US Foods Holding Corp. (USFD) Earnings Call Transcript
May 14, 2020
Earnings Call Speaker Segments
Perfect. All right. Well, we might as well go ahead and get started. Pietro, I first wanted to just thank you and the team at US Foods for taking the time to participate at Farm to Market, especially in what I know is just a really busy time for everyone across consumer retail. And we definitely do hope that all of you continue to stay safe and well. Very pleased to have you join us and lots of topics to address. So I guess, we'll dive right in, while we're waiting for Dirk and Melissa and Scott. Hopefully, they can get on to the system soon. So I guess the one thing I wanted to just start off with is just -- and you guys provided a lot of color on earnings last week in terms of the different channel trends. But just helping us to understand under the hood, what's driving that improvement, whether it's just more and more takeout or more restaurants opening back up, contribution from grocery? And just how we think of that progression going forward, especially as restaurants are opening up with restrictions in dining rooms. Should we think about it as just kind of a takeout kind of dynamic for some time until we get a little bit back to normal? I mean, how do we think about that progression and where sales could go from here?
Right. So thanks, Kelly. And I appreciate your thoughts at the outset. Really all of the above is what I would say, Kelly, in terms of the progress we are seeing. We've seen -- so let's start with restaurants more broadly. We've seen restaurants, right at their trough, were minus 60-ish percent over prior year, which is what you saw in the earnings call graph. And now we're in the 40% range of prior year, which is 100% increase from where we were in the trough. So we see continued progress, and every week brings some increase. In terms of where that's coming from, so it's coming from both the independents and the larger multiunit customers, roughly the same. I think I mentioned the QSR segment is increasing at a slightly higher rate, not surprising, as a lot of folks have talked about. In terms of geographies, it's coming from across the country, the less densely populated, large urban centers. So the more outlying rural areas have come back more quickly and are at a clip that is somewhere between where we were last year and the large dense markets. Within the independents, we're seeing some segments do a little bit better. Pizza, as an example, has held up better in this environment. Again, not surprising, that tends to be seen as more of a takeout and delivery option and the delivery and takeout option that you just mentioned. Everyone has figured out how to get into that business. And we've helped our customers do that with our webinars. But to give you an example, there was some recent Technomic or NPD data that I saw that showed that pre-COVID, the percent of business in the industry that was delivered and takeout was in the neighborhood of 30%, if I remember correctly. Now it's around -- or 15%, and now it's in the neighborhood of 80%. Obviously, off a smaller base, but it just goes to show you how much consumers have adjusted and how much restaurants have adjusted.
And are you seeing any of that -- one of the questions we've been getting is just is that as restaurants open up, are they cannibalizing that takeout business? Or is it incremental?
It looks incremental. It's really hard to say because we don't necessarily have data on, on whether that business is incremental -- sorry, is takeout or delivered. We look at an aggregate level of total shipments, total sales, and they are growing week on week. I think the takeout and delivery has continued to grow even from the bottom because consumers have adjusted. They're also more willing to -- or more eager, I should say, to go back to old habits of food-away-from-home. It just means they buy away-from-home and they consume it at home. So I think the growth is coming from both dine-in, which is very slowly reopening, and that varies a lot by different parts of the country and the takeout and delivery, which has really taken hold.
And how -- can you help us understand how we think about US Foods in terms of over or under-indexing to different parts of restaurants like QSR, like casual dining, like fine dining and -- or just help -- because it does seem like there's -- as you point out, some differences there in this environment.
Yes. So we're -- I would say our sales generally are representative of the industry in terms of independent restaurants. We have over 100,000 independent restaurants. So it's a very well-diversified group of restaurants across different segments. Our national sales, national multi-unit business, as we've talked about, is the largest part of the all other. So we're probably a little bit under-indexed in that segment. And the QSR is probably an area we're a little bit under-indexed. That business tends to be served primarily by some of the systems houses as opposed to more traditional distributors. But I would say the headline is our exposure to the various segments is fairly representative of the industry.
Okay. And I guess, one of the things that is kind of difficult to model is just we've had a lot of expense reductions. But as things ramp back up, at what level of sales improvement do we need to add expenses back? And at what pace? Or how should we think about modeling that?
I think I see Dirk is on. So Dirk, do you want to take that question? You're on, aren't you?
I am. Good morning. Sorry, I had just some technical difficulties getting in. So good morning, everyone. I think that's -- so Kelly, the way I would think about it is it's probably similar to the volume trajectory. You could have a little more or less depending on, again, the timing it comes. But generally, directionally as it comes because the biggest portion of the labor, to your point, it comes around the variable around distribution costs and then also around selling costs. So we have other actions that are around admin that we've talked and that we've taken as well, and those are more discretionary. As volume comes back, we will continue to be thoughtful as the way in which we add that back.
As you sit here today, I mean, and you look at expense rate, so there's a lot of moving pieces in the model right now with the acquisitions. And what do you think you can get that expense ratio back to longer term?
Well, I think -- maybe I'll start this just for right now. Our focus has really been -- so when we think about the fixed and variable part of our business is really focusing on both aspects aggressively and on the variable side of getting our variable cost reduced at a very high ratio relative to volume changes. And we've continued to focus on that and have had a lot of success there, especially as we've managed pretty effectively on the supply chain side, also around managing sales and then on the admin side, have taken a number of actions as well, again, around 30% or so reductions there. And our balance has been managing cost aggressively, but really being thoughtful to not harm the long-term health of the business as we go there and we're continuing to look for other opportunities to work smarter and impact cost. I think when you think over time, we continue, as I said, to look for those cost opportunities. And I think that one thing that a situation like this does is it forces you to continue to look at how you do business a little bit differently. Am I operating exactly the way I need to? And we're going to continue -- we have been, and we're going to continue to do that so that we can work over time to get the business to a level that's a healthy level of profitability. I think the -- with the demand over time, it's time frame specific is unknown, but with the food-away-from-home demands in the past, we would expect over time that, that continues to return, and it's just a matter of the timing of vaccine and people being comfortable.
So as we think about your business mix longer term, do you think -- when we do get back, do you think it will be similar? Or could it be different? And I guess I'm thinking about even some of your initiatives like in grocery. Does that stay? Are there any other categories you can get into? Some have brought up to alcohol or other products. Is there -- does this result in a different mix longer term, I guess, is the big question.
I think the mix may modify slightly. Part of what the mindset we want to have, Kelly, is being both opportunistic and about how the landscape evolves. We evolve with the landscape. I do believe, as Dirk said, that over time, the independents are a resilient bunch or an ingenious bunch. And so they will figure out how to be -- continue to be an important part of the fabric of this country. With respect to chains, we talked about a couple of years ago as to how we were -- have done the process, completed the process of pruning that part of the portfolio that was low margin or negative margin. So we would anticipate some good growth there. We have a good pipeline there. And I think the fact that some of the smaller competitors might be experiencing greater stress, I think, will present opportunities for us to grow that business. We have a pretty good pipeline as it is today. Health care is a really strong part of our business. We expect that to recover as things return more to normal in health care. Hospitality will take longer to recover. I think we've all read about just the challenges that COVID has presented to either large group gatherings or travel. In the grocery side of things, I would say, look, it's probably a two-pronged strategy in terms of the center of the store, where we've created a lot of these new partnerships. That business has been good in terms of kind of some baseline volume. We'll have to see how much of that business we want or sticks over the long term. It tends to be lower margin. But the faster-growing part of the grocery business, the home meal replacement, the deli, the grocerant, the part that looks more like a restaurant, that's right in our wheelhouse in that part that these new relationships are opening many new doors. And I think we'll capitalize in terms of some accelerated growth for that business. And then the last part, I would say, cash and carry as a result of our most recent acquisition. We now have the scale to and some additional capabilities to accelerate the growth of that business. That business has held up much better in this downturn than the broadline business, in part because it provides greater flexibility to restaurant owners, in part because there tends to be better value because the delivery is not part of the equation. And there's a little bit of consumer business that happens there as well, which is just a nice bonus, I mean, that we actively pursue, but it also has held up that business. So I would expect the cash-and-carry business to become a more important share of the mix over time as a result of the most recent acquisition we made and as a result of the fact that we've really been trying to develop that business for some time now.
And maybe we can talk a little bit more about Smart Foodservice. So how do the prices compare for that typical independent that's considering having product delivered or could go there and maybe save? How many SKUs are there? How far of a radius in terms of one of those facilities can customers really -- can that draw from just lots of questions on just how that business really works and is new kind of to our world.
So the -- I'll start with maybe a few numbers about the business and Dirk, make sure I've got the numbers right. It's a 7 billion -- $17 billion channel within the restaurant industry. So it's pretty significant. It's been growing faster than the rest of the broadline restaurant business. And the margins are better in terms of EBITDA margins, significantly better. And that's despite the fact, as you said, Kelly, that prices are lower. I mean, it's really -- it's hard to say because it depends on the item. But the range of prices could be anywhere from 5% to 15% lower on the shelf versus broadline-delivered business. Obviously, the delivery is an important convenience and service provider to the customers, but there's a cost to it as well. In terms of the draw, look, first, let me talk about the type of customers it attracts and then geographically. It attracts primarily the independent-type restaurants, although we've seen some of our health care and hospitality customers come in for fill-in occasion. So one, there's a fill-in occasion, and that's where we've seen the -- as we've talked about, the incremental business we've seen in our cash-and-carry business over the years isn't just the leakage that were stemming from a customer going to an alternative cash and carry like a Sam's Club or a Costco. It's also -- we're also getting more share on our delivered business, which is a little bit counterintuitive, but that was a big part of the rationale for the acquisition. And I think the reason there is because we have now greater share of mind across that customer, for a customer who splits their business amongst 3 or 5 distributors, which is the majority of customers, not all of them. And you're actually getting more share from the other distributors on a delivered business in addition to the leakage to cash and carry. So you get that fill in. You get some customers who are more price-sensitive, who will do a majority of their purchases from the cash and carry. A lot of those are more ethnic in nature. But again, because of the different economics, that's still a more accretive business to us, even though it's serving a more price-sensitive business. In terms of the draw, it's what you would expect in the large urban markets. The trade area tends to be a little smaller. In the more rural areas, it tends to be a little larger. One of the things we like about the Smart Foodservice acquisition is they have a smaller footprint than -- or box than we do, which expands the geographic opportunity we can expand in. And you'd be surprised at how far some customers will travel to save a little bit of money.
So the big question with investors and the big topic seems to be this market share opportunity as we come to this for the larger, more well-capitalized companies like US Foods. So maybe just help us think about how that could play out. And are there any other really lasting impacts from this that you see for the industry?
So as we've talked about, I know some of the other larger competitors have talked about the strong balance sheet we have and the larger competitors have do position us well to take advantage of the stress that exists up and down the supply chain, whether that's -- as an example, as we recover in this phase of recovery having the right inventory in place to meet the needs of those customers is no easy task. You're not sure. It's a bit of a lead time. You're not sure who's opening when, with what menu. So being able to lean in on a temporary basis from a working capital perspective, especially on the longer shelf life items, really positions us better than some of the smaller competitors who might be more stressed. So that's an opportunity from a market share perspective. And as things unfold, the investments we're able to make in terms of helping our customers through our value-added strategy, our playbooks we've developed, our webinars, our new products, all of those things take scale. And again, we're in an environment where smaller competitors might be stressed, that scale starts becoming even more important. So there's a number of ways in which over time -- and then there may be some competitors who just don't survive and go out of business, and so we'll be able to pick up the pieces there. So there's a number of ways in which I think larger-scale players are advantaged, especially those like us who have a more differentiated playbook that really is there to meet the needs of the customers. In terms of quantifying that, I think that's really hard to say at this early juncture.
It's also a place just where our -- helping our customers make it in the selling support model that we have really comes in helpful as these operators are maneuvering through a less certain environment of giving them tools and things that help them to be more effective and share those best practices, we think, is an advantage as well.
Absolutely. Any other lasting impact from this that you think could result as we move forward?
I think there -- yes. So we can go up and down the supply chain. So restaurants, we'll have to operate differently in terms of how they organize and configure their operations. We have a playbook that we've now just distributed to our customers that is available on our website that basically describes all the things you need to think about differently as a restaurant. The expectations you set for a customer when they arrive, are they going to wait outside or what should they expect. If you look at what's happened in other countries, building that trust amongst diners that your restaurant is a safe environment is really critical. And that first experience is really going to help determine how much consumers continue to dine out. And so I think just what that environment looks like is going to be different. I talked about at the distributor side of things how there may be fewer players, I think, on the manufacturing side. And you've started to see this in retail in order to gain some efficiencies in the supply chain, and there's been a rationalization of some of the SKUs and some of the categories. We've seen that in grocery. I would expect that to happen on our side of things as well that helps make for a more supply chain -- a more efficient supply chain. So there will be a number of ways in which, even if the long-term demand is depressed a little bit from pre-COVID levels, I think there's a number of ways in which the industry will adjust in order to attract diners and to ensure that costs fall in line with whatever that demand ends up being.
Yes, that's a good point. I mean, we were hearing about just a lot of simplified menus. And I mean that's got to impact the number of SKUs that you need to carry or how -- where are you along that process.
We're -- so we're starting that process. Right now, the focus I said is just making sure we have the right inventory in place for the recovery. So we're very focused on this part of it. And as I said, that's no easy task when the tap was literally turned off 6 weeks ago, but we're starting to do the work. I'm sure it's no different than other distributors. But as an example, we have 1,000 SKUs of French fries across the system. The optimal number is probably something less than that. So we're starting the work on that, and it will be helpful or important to have to build partnerships with our manufacturing partners to find out what the right optimal assortment is. But I would say that's more in the medium term and in the next few weeks and months.
Speaking of your, I guess, vendor partners, how dramatically were they able to shift to retail production lines and so forth? And can they shift back? Or was there a shift? Or I guess it depends a lot by the category, some may be difficult, but what are you hearing from them?
Yes. So it depends on the manufacturer and the category. Most of them play in both retail and foodservice. So there was some initial amount of time to reconfigure production. But the biggest difference between foodservice and food consumed at home, as you know, is the packaging size. And so there was a lot of inventory that had been built up that they and we are slowly working our way down from. But the -- generally, the ingredients are the same, and it's really about the packaging that they use. And then there are a small number of manufacturers who are more focused, more singularly focused on foodservice. And for them, it's obviously been harder just like it's been for the rest of the foodservice industry. But I think, again, no different than in our part of the world. Those that have the scale and staying power will continue to be around for a long time, and there will be those who -- smaller ones who are more focused on foodservice who will have a harder time to adjust.
I guess bigger picture question, going back to kind of the industry, which feels like it's been very rational. I mean, I know it's always competitive. But it feels like with the strength that we've seen in independents over the past several years, it's kind of created this very rational environment. And so I guess the question is, do you think it can stay that way going forward? Or does this spark more competitive pricing behavior across the space?
Yes. I would expect it to stay that way. So first of all, we haven't -- even in the very few short weeks we've been in the recovery phase, we haven't heard of anything of an irrational nature, number one. I think, two, I talked about the stress that smaller customer competitors have been under and the fact that we have been approached by a number of larger customers who are concerned about the sustainability of those smaller suppliers. What they really want is security of supply. And so the conversation is maybe a little bit different than a few years ago, where it was really more around price. And it's now more around security of supply. And that's been happening over the last few years, as we've talked about, as capacity. I think there was a period of time in our industry where capacity perhaps got ahead of itself, and now capacity is maybe more in line with demand. And I would expect that to continue because I don't expect there to be large investments in capacity over the next couple of years. So as demand recovers, the underlying factors that make for a more rational environment should continue to persist.
It's an interesting point. So I mean, from what you've seen over the years, does that tend -- this capacity, is that what tends to drive more of those phases of competitive pricing more than anything else?
Yes. What we've seen is over time, there tends to be -- we -- as I've said in similar settings, Kelly, it's a competitive industry. You just have to look at our EBITDA margin. So it's a competitive industry. And when we do see more intense competitive action, it tends to be hot spots in one or another part of the country. It's isolated that way. And that tends to be prompted by either new capacity coming on stream or new leadership in a particular division that's trying to catch up because it's been underperforming, and that tends to be short-lived. So those tend to be the 2 factors that drive more competitive activity on an isolated basis.
So I guess, maybe just a couple of minutes on SGA and Food Group. So the integration has been delayed a little bit there. Can you just remind us how that's performing? And how we should think about the synergies? Should we think about the dollars still being the same? Or should we think about it on a percentage basis? And another question I've been meaning to ask is just how the tax benefits from that transaction flow through to US Foods, I guess, over the coming years?
Sure. So Kelly, I think when we think about the overall performance of the business, the impacts on volume in the business are very similar to what we've talked about in the organic or the legacy business. So not a whole lot different there. I think when you talk about the integration and the synergies, so as I mentioned on our Q1 earnings call, we paused the integration work and are beginning to work around looking to resume that as soon as travel can resume and as customers reopen. We do still expect to achieve a full run rate synergies we've committed to. I think the TBD is more on the timing of the achievement as it will be a little bit delayed from the COVID-19 as well as the volume recovery on the timing as a result also of system conversions. I think the ultimate cadence won't be that different, but the timing and dollar amounts will be a little bit different as we go forward. From a tax perspective, I don't remember right offhand that -- I believe the taxes flow through over, I think, it's 15 years. And it just -- it flows through pretty consistently year-over-year as far as a benefit to us. So that will be a real cash benefit each year.
Okay. And maybe just last one to wrap it up. I think we have another 2 minutes here. In terms of the -- US Foods has always been looked at, I think, from my seat, at least as kind of one of the leaders in technology in the space. And so how has that helped you manage through this period? And where do you think your investments in technology need to go going forward?
Yes. I think it's helping that as we -- again, as the tap was literally turned off, there were a lot of customers who continue to operate, especially in some of the outlying parts of the country. And the fact that those customers were comfortable with and with our user interface, our leading e-commerce interface, I think, helped. In terms of where this goes, I mean we're -- as Dirk said earlier, we're looking at everything in terms of how to ensure our business stays true to its mission of helping our customers be successful but perhaps in ways that are different than we'd anticipate. The type of product innovation we're going to do might shift a little bit towards things that are -- perform better in a more of a to-go environment, helping them with the -- run their business. These webinars we've had, Kelly, helping customers with, first, navigating the CARES Act, then helping them figure how to reopen, now this playbook on how to configure your restaurant have had really, really positive reception on the part of our customers. One of the things we've learned, as an example, is our restaurant operations consultants who are really good at helping customers, again, through the wonders of Zoom and virtual technology, we've been able to leverage those ROCs across the country. And so I think the way we interact with customers will rely more on technology. And I think all the good work we've done over the years is just going to position us well relative to some others in our industry.
Great. Well, I think we do have to wrap it up. But again, thank you for your participation, and I hope you all at US Foods stay well.
Thanks, Kelly. Appreciate the opportunity.
Thank you.
Stay safe.
Have a good day. Bye-bye.
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