Thank you. We're going to kick off with US Foods. very happy to have them in person this year. We actually were restricted at at this time last year, which we'll probably get into the reasons why in just a few minutes. We have Dirk Locascio, who's the company's Chief Financial Officer and someone that I've worked with since the company's IPO some years ago. I want to ask Dirk as as CFO and and previously active in the finance function before that over the past 14 years or so. Just to talk about the US Foods of 2023, maybe the US Foods of 2019.
Just in terms of, like, how. , it's really a it's a personal question, but also one T hat has professional application is how you see the company evolving, changing maybe some softer comments around just energy, attitude excitement, worry, whatever you, whatever the case may be in terms of the evolution that you've seen as actually a quite tenured executive at this point.
Well, first of all, thanks, John, for having us here, and it's good to be back, and as you said, back in person. It's good to do these things back here. Yes, as I reflect back on the last number of years, it really has been quite the set of experiences. When I think back from even where we were before going public to the 2019, early 2020 to now, a lot of change, a number of challenges. W e've definitely come out the other side a stronger company than we were prior.
A few things, just one when I think back even to, right before the the COVID timeframe in 2019, when from a capabilities perspective, ultimately, we have continued to advance our capabilities, some of that was on our roadmap, some of that COVID forced us to make sure we were agile and the teams were working together more effectively. Couple of specific things, this really helped us to manage our way pretty effectively through what was a challenging few years, we look forward to had a good solid year in 2022 and really look forward to building on in 2023 and beyond. A couple of things that I would really point out. One is just the teams working together.
We've never really had a siloed approach in the organization, but the level of collaboration when I reflect on these last three years is even very different than it was before. A couple of examples and that I've used before, but one of them is as we were heading into COVID and volume dropped off so quickly and our sales and our collections or credit team had to work extremely closely together. When you think of north of $1 billion in receivables and not sure what was going to happen with customers, our teams worked incredibly well together. I'm extremely proud of those teams, and our losses were very, very insignificant.
Not only was it the financial outcome, that some process redesign and the collaboration between those teams helped us to get through there. Even today, all of our receivable metrics remain stronger than they were pre-COVID. That is because those teams are working closer than they ever had before. I'd say the second key one is our commercial, our sales teams, and our operations teams. As we've acknowledged historically, our operations team didn't have as strong of a seat at the table as it probably should have, much more sales-driven. That was really a combination of sort of 2020, 2021 that we knew that needed to change. Secondarily, COVID also helped necessitate that change and effect that change with the teams working together well.
The company has much more of a focus on a balance of sales and operations. A s we brought in some good new talent the last three years, we're well positioned. N othing illustrates that better than the routing initiative we've talked a lot about, where when you're going to change customers deliveries and routes, et cetera, the supply chain team can't be effective without having the sales team working side by side. That level of collaboration and partnership is very different, and I believe that is going to continue to be a bigger and bigger unlock as we look ahead.
You actually saw, and this is not forward-looking, I'm not even alluding to that, but, you actually saw an acceleration in your local case growth in the fourth quarter of 2022, relative to the third quarter and relative to the second and first. That was not the, at least the restaurant industry that I cover. That wasn't typical. That was a trend against the industry in a very positive way. D id some of those changes that you were discussing allowed that acceleration? Well, firstly, correct me if you view the numbers differently, please correct me, on stage.
Talk about that acceleration that we saw in the local case volumes, 2022 versus 2019 and and what initiatives that you did that drove that and whether there is legs in that, if you will, of outperformance as we go into 2023.
Sure. You're exactly right. We did see acceleration, and we're pleased with the way we exited the year and the momentum that we enter 2023 with. I t's a few things. One is just we've had the benefit of really bringing the value proposition we bring to customer, whether it be the technology and the replatform and really stepping up significantly the performance and enhancing our leadership in the industry using our MOXē digital platform. It's the team-based selling and some of the value proposition that comes from there. Some of the other tools and resources that we offer operators to help them, whether it was at the beginning of COVID, manage through the PPP process and then over the course of last year through inflation.
All that came together, and those were all enablers of as we got better and better at that, really accelerating our growth. The other key thing that you heard Dave Flitman and Andrew talk about on our last call was using the data that we get from third party, more ingrained in our business, our process. Just a few years ago, our industry really had none of that. We had one third party number that was. It was a big number, and there really wasn't anything actionable underneath it. As that data's become available, our combination of my team, our commercial team, has really worked with our IT team.
We've made it very visible to our sales leaders to our sellers of what it tells us, where we're winning, where we're losing, where the biggest share opportunities are in different markets, and made it easy from a tool and training perspective. That's really allowed our sellers to feel like it's not being done to them versus it's a tool to help them win.
Can I ask a little bit more? Is that things like NATRAC and Black Box? I mean, is it NPD data? Just like, what exactly like exist that you can use today that you couldn't use three or four years ago?
It is NPD data.
Okay.
Technomic was the historical that we all which is a helpful benchmark, but that's really the benchmark.
Okay. Okay. All right. Perfect.
Yeah. That's it's been a real enabler for us. It's not just the data. As you can imagine, anything like that that has immense amount of data can be overwhelming.
Yes.
It's really the collaboration of making it easy to use and understandable and actionable that's been the unlock.
That's interesting. It probably shows, your opportunities maybe in certain category growth, say, "Hey, listen, our," I'm just going to make this up. "Your Mexican business is flat, but the Mexican category is growing five or whatever." You can just know how to allocate maybe some... Am I getting that right? Y ou need some time and resources in specific categories. Are you also using it in terms of going to the sales force, say, "Okay, listen, you're doing a great job. We're going to give you more," but also managing out maybe some people that aren't participating with some with some category growth?
It's all of the above.
Is it helping you as well in terms of a more efficient company?
It is. It's really all of the above. Historically, because our industry didn't have that, it would be if you were growing at 5% and I was growing at 4%, we'd say, "Well, John, you're performing better than I am." If you're in Austin and I'm in Detroit or Illinois of course, you better be growing faster because your market's growing a lot faster. That's a way now to really calibrate.
It's, it's even funny that you would say that. I mean, yeah.
Yeah. I mean,
Like, your population is growing, mine's shrinking.
Yeah. It's absolutely a help. T hat, then what we've done is use that to understand, you're right, if in your market if, in fact, you're within your zip code, if bar and grill is your biggest case opportunity, how do we make sure that we're sorted properly?
Right.
Let's understand what categories we're winning or losing. It really is quite actionable and quite granular.
Okay.
We have more opportunity to continue to use it more effectively, but very good work done to date.
That is very sales-focused. I was like, listen, I'll probably touch on this a couple different times. Sachem Head , your activist investor in people, it's US Foods needs more of a supply chain background. For whatever reason that was the seat that had the most turnover within US Foods. Y ou just admitted that operations wasn't treated as the same, maybe equal partner sales was pre-COVID. S o talk about in the back-end operations, probably a lot less sexy and interesting to talk about on stage. W hat are those supply chain opportunities to maybe go with what you just described as a sales customer-facing opportunity?
Sure, that, you're right. It's not the sexy, but it's the things as a distribution company, you need to do extremely well. Typically, when you do those operational things well, and it's collaborative with the sales team, it usually results in a better customer experience, which then is going to have a better impact on your sales. Maybe a couple of things, very specifically, if about even using some of this zip code data it helps us with. Because we think about density, that helps the supply chain. If you already have trucks going to certain areas and you're growing.
The best thing, the way to grow is if you have existing customers buying more. The second best is when you have sort of things that can ride along the same route. That's a great way that the teams have worked together more. I'd say the routing initiative that we've talked a lot about, same thing. Another one where it's been teams working together, and it's by taking miles out of the system, customers typically get increased on-time delivery.
It's allowed us to be more effective from a sales perspective. It's really that equal voice and that push and pull back and forth that's been very helpful. Even when of some changes that we made a couple of years ago and that I talked about around our operating model and some of the pieces around having these small teams of some experts that do two things. They do standardization of process and taking best practices, they also go in and help some of our sort of underperforming markets. Those teams, the commercial and the operations team, do a lot of this together. It's not my team and your team as opposed to together. We think that's still a lot of runway for us, but a lot of process improvement over the last 3 years as a result of that.
And what about the process improvement to go? As again, a supply chain, again, we're not going to spend too much time talking about , Dave Flitman, your new CEO, but obviously, he has a supply chain background. How can we expect to see the supply chain change over the next couple of years? What are the, what are the near-end supply chain opportunities that you're working on? We understand, you have route density, route management. What else might there be that could be significant?
Step one was really what I talked about of acknowledging that supply chain needed that strong focus, and we're well, beyond that, and we're continuing to build upon it. Y ou're right. Dave Flitman's strong operational background, will be extremely beneficial for our company. He knows our industry, but he also knows other distribution businesses. I mean, that's basically the business he's been in for the last 30 plus years. T hat'll be very positive for us. T he other thing that goes with that is a lot of operations, as you noted, really is not all that sexy. It's a lot of doing the basic block and tackling, doing it extremely well, doing it in a standardized way.
Those are the things that we've had mixed progress on historically, some of those things are the things we'll continue to do. While at the same time, doing some things like that I've talked about, that we've invested in l eadership training and engagement that really helps with employee retention. We've offered employees some flexible scheduling in 1 test market that's now moving to 2 other markets. Those are each things that in this world of when employees have other options, really to make sure that we're doing right by our associates.
Then when we do right by our associates, what we've seen in the tests is that it's improved retention, which improves productivity. It also improves safety and just the qualitative feedback that's gone with that has been positive. It's a combination of blocking and tackling. It's the things that are different than what our industry has tried, and we're going to do those and do them much more effectively than we've done in the past.
Okay, interesting. The question that I asked on the acceleration case volume in the fourth quarter. One is team-based selling. This is a company that, at least in my short tenure with it, is built on team-based selling. That wasn't particularly new, and from what I understand, like, MOXē is, like, more or less brand new in terms of what the customer actually having it having it on their app platform and and using it. Is there something else that is happening behind the scenes? MOXē, for example, which again, correct me here, but is a much better customer-facing digital ordering tool that is also for the sales force.
Talk about, like, that program in particular of driving attach, driving orders and to suggestive selling. How much of that is personalized then? The change of MOXē versus your old system in terms of how much of an improvement. I mean, are we talking about a 0.1 upgrade or like or sorry, something much more significant in terms of what actually gets in the customer's hands?
We view it as a very significant upgrade. It was being the leader in the industry. It was one where we had continued to invest, but we needed to make a step change, and we did that and launched it back in the fall for our local customers are continuing to convert. Some work we continue to build on for our national customers. That'll be rolling out over the course of this year. From a customer perspective, what we did is we got a lot of customer input upfront and through the design and through the testing process. It does a few things. I mean, one, statistically it's a lot faster. I t's 30% or 40% faster. There's more data that's available, whether it's product data, ingredient data.
Customers can do a few more things that are more easily to get to, whether it's inventory, invoices and again, fewer clicks, fewer less, sort of, challenges within the system. T hat's a big unlock. The seller can do more within there and within the tools related to it. It's, it's a combination of both, but the customer really was at the center of that. Our goal is to continue to make it easier for customers to interact with us in the way they want to interact. Sellers remain a critical part of that relationship. We have and will continue to add sellers, especially in those markets with outsized growth. That overall, team-based selling and the digital have to all go together, because in many cases, that's how our customers want to interact with us, and we want to make sure we help them be successful.
Some years ago, you went, it was from 4,000 marketing associates to 3,000, but maybe those were whole numbers and the change wasn't as significant. Where are we in terms? T alk about where we are in terms of the selling headcount, in terms of where you think that goes optimally. Maybe you have an opportunity to add more to get more. Then let's segue into the distribution side of the headcount. First on the sales side.
Sure. Our headcount, sort of all in. You're right. We look at it from the sellers. We also look at it from the all in, all the resources that go with it, because our on the seller is really not just the order taker as opposed to the value-added partner through there. We look at it, whether it's new business managers, restaurant operations consultants, specialists, et cetera. , the last couple of years and in 2023, we expect to continue to add headcount.
Okay.
It's really continued to add. As I've said a number of times before, we will not let headcount get in the way of our growth. When it comes to sellers, especially those markets where we have outsized growth opportunity, we have and will continue to add. It's really about making sure that we're doing it in a way that sort of helps enable that growth versus just adding in. T hat's the key to that.
Okay. The important thing is adding headcount. You still... I mean, that's a that's obviously still a value-added system for you guys. The efficiency is going to be adding more sales to get more volume as opposed to being more productive per salesperson.
Right. Both are a focus w e will continue to add. We, like I said, we truly value our sellers and the related resources with them are a key part of that customer relationship. The things that we'll continue to look at is, in addition to the customer experience, how do we make that seller's job easier? How can they spend less time on their own blocking and tackling and instead focusing on working with the customers and growing their business.
Warehouse labor, driver labor, I mean, this was a very difficult category from the second half of 2021 all the way through 2022. , give us the lay of the land. , comment on turnover. Talk about productivity. Talk about overtime. , where are we, how are we thinking about 2023 versus 2022?
Sure was. I mean, quite a year for us and our broader industry and many others as far as labor. If I reflect back where we started the year, where we ended the year. So as you pointed out first part of the year heavily focused on getting snapped to the right level and we have been at that level for quite a while and that ain't really shifted to much more to retention in productivity but we are highly qualited and When we sort of our turnover levels, sort of drivers historically have had a lower turnover level. That it did increase during COVID or post-COVID, but not a whole lot. We've seen that really get back much closer to where it was pre-COVID.
The increase that we saw, which was mostly in the warehouse, so warehouse was a higher turnover to begin with. We saw it roughly double, and we've closed about half of that gap. We saw in Q3 and Q4, we saw continued improvement there are pleased with that. We expect to continue to build upon that. We think that the things that we've done around the leadership engagement, some of the initiatives, as we continue to deploy flexible scheduling, all of those things we expect to continue to help.
At the same time, we're not taking our associates, we're not taking their retention for granted, and we're continuing to work on a better environment. When you have a more stable workforce, even the productivity initiatives we do around making our associates jobs easier can be more sticky and more effective. That's what we're going to continue to focus on.
Okay. US Foods is different than at least some of your major peers of you have one type of warehouse to you typically deliver from one type of truck. Whether a chain restaurant, independent restaurant it goes from the same type of facility, at least what externally looks to be the same type of truck. That's a unique part of your business. Also the size of your cash and carry business is something that's different. A s we, of course, you guys have, being a clean slate to be able to think about is like, what would this business be today if we were to redesign it today? Ta lk about maybe some interesting opportunities in terms of maybe , rethinking the design of US Foods today versus how it was 10 years ago, for example. Is there an opportunity?
Sure. T he thing that we learned years ago is sort of having separated warehouses or whether they're more concentrated in certain customer types can make sense in some circumstances, but not necessarily widely. We do have several distribution centers that are more concentrated on chains.
Okay.
As an example.
Are exclusive to you or?
Largely.
Okay. All right. Fair enough.
Very concentrated.
All right.
It's not a key, a key focus, but we do have some of those. T he important thing that we've really focused on going all the way back the last eight or 10 years is what's the right customer mix, where are the right locations, what's the right service for those customers, and then what are the right economics that we earn on those customers. All the way back it is, independence, health care, and hospitality are going to continue to be our focus, and we're going to be thoughtful and opportunistic on the right chain business. We've done a lot of work. Some chain business is very good. This is by no means that we're not going to serve chain business. It's about the right partners and at the right economics.
We've done a lot of work over this last three years in chains, and we've talked about a small number of exits, but the lion's share, it's really been more about getting economics and service in line with the evolving environment that we've been operating in. We think that works well. The sort of continuing to look at customers that what I always refer to as hygiene, we would expect to continue. T hat's just a very good practice that any business should be doing. Then on the cash and carry, you're right, that's exciting when we think about omnichannel. We obviously have our broadline, which is through the seller and/or the digital. We have in the broadline, you can get large trucks.
We have small trucks that we call Pronto that serve mostly urban areas, that is in about 30 of our markets. That works quite well for us. We have our Direct Ship business where it's sort of more specialty type of things that are coming through our digital platform, but come straight from manufacturers. All those then work together, and then CHEF'STORE, or cash and carry is the last big piece. That is one where we're approaching 100 stores this year, more concentrated in the West and Northwest. We continue to grow that business. We added six last year, and we expect to add at least eight this year.
We think that continues to be an opportunity for us. Y ou heard Dave Flitman said he hasn't really spent a whole lot of time on that part of the business yet, which is understandable and six or eight weeks into the business. That is one that we are continuing to focus on, really building the machine that is ready to open more stores. This was a business that really wasn't opening many stores prior to us buying them. Working it from the four to the six and then eight this year, and then focusing on accelerating the ramp to profitability are all key things. W hen you put all that together, we offer the right services for the right customers versus what we don't try to do is do everything for everyone because we find sometimes that can get to be a bit messy.
Absolutely. If I were to go back to 2019, healthcare and hospitality together were about a third of your business, which both of them were somewhere around half and half, so basically a sixth and a sixth of that, a third. Healthcare was still down 4% in fourth quarter of 2022 versus 2019. Hospitality down around 11%. , do you, I mean, as you see the the current environment, do you expect by the end of 2023 that to at least be back to par? H ospitality one would think is a is a growing business. healthcare it's like healthcare needs are going up, not down should be a growing business over time. Just talk about those, let's spend a minute on those two sub-segments.
Sure. We do think both recover. Th e positive part is it's hard to know exactly when they get back to par to 2019, but for I t's 6 quarters in a row, they've each shown continued improvement in trajectory, and that's a big positive. Healthcare, to your point, all the aging demographics indicate that should fully recover. The hospital system acute is largely was there by the end of the year. Senior living is the one that's trailing more, and that's a combination of some staffing in those facilities as well as bed occupancy is still below where it was pre-COVID. A s we get COVID further behind us, that's one where, again, back to the aging demographics, we think we'll continue to grow that part of the business.
We feel good there, we of course, have our net new business that we're continuing to bring on. On hospitality, t hat is one where it started from such a low base, and we've seen very significant continued growth there. Really, a key unlock there was in the last call it four or six months of last year, you started to see more things like this, large group events, whether it be conventions, weddings, trade shows, et cetera, begin to return. We're in hospitality, we're more indexed to full service lodging, places sort of that have a lot of options there are ones that as those things return, we expect to continue to improve in our business.
Those didn't really, again, like I said, come back until later in the year. T he only part that's more of a question mark in hospitality is does core business travel fully recover? That's a relatively small piece. We think that through the combination of the recovery in our net new business that we'll continue to grow. T hat's a good tailwind that we have coming into this year. We still have recovery coming. No matter what an environment is, we think there still is that good tailwind.
Were there any major accounts that were lost that we should consider? I know a number of like hospitality clients went into GPOs. I mean, this is beyond me, but they went into GPOs, for example, that maybe then went out and like rebid the business. Did any of that happen to the point where you did, where you just have a lower base to build from because you lost some business, or has it been more static? I'll step by wins.
There's always some wins and losses, but we've had good net win progress the last few years.
Okay.
That's not contributed to that. In fact, we've seen good share gains in both healthcare and hospitality. We have good relationships with multiple larger GPOs across both healthcare and hospitality, and that becomes an attractive value proposition to members because. It's relatively attractive business to us. At the same time, it helps them from a cost perspective. We don't see any headwinds why we can't continue to improve and grow in those attractive parts of the business.
That's group purchasing organization, right?
Yes.
That was a new one for me. Okay. The question, like, the industry's in an interesting place. A lot of people, I'm not one of them calling for like a real recession for from the consumer. Pressure on over restaurant sales volumes at the point where inflation potentially turns into deflation maybe by the end of year. I want you to comment on this do you see Of disinflation, yes. I know you'll say that, but do you actually believe in deflation?
That environment that I tell you, slower consumer environment matched with deflation, on a piece of paper, you say, "Gosh, that's not a good environment for a distributor." How important is that theme that in terms of like what your focus is, and can you manage through that from a profitability perspective, or is that just a bad year in what hopefully will be a series of good years to the extent that environment comes?
We think it's a good time to be, in a distribution company, especially USFD. With that said though the, if we look at the demand, sort of if we did have a downturn or recession, so people oftentimes go to 2008, 2009 when.
Yeah. Well, that.
I mean, the industry were down sort of mid-singles.
When employment was down five, by the way.
Right.
That was-
Though, that's where I was going to go, is if you actually look at, we've done a lot of work in looking at 3 or 4 other inflation-induced downturns, and you see it's more of a 1 or 2 of reduction in growth. When you think of that combined with the fact we have the tailwind still from healthcare and hospitality not being where they were, we would expect to continue to see growth, w hen you're talking about, again, a point or two of impact, when you think of staffing and such, we run on the front lines with more overtime than that. We feel very well positioned to work through that. What we found also is that, if you look back over time, consumers spend a very consistent % of their income on dining out and entertainment.
We think we're well positioned there , just as we look ahead, that resiliency combined with the tailwinds are positive. Y ou're right. We do we will likely see continued disinflation as we've seen slowing inflation. We talked about in the fourth quarter that we saw slower inflation in sort of non-commodities, but we hadn't seen deflation, and we still haven't seen deflation. It's really the commodities, especially center of the plate, which can be more volatile in any environment. When you look at center of the plate, that tends to be where most of our product is marked up on a per case or fixed amount.
If you have inflation or deflation, you have a little noise in a period, but it doesn't really... If you make $10 a case before, you're going to make $10 after. That's actually a positive place to see some deflation because it doesn't negatively impact the long-term earnings power of our business. They're expensive cases, so it helps our customers, and it helps the end customer there. If we see, if we see some inflation or deflation debate on whether my crystal ball is all that accurate, but I would expect that we will not see deflation in grocery type of categories versus slowing inflation.
If we see inflation or deflation is going to come more from if you have some of the proteins or commodities that move around a little bit. T hat otherwise, it's going to be very stable. Cause also a lot of the underlying inputs from manufacturers and that their own labor costs are up quite a bit. T hat'll make their price increases sticky.
You have, is it three new board members?
We have three that joined in the middle of the year related to the sort of Sachem matter, and then we had two that we appointed earlier in the year. We have 5 new board members in the last year or so.
Obviously, like, you're engaged with them.
There's like your guide in 2024 was $1.7 billion. I want to finally be correct on the name. Sachem, I think, was arguing for $2 billion of ebitda for 2024. It's interesting, he's like, "Listen, I think you can argue for anything when you're outside of a company," and not maybe understanding some of the details and complexities and what have you. , with so much new board leadership, and to some extent, I'm going to end with the question I started with of, hey, new board, setting priorities, expectations CEO, who by the way, sounded fantastic on his first conference call six weeks in.
Thank you.
Where is their mind in terms of expectations? I s that $1.7 billion that you previously guided for 2024, is that achievable, conservative? Is it something that you're reviewing? Just if you can, just the comments of, hey, five new board members is a lot for a company of your experience. How maybe some different perspectives and attitudes or beliefs may be influencing previously set targets.
On the $1.7 billion, hopefully what everyone took away from the call is Dave was 6 weeks on the job, as he commented, he was really focusing on the near end, and it was really more of a sort of continuing to develop his sort of understanding of the business and then a perspective. Sort of as the year goes on, I would expect he'll have some additional comments in Q1, et cetera, on that. , he did comment that he believes that the pillars of the long-range plan that we have are the right pillars and that we're making good progress. I'm not going to comment on whether Sachem thinks it's $2 billion or $1.7 billion. What I will tell you is, our board is very high functioning.
Scott, as he's joined the other members, you would not know that we had gone through, because everyone is focused on winning, and they want us to succeed as a business. E veryone. T hat was their, sort of their premise going in, is they want us to be successful. Each of our board members, they lean in in their different areas of expertise. They push management as you would expect a good board to do. If you sat in on one of our board meetings, you would not know that we went through. W hat you would see is you would see a very low ego, very engaged board that wants US Foods to continue to win and build on the strong momentum we've had this last year.
Sounds great. Thank you so much.
All right. Thank you, John Ivankoe. Good to see you again.
Great to see you.
Thanks, everyone.