US Foods Holding Corp

NYSE:USFD

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Second Quarter 2023 Quarterly Earnings Conference Call. [Operator Instructions] Thank you.

Adam Dabrowski, Director of Investor Relations. You may begin your conference.

[Adam Dabrowski, Director, Investor Relations]

Thank you, Rob. Good morning, everyone, and welcome to US Foods second quarter fiscal 2023 earnings call. Speaking on the call today, we have Dave Flitman, Chief Executive Officer; and Dirk Locascio, Chief Financial Officer. We will take your questions after prepared remarks conclude. Please provide your name, your firm and limit yourself to one question and one follow-up. 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, and unless otherwise stated, we are comparing our second quarter results to the same period fiscal year 2022. 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 for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in those statements.

Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website, except that we have not provided a reconciliation of forward-looking non-GAAP financial measures as indicated therein.

Thank you for your interest in Food, and I'll now turn over the call to Dave.

[David Flitman, Chief Executive Officer and Director]

Thanks, Adam. Good morning, everyone, and thank you for joining us today. It's hard to believe that I've already been at US Foods for seven months. During this time, I have continued my focused effort to get deeper into the business and interact with more of our associates, customers, suppliers and investors. I'll start today by sharing highlights for the quarter and progress against our strategy and long-range plan before I hand it over to Dirk to review our financial results and updated fiscal 2023 guidance.

We remain intensely focused on executing our long-range plan, and it showed in our strong financial results again this quarter as we delivered record adjusted EBITDA of $432 million. We achieved 17% adjusted EBITDA growth through a combination of profitable volume growth and margin expansion. Additionally, we delivered healthy total case growth of 3%, led by 5% independent case growth, underpinned by 5.5% growth with broadline independent restaurant customers, along with 7% healthcare and hospitality growth. This is the ninth consecutive quarter our team has gained independent market share.

Finally, we accelerated cash flow generation through our earnings growth and working capital improvement. Our strong cash flow year-to-date has allowed us to invest in the business for organic growth, prepay additional term loan debt and return capital to shareholders via share repurchases. As a result of our strong performance for the first half of the fiscal year and continued momentum, we are increasing our full year earnings guidance, which Dirk will share leader. My expectation is that we will continue to execute our plan and build upon our strong momentum.

Now let's turn to Slide 4. Our strategy guides how we operate and what we focus on to win at US Foods under our four pillars of culture, service, growth and profit. Last quarter, I introduced the simplified model, which is much clearer for our associates, so we can be more action and outcome-oriented across the company. These changes are resonating with our organization and are helping us remain focused, which contributed to our strong second quarter results. The other key change I made was to our organizational structure, bringing our four region presidents on to my management team, and that change has been outstanding. Having them at the table has improved communication between our functions in the field and streamlined our decision-making regarding execution of our broader strategy. I'm going to briefly focus on second quarter progress points against the culture and service pillars, and then Dirk will talk about the growth and profit pillars later.

Turning to Slide 5. The first pillar is culture because our culture and our people fuel our strategy. Instilling a stronger safety culture has been a focus since the day I arrived at US Foods. I am pleased to say that we have made very good progress in just seven months. Our second quarter year-over-year results improved approximately 20% compared to the prior year through a combination of tone from the top and focused programs to drive results. We have good early momentum with significant opportunity remaining.

On a related note, I would like to recognize the 13 US Foods drivers who were recently named to the International Foodservice Distributors Association Truck Driver Hall of Fame. This prestigious accolade is only awarded to those who have exceptional safety records, including 25 years of service without an accident. What makes this year even more special is that Alicia Seyler, one of our drivers based in Loveland, Colorado, with 27 years of service was the first-ever female driver elected to the IFDA Hall of Fame. We are proud to have these world-class drivers dedicated to safety at US Foods as we strive to provide our associates, customers, business partners and the communities we operate in with a safe and hazard-free environment.

Additionally, we recently published our 2022 Corporate Social Responsibility Report and I am proud that we have made continued improvement across our three focus areas of people, product and planet. I encourage you to go to our website to read about our progress from our sustainable products, the US Foods scholar program to our compressed natural gas trucks and Scope 1 and 2 emissions reduction.

Moving to service on Slide 6. As a reminder, our research tells us that the most important services to our customers are on time, correct orders and high-quality fresh products. Our product service levels to our customers are back in line with pre-COVID levels. Vendor service levels to US Foods have also steadily improved. However, they remain slightly below pre-COVID levels. This progress is yielding positive results from a service level perspective and is also helping us reduce our working capital.

Our routing initiative continues to make progress. And in the second quarter, we delivered the best cases per mile metric in the last three years. We are also preparing for a pilot of our new routing software later this year, which will significantly increase our capabilities. I look forward to our learnings and the progress we will continue to make.

Finally, MOXē, our digital customer platform has now been fully rolled out among our local customers and feedback continues to be very positive as are our Net Promoter Score results.

Turning to Slide 7. I'll walk through our second quarter highlights in a bit more detail. We grew adjusted EBITDA by 17% despite essentially no sequential inflation and, in fact, modest year-over-year product cost deflation, driven by center-of-the-plate categories. Our adjusted EBITDA margins also increased 60 basis points from the prior year as our initiatives continue to ramp up, and we gained operating leverage this quarter. Year-over-year, total case volume growth was healthy at 3%. Case growth was led by 5% growth in independent restaurants and 7% growth in both healthcare and hospitality while chain cases were down 4%.

Our independent case growth was negatively impacted about 70 basis points from slower growth in our CHEF'STOREs as we work through a systems conversion which is largely behind us now. This means our broadline independent customer case growth was 5.5% for the quarter. The software chain results this quarter are primarily due to no longer lapping Omicron, the softer macro and the impact on same-store sales across most of our chain customers.

Healthcare and hospitality continues to demonstrate strong growth, driven in large part by helping net new business. We are pleased with how our target customer types continue to outperform the industry, resulting in share gains. With that said, we still have opportunity to improve performance as we focus on more consistent execution. We have good momentum and expected to further accelerate.

Moving to our customer experience. We, again, gained year-over-year market share in our target customer types as we remain focused on executing our differentiated strategy. For independence, this is the ninth consecutive quarter of share gains, which demonstrates the progress we continue to make. I am happy to report that MOXē is fully rolled out to our local customers, reactions continue to be very positive, and we are releasing regular updates based on customer and seller feedback to improve this industry-leading platform. We are now beginning to roll out MOXē to our national customers.

This platform, combined with our other leading digital tools and service model will enable us to continue to service our national customers well and build it and convert a strong new business pipeline, especially in our target customer types. We also actively expanded customer usage of VITALS, our technology suite for healthcare customers to leverage added capabilities and help our customers more effectively manage their overall costs.

Very importantly, we continue to make progress on our supply chain excellence journey during the second quarter. In addition to our improved momentum in safety, our productivity performance also improved year-over-year and sequentially for both delivery and warehouse, which is very encouraging. I am pleased with the progress we are making and expect us to further accelerate that progress in the back half of this year and into 2024.

Our flexible scheduling and seven-day delivery pilots are progressing well, demonstrating results in line with our expectations, including a double-digit percent reduction in turnover in each of our pilot markets. As I called out last quarter, our near-term focus will be to expand flexible scheduling broadly.

We only roll out seven-day delivery opportunistically where capacity is constrained. Our team is actively working to expand the flex scheduling approach and we expect to have more than half of our locations live on flex scheduling by year-end, which we believe will further improve associate satisfaction and retention.

Finally, we continue to strengthen our capital structure and prudently allocate capital to fuel long-term growth. Through earnings growth and additional debt reduction, we lowered our net leverage to 3x, which is the first time we've been in our target range since it was established. Our debt ratings were upgraded by both rating agencies, demonstrating our strong progress and underlying business momentum.

In parallel to the continued leverage reduction, we spent $166 million on share repurchases. Shortly after the end of the quarter, we closed on our first tuck-in acquisition in six years, Renzi Foodservice. As part of our continued investment in Renzi, we are slated to break ground on the expansion of our Renzi distribution center this month, which includes approximately 10,000 square feet of construction, providing additional loading dock space for 8 new refrigerated loading base to support our growing customer base in the area. We are excited to welcome the Renzi associates, and I look forward to working closely with this high-quality team to drive future growth.

Each of the actions we've taken on deploying capital in a balanced manner reinforces our commitment to being responsible stewards of capital to drive long-term shareholder value creation.

With that, I'll hand it over to Dirk to go over our financial performance and guidance in further detail.

[Dirk Locascio]

Thanks, Dave, and good morning, everyone. Let's turn to Slide 9. We are very pleased with what we accomplished in the second quarter and the strong momentum we continue to have at US Foods. Adjusted EBITDA grew $64 million or 17% from the prior year to $432 million, which was a record quarter for US Foods. In addition to strong EBITDA dollars, we expanded our adjusted EBITDA margin 60 basis points from the prior year as our gross profit grew significantly more than OpEx. Finally, adjusted diluted EPS grew 18%, which is also a record.

Within our results, net sales were $9 billion in the second quarter, an increase of 2.1% over the prior year. Total case volume increased 2.7%, partially offset by year-over-year food cost deflation and product mix impact of 0.6%. As Dave mentioned, case growth was healthy overall and especially in our target customer types. Case growth slowed from the first quarter, largely as expected, since we no longer had a year-over-year benefit from Omicron lapping in the second quarter. We faced a headwind to case growth in the second quarter, primarily from a system conversion at CHEF'STORE. However, we have largely worked through it at this point and are seeing sales improve. We are pleased with the 5.5% broadline independent case growth.

We did see modest year-over-year product cost deflation, and it was driven by center of the plate as groceries still showed year-over-year inflation in the quarter. Essentially, we had no sequential inflation and still are not seeing deflation in grocery categories, which is encouraging. Since grocery categories are predominantly a percent markup and more impacted by deflation compared to center-of-the-plate categories, which are largely fixed markups and not as impacted by deflation.

We continued our strong gross profit performance this quarter as our adjusted gross profit dollars increased 9% from the prior year. Most of the strength is due to the excellent progress we have made over the past year on our long-range plan initiatives across cost of goods, logistics management and pricing. Our initiatives have been critical in mitigating the increased operating cost we and the broader industry have faced.

OpEx was above the prior year for the second quarter, albeit significantly less than the increases we saw in the past two years. The second quarter year-over-year increase in OpEx per case was largely driven by increased seller compensation and higher incentive compensation costs as distribution cost per case was better than the prior year.

We continued our progress against both the growth and profit pillars, and I'll spend a few minutes on each of these. We are focused on profitable growth and share gains in our target customer types, by leveraging our differentiated service model, digital capabilities and unique products. We are on track to exceed our 1.5x goal for restaurant volume growth for the full year led by strong independent case growth.

In the second quarter, we drove year-over-year share gains in each of our target customer types and continue to develop a strong healthcare and hospitality new business pipeline. As Dave mentioned, this was our ninth quarter in a row of independent share gains. As we grow faster with our target customer types, it helps our customer mix and drives profitability.

Next to profit on Slide 11. In addition to profitable growth, we continue to make progress on our initiatives to increase EBITDA margins. Our team effectively managed a relatively volatile quarter for commodity categories as we leverage our processes and maintain our strong gross profit per case. At the same time, we further progress on initiatives such as cost of goods or COGS improvement by working jointly with additional vendors. We remain on track to address a total of 60% of COGS by the end of fiscal 2023. We continue to advance our efforts to drive operational efficiencies as productivity improved year-over-year and sequentially for both delivering warehouse.

Our flex schedule and pilots are progressing well and demonstrating good results. This powerful initiative has a twofold impact. It gives associates more scheduled flexibility and provides US Foods with better associate engagement and retention. Ultimately, this adds up to a win for our customers through stronger service.

Finally, we are progressing with our indirect procurement work and have identified a number of opportunities, which we are pursuing and will ramp up further value creation in 2024. I'm now going to pivot from earnings to cash flow.

Turning to Slide 12. We continue to increase our strong cash flow and expect to build upon this as we grow earnings. Our strong cash flow allows us to continue reinvesting for growth and to further strengthen our capital structure. We have and will continue to prudently allocate capital against our core priorities to invest in the business, reduce leverage return capital to shareholders and pursue accretive tuck-in M&A to strategically expand our distribution network.

Year-to-date, we have invested approximately $200 million of cash CapEx and fleet leases, including projects to expand fleet, improved analytic insights and improved technology and supply chain and sales to enable further organic growth. I'll talk further in a moment on reducing leverage. In parallel with the debt reduction, we repurchased $166 million of shares in the second quarter, $150 million of which came from the KKR stock sale. Following this repurchase, we have $286 million remaining on our $500 million share repurchase program.

In early July, we completed the acquisition of Renzi Foodservice, and are excited to welcome the Renzi team to the US Foods family. This is our first tuck-in acquisition since 2017, and we are thrilled about the quality of this business and associates.

Moving to Slide 13. We meaningfully reduced our net leverage compared to year-end 2022 through a combination of net debt reduction and earnings growth. You can also see on the slide the significant progress over the past 12 months. Our net leverage ratio was 3x at the end of the second quarter, which is the top end of our target leverage range.

We continue to prioritize debt paydown and prepaid an additional $60 million of term loan in the second quarter, bringing us to $125 million of prepayment year-to-date. Our overall debt structure is in good shape if we don't have any maturities until 2025. That said, we're looking ahead to the 2025 maturity and expect to proactively address that in the next quarter or two.

Actions this quarter resulted in credit upgrades from both rating agencies. We remain focused on creating value for shareholders and allocating our capital prudently across the four parts of our capital allocation strategy.

Now turning to guidance on Slide 14. As a result of our strong year-to-date results and outlook for the full year, we are raising our full year adjusted EBITDA range to $1.51 billion to $1.54 billion and our adjusted diluted EPS range of $2.55 to $2.65 per share. We remain on track to reduce leverage to below 3x by the end of the year.

We are well positioned to deliver against this guidance and expect to be at the higher end of the earnings guidance if the macro remains similar to what we're seeing currently.

With that, I'll pass it back to Dave for his closing remarks.

[David Flitman, Chief Executive Officer and Director]

Thanks, Dirk. I will close where I started. Seven months into my role, I couldn't be more excited about US Foods and the opportunity ahead for our business.

Slide 15 summarizes our investment thesis and why I am so bullish. US Foods is a strong company, and we continue to get stronger. We are a leader in a highly fragmented industry in a pure-play U.S.-only based distributor focused on broadline distribution. Our business is resilient across various macro backdrops and US Foods offers further stability through our laser focus on controlling the controllables and executing against our long-range plan.

We are targeting independents, healthcare and hospitality for growth where we believe our differentiation adds even more value and we are seeing the results in our outsized growth and continued share gains. This progress has been driven by the quality of our strong team, our service model and our digital capabilities, including MOXē. I believe these are all compelling reasons to invest in US Foods. We are focused on building on the company's core strengths while finding ways to more effectively execute our strategy and accelerate our rate of improvement.

I am confident this combination will lead to a very bright future for US Foods and all of our stakeholders.

Finally, I would like to thank our 29,000 associates for their continued dedication and the excellent work they do each day to help our customers make it. Our associates are critical to our success which underscores why you matter is a very important one of our cultural beliefs.

With that, Rob, please open up the call for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Mark Carden from UBS.

[Mark Carden, UBS]

So to start, it looks like you took meaningful market share in the independent channel, albeit with a bit of a slowdown in case growth relative to last quarter. Outside of some of the disruption with CHEF'STORE, which it sounds like you've largely worked your way through, what are you seeing with respect to the health of this customer overall? And any changes on how you're thinking about the channel's contribution to your growth in the coming periods?

[David Flitman, Chief Executive Officer and Director]

Yes, I appreciate the question, Mark. We are seeing strong health of the operator and independents. And if you recall, I mean, we were expecting the performance that we had in the second quarter. If you recall, we had the Omicron lap go away here in the second quarter. And as we provided color last quarter, we saw some softness in the March that led into April. May and June got sequentially stronger. And while we don't give quarterly guidance, I can tell you the start to the third quarter has been at or slightly above what we saw exiting the second quarter trajectory. So we feel very good about the health of the operator, but more importantly, our ability based on our differentiation to continue to take share in that segment of the business. And then besides that, healthcare and hospitality remained very, very strong. We're taking share in both of them, and we have very strong pipelines across the board.

[Mark Carden, UBS]

That's great. And as a follow-up, just on deflation, how much did deflation intensify as the quarter progressed? How much risk do you see it ultimately impacting your grocery category sales? And then when you think about next year and the $1.7 billion EBITDA target, is that contingent upon a return to a more normalized inflation backdrop? Or do you have enough with your initiatives to get that in a variety of scenarios?

[Dirk Locascio]

Mark, this is Dirk. So overall, the inflation deflation picture was pretty similar across the quarter. So you saw it changing really as you were lapping prior year. But if I think of it through the quarter, grocery overall still continued to see for the quarter a little bit of inflation. So we still haven't seen deflation popping up there. And in the proteins, a lot of that is coming from the lapping of much more inflation a year ago. And as I said in my prepared comments, we'll take that because those tend to be more fixed markups and our teams have very good processes to manage through it. So even in this environment of very little inflation or modest deflation, we think we're very well positioned to manage through it. And as you've heard me say a number of times, as we focus on controlling the controllable, gross profit -- the strong gross profit growth we driven is really predominantly been from a number of the initiatives we've executed.

[Operator]

Your next question comes from the line of Edward Kelly from Wells Fargo.

[Edward Kelly, Wells Fargo]

Nice quarter. I wanted to start with -- I wanted to start on the cost side. You mentioned distribution cost per case better than 2019. I think we look at the progress in OpEx per case and the progress is very good. As we look out the next couple of quarters, I mean, it seems like OpEx per case maybe year-over-year is minimal growth at that seems like you might be entering a period. Can you just talk a bit more about what's driving the cost per case on the distribution side down? Are we thinking about this rate going forward? Obviously, there's puts and takes around wage inflation. Just any help there would be great.

[David Flitman, Chief Executive Officer and Director]

Yes. I appreciate the question. I'll start at the higher level and give Dirk a chance to win in any of the specifics. But as we've said the last couple of quarters, we feel very good about the momentum we're getting on productivity, both in our warehouse and delivery. And you heard me say on the call there, we had sequential improvement as well as year-over-year improvement in both. And so the initiatives we're driving, we're very excited about. We expect those to continue to get traction in the back half of this year. And I would point out to your point, this is five or six quarters in a row where our operating expense growth that continues to decline. And that's based in large part by the good work our team is doing, particularly in supply chain.

[Dirk Locascio]

And the only thing I would add is, in the quarter, as I commented, overall distribution cost per case was lower than it was a year ago. And the two areas that really drove our increase were seller compensation, which is driven by the strong gross profit results we've had. And then secondly, incentive compensation, which is a good place you're going to have higher costs because it drives team to continue to perform at a stronger level. So we feel, as Dave said, very good about the progress and the path ahead and our ability to effectively manage costs and gain leverage.

[Edward Kelly, Wells Fargo]

And then just a follow-up on gross profit per case. The 6% gain this quarter with some deflation is obviously very encouraging. As we think about the quarters ahead, is there any reason that you shouldn't at least be gaining in that gross profit per case? I mean, just where you stand today, it doesn't seem unreasonable at all that you had at least a low single-digit year-over-year gain there continuing. But maybe just some color there and where do you think you stand in terms of like the innings in terms of the upside here?

[David Flitman, Chief Executive Officer and Director]

Sure. Good question. So for the second quarter, adjusted gross profit dollars were up about 9%. So pleased with that. And I think the -- if I think of the year-over-year, you may see some lesser year-over-year increases just because we've had such strong gains as we're lapping those. We get to your point, get back to a more normalized environment, but continue to feel very good about the durability and strength of our gross profit per case. And I think the way we continue to look at it is there's not an end. We're going to continue to focus on the gross profit gains. And our goal here is to continue to run the play to pro gross profit faster to OpEx to drive margin because as you know, our overall EBITDA growth is a balance of profitable growth, especially in those target customer types. And we think we have -- we're happy with the progress we've made and we have a lot of runway ahead.

[Operator]

Your next question comes from the line of Brian Harbour from Morgan Stanley.

[Brian Harbour, Morgan Stanley]

Yes. Can you maybe just comment also on the chain restaurants? I know it's kind of not the customer focus at this point, but any change in trends with case volumes for chains?

[David Flitman, Chief Executive Officer and Director]

Yes, I'll take you back, Brian -- good question. I'll take you back to some of the commentary we had in the last quarter. And if you recall, one of the things I said when we were down a little bit less than the market was don't read too much into that. It has in large part to do with the portfolio change each of the competition has, number one.

Number two, we weren't surprised at all because of the lapping of the Omicron effect that we pointed to in the first quarter. And then the second thing is the backdrop within the chain segment has gotten softer as the year has progressed. I'd point to two things. One is the Technomic data that said the change, we're going to be up about 200 basis points back in January. They adjusted that to flat for the year in May. And then the recent Black Box data had the second quarter for changes down anywhere between 2% and 3%. And I think they pointed to about 2.7% in July. So it's really a traffic issue in chains. And as you point out, that's not our focus. We're going to be opportunistic on change, and we're going to lean in hard on healthcare, hospitality independents and continue to run our playbook.

[Dirk Locascio]

I think, Brian, hopefully what you continue to see here in the second quarter is in a pretty normalized operating environment has recovered. The fact that our overall independent is still growing at 5.5% in the broadline which, as I said in the first quarter call, we think sort of in the mid-5s, that's a very strong case growth. We're taking share. Healthcare and hospitality is not by chance that we're growing still at 7%, well above market. And so those are the things that we're going to continue to control the controllables despite the macro backdrop, we feel good about where we stand and our outlook.

[Brian Harbour, Morgan Stanley]

Okay. Great. The deflation rate you saw, if that was sort of steady through the second quarter, is it -- do you think it will be something similar in the second half? Or how are you thinking about that? And then also just you had kind of the LIFO benefit from lower inventory values. Will that still be kind of a factor in the third and fourth quarter?

[David Flitman, Chief Executive Officer and Director]

Sure. Maybe I'll take them in reverse. So LIFO is hard to predict based on deflation or inflation, what happens there. I mean, I'll remind you that the way we reported adjusted, it's backed out of there. So that is not a help for us in our adjusted EBITDA numbers. It does help in our overall GAAP numbers. And the second part is the -- in the second half year, yes, it was pretty stable in the second quarter. I think in the second half of the year if we continue to see some deflation at this point based on what we're seeing. I expect it to be -- continue to be driven primarily by the center-of-the-plate categories. As grocery, as I mentioned before, still really hasn't shown signs of deflation there. And even if we see some modest additional deflation in proteins, we feel very good about our ability to continue to drive our strong results.

[Operator]

And your next question comes from the line of Jeffrey Bernstein from Barclays.

[Jeffrey Bernstein, Barclays]

Great. Two questions. The first one, just on the follow-up for the total case growth. I know we dissected and the independents were better and the chains were worse. But in total, I guess, a little bit of a slowdown. I'm just wondering whether there's a concern of a slowing macro or maybe what your expectation is for the back half total case growth within your updated '23 guidance. I mean, Dave, you mentioned the upper -- or Dirk, you mentioned the upper end of earnings guidance of the macro holds. I'm just wondering what that assumes for total case growth for the second half or the full year?

[David Flitman, Chief Executive Officer and Director]

Yes, I appreciate the questions. I would point to the comments I made earlier around the stability in the independent space and the health of the operator holding up quite well, particularly as we put the calendar here into the early part of the third quarter. Importantly, our ability to continue to take share. I'm getting nothing but more confident around that, given the strength of our team, our ability to lean in, in a local market basis and provide the best value and product offerings and really understand where we can target those independents. That continues to get very, very strong. All that's contemplated in our back half outlook. So we would say we're in a very stable environment, and we will continue to take share there. I already commented on the chain space and our focus there. Dirk?

[Dirk Locascio]

And you just come back to Dave's comments that he made in his prepared remarks just around the lapping of Omicron. I mean that is 200 basis points or 300 basis points across much of the business. And so when you think of Q2 being a very normalized environment, I think the business is still growing at 3%. When you have a lot of businesses that are really going backwards pretty meaningfully. And the fact that we are growing much faster than that in these target customer types, which are more value-added, more profitable, et cetera, that Dave said we feel very good about. So where we are, what we saw in July and the stability of the overall macro.

[Jeffrey Bernstein, Barclays]

Understood. And a follow-up just on the EBITDA margins. I know you talked about the 60 basis points of expansion to the 4.8%. I think you previously noted that for full year '24, so a year from now, you would hope to get back to at least 4.6%, which was pre-COVID levels. I know the seasonality at play and it's difficult to compare the second quarter of this year to kind of a full year guidance for next year. But Dave, if you were just taking a step back, I mean, how do you assess the ultimate potential for those margins over time? Whether you look at comparable peers or whether you're looking at historical trends, just trying to get a sense because, again, at least this quarter, you're already above kind of that pre-COVID level, again, stripping out seasonality, but just your thoughts on the EBITDA margin going forward.

[David Flitman, Chief Executive Officer and Director]

I feel good about our ability to control what we can control, not so much concern to your point around what our peers are doing, but what we're doing inside our company. And as you've heard Dirk say here a couple of times this morning, we're focused on initiatives and things that we can control, and we think there's still a lot of juice in the squeeze. And so I'm feeling increasingly positive about my comments last quarter around our ability to deliver against that $1.7 billion plus or minus in 2024. And obviously, we'll have to say about that as we get further into the year and provide guidance for next year. But nothing gives me a reason to pause. I have just continued to gain confidence around our ability to execute and ramp up both our growth and profitability.

[Operator]

And your next question comes from the line of Kelly Bania from BMO Capital Markets.

[Kelly Bania, BMO Capital Markets]

I just wanted to talk about EBITDA margins. I guess, historically, your second half EBITDA margins in total are a little stronger than your first half, but your guidance, I think, seems to imply a little bit of the opposite, maybe a little bit lower in the second half. So just curious if you can talk about how much of that is conservatism or other factors that might be impacting the margins in the second half or any change in maybe seasonality that we should be thinking about as we think about the second half?

[Dirk Locascio]

Sure. Kelly, this is Dirk. So overall, pleased with the progress we've made on the overall margins. I think as we think about the outlook for the year, even what's embedded in there, especially in my commentary about the higher end that includes being in a normalized environment, a pretty healthy EBITDA growth rate still in the second half of the year of high single to low double digits. So I feel good about ability there. I'm not going to comment on specifics within the different lines. But what we do expect is we do expect to continue to still make progress on our EBITDA margins. And I think there's still, as Dave commented, plenty of opportunity ahead. We feel good about where we stand at the halfway point and our outlook for the balance of the year.

[Kelly Bania, BMO Capital Markets]

Okay. That's helpful. And maybe just to follow up. I don't think we have your sales outlook for this year or have had that. But I guess, just curious if or to what magnitude deflation has impacted the outlook for this year and next? Or is that really was already in your expectation for the year? Or if you kind of had to internally make any changes to your outlook given kind of where food pricing is? Help us kind of understand how that evolved into your expectations for this year and next?

[David Flitman, Chief Executive Officer and Director]

Sure. I think that just because inflation and deflation have been harder to predict. So it may impact the sales dollars, but it doesn't really impact overall given it's come primarily in the protein categories our strategy and what we've executed against. So there's not been a whole lot we've had to adjust. What we are focused on, as you know, is really the case growth and the strong case growth that we have and continue to have across the business. I think that we do watch the different categories very closely and where we may see inflation and deflation is showing up. But in the current environment, we're going to stay the course and we think that will generate the continued momentum that you've seen over the last four or five quarters.

[Operator]

And your next question comes from the line of John Heinbockel from Guggenheim Securities.

[John Heinbockel, Guggenheim Securities]

I wanted to start with the broadline independent growth, right? If you think about growth in distribution points, right, growth in locations served versus drop size. I'm curious how they relate to each other? Which one is bigger? And then maybe, Dave, your thought on wallet share. And we're not giving numbers, I guess, but thoughts on how high is up? Because it still seems that for you and others, it's way too low versus what it should be.

[Dirk Locascio]

Yes. John, we feel good about it, again, with the backdrop of the health of the operator that I mentioned earlier. Our ability to take share is strong. I'm pleased with our rate currently of new account generation. But I do believe there's an ample opportunity for us to continue to penetrate our existing customers while we're bringing on new ones. And then ramp up the penetration of those new customers through the course of time. Our team gets that algorithm very, very well and is extremely focused on it. And in the quarter, I would say the new account generation was a bit stronger in that penetration to the first part of your question, but we're squarely focused on both and have a lot of confidence in both going forward.

[John Heinbockel, Guggenheim Securities]

And then maybe a totally different topic. Obviously, gross margin was healthy when we had inflation, it should be also right healthy with deflation. But if I look at the vendor management or procurement that set of opportunities versus mix, both product and customer, which one do you think is bigger, let's say, looking out 12 to 18 months, is not vendor management piece larger? Or you think they're equally sized?

[David Flitman, Chief Executive Officer and Director]

I'm not sure I've given not to either one of those at this point. To your point, John, we've got a lot of activity going on in both areas and there's still a lot of room for improvement in both.

[Dirk Locascio]

And I think, John, if you think about -- you think of both really a continuous journey. And that's -- when you think about the customer mix piece, that's why we have relentlessly been focused on outgrowing with these target customer types because of the value add. And we think we can bring the overall profitability mix that comes with that.

[Operator]

And your next question comes from the line of John Ivankoe from JPMorgan.

[John Ivankoe, JPMorgan]

I know in previous calls, we've kind of talked about maybe some opportunities around indirect spend, low-hanging fruit, I think maybe some unaddressed previously was previously used. Where are we in that journey? I guess how much is kind of showing up that you actually might want to consider? And is this just maybe getting more out of your current spend? Or is actually reducing total dollar spend part of the opportunity?

[Dirk Locascio]

John, Dirk. Thanks for the question. So it really is -- we've progressed where we've now identified a number of opportunities. We've begun to go after them. Expect to see some modest dollars show up later this year and then ramp up over the course of next year. So good progress since we talked about it last quarter and it really is a lot about optimizing our current spend. And so in these cases, as you've heard us talk about, we're targeting typically trying to offset our cost inflation as much as we can with productivity. And this would be one of those levers as we try to do that. So good progress and we think there's plenty of opportunity ahead.

[John Ivankoe, JPMorgan]

And Dave, from your perspective as you've kind of come in and have kind of seen the way that US Foods was previously structured? Are there any kind of thoughts that are emerging, the longer that you get on -- spend time in the seat or just maybe things other than just some of the regional structures that you've done and things that can be differently? And your continued exposure to the CHEF'STORE, is that a business that we should expect increased capital and over time? Or is that under evaluation?

[David Flitman, Chief Executive Officer and Director]

Yes. So I feel very good about the momentum that we've got. CHEF'STORE. I'll just take that one quickly. Obviously, the complication around the systems conversion that we've had here has made it a little difficult to get a handle on underlying volumes and those sort of things. Still believe very much in the value of the business case and the synergies with broadline and we'll be looking as we get the system stuff behind us to get the right data leakage to prove that to ourselves. But opportunistically, going forward, as I've said last quarter, I see a lot of opportunity really in all areas of the P&L. Importantly, I'd point you to what I said last quarter, is that we ramp up this thinking around continuous improvement in productivity and efficiency in that 3% to 5% range. We'll have more to say about that. But as Dirk just highlighted, the intent to offset inflation by getting more efficient and productive every year is a constant theme that you will see us talk about here going forward in the business. And I believe that's a fairly significant change in the organizational thought process here. But more to come on that in the future.

[Operator]

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

[Alex Slagle, Jefferies]

Just a couple of follow-up questions. One, I wonder if you could clarify how the new routing software benefit to come, I guess, in '24? Is that already contemplated in your views of being able to get toward that previous $1.7 billion EBITDA target for '24? Or could there be upside relative to that or related to this?

[David Flitman, Chief Executive Officer and Director]

Yes, there always could be upside, but that was contemplated as part of the long-range plan when the company put that out in the $1.7 billion target for next year.

[Alex Slagle, Jefferies]

Got you. And on turnover and retention, I guess any additional color there on the progress through the 2Q, I guess, driver turnover you've gotten that back toward '19 levels already and warehouse turnover was still above. But maybe just some updates on how far you've gotten, where that goes next?

[David Flitman, Chief Executive Officer and Director]

Really good progress in both areas. The turnover in the warehouse and on the outbound side continues to persist a little stronger than delivery. To your point, we're not quite back to where we hope to be at this point in 2019 levels. However, we've got three quarters in a row now of continued reduction in turnover and improvement in productivity, both in delivery and warehouse and to our discussions around things like our flexible scheduling initiative and the significant ramp-up that we've got on that in the back half of the year being in more than half of our markets after this pilot phase here in the first half gives me a lot of confidence that we will continue to drive significant improvement there and at getting back to where we hope to be. So really good momentum and more to come.

[Operator]

[Operator Instructions] Your next question comes from the line of Andrew Wolf from CL King.

[Andrew Wolf, CL King & Associates]

Taking the -- the market share you're taking with independents, what are you facing that -- could you share with us what your belief is the independent sector for foodservice distribution is growing or not growing? Like what are you comparing that to?

[Dirk Locascio]

Sure. Andrew, this is Dirk. So as we've talked about it externally, we relative to Technomic because that's what you guys and many other investors have more access to. Internally, we use -- on a month-to-month basis, we use an NPD data set because it's much more granular and actionable. And so when we talk about the share gains, on a regular quarterly basis, that's using NPD data. So 80% or 90% of the industry provides them. So we're seeing share gains using that. So it's an independent, they measure everybody the same and please to have followed that. If you look at Technomic, that Dave said, the Technomic outlook, I believe, for this year calls for independents to be down a couple of percent, and I think change to be flattish kind of overall restaurant yourself. So if you think of where we are relative to that of the strong independents continuing to grow at 5% to 6%. And again, then in chain a little bit slower. But again, that hasn't been our focus. And we will take all day continuing to grow at a much faster pace with independent healthcare and hospitality, and that remains the focus.

[Andrew Wolf, CL King & Associates]

Okay. On your sales associates, obviously, with an increase in -- they're selling more, they're going to make more money. But could you talk about sales product -- the associate sales associate productivity versus hiring new folks as the driver of the market share.

[Dirk Locascio]

So overall, the way we think about it when we look at market share, it's overall just how we're doing in markets, how we're doing by categories, how are we doing by restaurant types. And then underneath there, there's -- as you expect, there would be -- we have a performance management process of how individual sales reps are performing. But in parallel, we do continue to actively hire especially in those markets that are growing at a faster rate. So it really is a blend. And as we think about share gains, we expect that to be driven by both performance management, but definitely on continued adding of sellers in those markets that are growing faster.

[Andrew Wolf, CL King & Associates]

Okay. Well, I guess more of the same and it's working right now. And lastly, following up on your lower cost per case and distribution. That includes fuel and mileage, right? So as we unpack different things, we look at from the warehouse to delivery, it sounds like it would be more on the delivery side, given some of the progress you're already making on the routing, some income on bringing stuff back and obviously, fuel. Is that -- on a dollar basis, is that the way to think about where most of this better results are coming versus not incrementally just sort of like for the quarter?

[Dirk Locascio]

I'll come back to where Dave talked about earlier in his comments on this is, while we're pleased with this, we're seeing productivity improvement in both warehouse and delivery. So they're both contributors. They each have impacts on, yes, on fuel, on routing, et cetera, and they each contribute. So without parsing out the individual, I think the more important takeaway is when we think upstream on the retention of the turnover, et cetera, seeing the improvement, and that's leading to overall lower cost per case and that's demonstrating what we're doing is working, and we expect to do more of that.

[Operator]

And your next question comes from the line of Jake Bartlett from Truist Securities.

[Jake Bartlett, Truist Securities]

My question is about gross profit per case and the ability to maintain that. And you understand that protein in center-of-the-plate are generally priced on a dollar markup, so the deflation doesn't impact it. But my question is whether that could allow for greater price competition? So it seems to be the biggest risk is that competitors try to drive business more with price than service levels as they have over the last few years. So how would you assess that risk? Are you seeing any kind of more aggressive pricing out there? How do you expect to approach pricing going forward?

[David Flitman, Chief Executive Officer and Director]

Overall, we feel good about the durability of our gross profit. I think for the last few quarters, we've been asked how we thought we would fare with lapping large inflation a year ago. And hopefully, what people have seen as we've demonstrated still strong gross profit results despite that. And that comes back to the focus we've had on our own execution of initiatives driving the results that we're seeing. I think that from a macro and competitive environment, it continues to be stable. It's really back to a pre-proven world where it's a competitive industry. And that's where we operate in, but we haven't seen a level of irrationality that any different than you would see in a normal environment. So quite healthy and we expect to continue with strong gross profit, driving solid very good EBITDA growth.

[Operator]

And your next question comes from the line of Peter Saleh from BTIG.

[Peter Saleh, BTIG]

Great. I just wanted to come back to the CHEF'STORE conversion issue. Can you just elaborate on what that system issue was? And is the 70 basis point impact fully consigned to the second quarter? Or do you think any of that will bleed into 3Q?

[Dirk Locascio]

Peter, this is Dirk. So overall, we think through there is we had to convert off of a system under a new system by earlier this year as part of our purchase agreement, which we did. So all markets are converted. And it's not uncommon, unfortunately, for -- when you have conversions of this magnitude to have some challenges, which we did see. Let me just put it into context. So when we talk about some sales challenges there, it's down low single digits. But when you compare that to independents that are in the broadline are up 5.5%, it has a more meaningful impact there. And some of the challenges there were around us we do conversions resulted in issues where orders weren't fully going through, et cetera. So we had less product on shelves, et cetera. That's all been remediated. It has been for a few months, and we've been focusing on continuing to get customers back in the store to recoup that and do expect to get back to growth in the second half of the year.

[Peter Saleh, BTIG]

Great. And then just on the leverage being around 3x. Currently, how are you thinking about capital allocation kind of going forward? Is it more debt pay down? Or do you think you'll shift a little bit more to share repurchase at this point in time as EBITDA continues to grow and the leverage kind of comes down naturally?

[Dirk Locascio]

Well, I expect -- as you know, Dave's comments that we did close early in the third quarter on the Renzi Foodservice acquisition. So that is a Q3 use. And then on top of that, I do expect for the near term, a continued balance of debt pay down and share repurchase. We think both are important, and we're going to continue to focus on. I think the good working capital performance this year as the team service levels have improved. Our teams have very methodically gone through and found those opportunities to remove some of the added stock we added when vendor service levels were lower, while still focus on maintaining high customer service levels that's allowed us to generate the even stronger working capital numbers this year, which has helped with the funding of the acquisition, et cetera. So to directly answer your question, I have to, I expect it to be balanced, but you will see our first tuck-in M&A, which we're excited about.

[Operator]

And we have reached the end of our question-and-answer session. I will now turn the call back over to Dave Flitman for some final closing remarks.

[David Flitman, Chief Executive Officer and Director]

Thank you all very much for joining us today. Our business is strong, and I have great confidence in our ability to accelerate our momentum. Have a great day.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.