitman for closing remarks.
Thank you all for joining us today. I'm incredibly excited to be here and the momentum that the company has. Appreciate your time. We'll talk to you all soon. Take care.
This concludes today's conference call. Thank you for your participation. You may now disconnect.