US Foods Holding Corp

NYSE:USFD

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Rochelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Holding Corp. Third Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mike Neese, Senior Vice President of Investor Relations. Please go ahead.

[Michael Neese, executive]

Thank you, Rochelle. Good morning, and welcome to the US Foods Third Quarter Fiscal Year 2024 Earnings Call. On today's call, we have Dave Flitman, CEO; and Dirk Locascio, our CFO. We will take your questions after our prepared remarks conclude. [Operator Instructions]

Our earnings release issued earlier this morning and today's presentation can be found on the Investor Relations page of our website at ir.usfoods.com.

During today's call, unless otherwise stated, we are comparing our third quarter fiscal year 2024 to the same period in our third quarter of fiscal year 2023. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our Form 10-K for a detailed discussion of the potential factors that could cause our actual results to differ materially from those statements.

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 presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures.

Now I'd like to turn the call over to Dave.

[David Flitman, executive]

Thanks, Mike. Good morning, everyone, and thank you for joining us. Before we begin, our thoughts are with all of our associates, customers and communities impacted by Hurricane Helene and Milton, which have each caused catastrophic devastation across parts of the Southeast. We are grateful to our local teams for their unwavering commitment to aiding recovery efforts and continuing to serve the community through countless hours of volunteering and donations during this difficult time. Thankfully, all of our associates are safe, but many suffered damage to their homes and property.

I'll briefly highlight one of our associates who have gone above and beyond to make a difference in North Carolina during these trying times. Josh Hope is a salesman for US Foods and local to Boon County. He gathered volunteers to provide a wide variety of grassroots relief support. He and others coordinated to Go Funding page that raised more than $400,000 of donations for those impacted, deployed 11 truckloads of food donations gathered with the support of local organizations and businesses, including US Foods, organized the purchase and delivery of 40 generators impacted areas. Thank you, Josh, for your incredible efforts and to all our associates who have helped and continue to help our customers and communities during this challenging time.

Now let's turn to our results from the third quarter. I will then update you on core initiatives across each of our 4 strategic pillars before passing it to Dirk to review our financial results and provide an update to our fiscal year 2024 guidance.

Turning to Slide 4. We delivered 13% adjusted EBITDA growth, solid adjusted EBITDA margin expansion and 21% adjusted EPS growth as we continue to deploy our proven operational playbook and execute our strategic initiatives. We delivered another quarter of strong results despite a challenging macro environment and unforeseen weather-related impacts, which pressured industry case volumes. This is a real testament to our team's focus, our execution and our ability to control the controllables.

We drove volume growth and captured market share in our target customer types of independent restaurants, health care and hospitality. Total volume grew 3.8%, while our independent restaurant cases grew 4.1%, which resulted in our 14th consecutive quarter of market share gains.

Moving to capital deployment. We were prudently aggressive with share repurchases this quarter, totaling $580 million. We will continue to execute buybacks as we believe our shares remain undervalued. Since initiating our buyback program in late 2022, we have repurchased over $1.1 billion of our shares at an average price of $50.68 and will continue to be good stewards of capital deployment.

Let's turn to the broader macro and our focus on our target customer types. In addition to the softer macro environment, there were several large storms in the third quarter that adversely impacted our Southeast business where we over-index on independent restaurant market share. The impact from the slower Southeast growth was nearly a 100 basis point headwind to independent volume growth. And excluding the Southeast, our organic independent volume growth was modestly higher than our second quarter growth rate. Monthly foot traffic was down approximately 3.5% for the third quarter, but sequentially improved throughout the quarter. And once we got past the storm impacts in the early part of the fourth quarter, we have seen further improvement, which has translated to an approximately 100 basis point acceleration in our organic independent case growth. We are also seeing a similar improvement in our chain same-store volume.

Our go-to-market strategy, including team-based selling, innovation and digital combined with our operational playbook enable us to capture profitable market share no matter what external factors come our way. And despite the challenges I've just outlined, we were quite pleased to grow independent market share in the third quarter, both sequentially and year-over-year at a faster rate than we did in the second quarter.

Let's move now to our 4 strategic pillars. I'll discuss our progress on each, starting with Slide 5. Our first pillar is culture. Our focus and top priority are always the safety of our associates. During the quarter, our injury and accident rates were 21% better than the prior year. While we continue to make incremental progress each quarter, we will not rest until we have 0 injuries for our associates.

This year, we supported the American Red Cross with a donation of $300,000 to support disaster relief efforts including Hurricanes Helene and Milton. Our US Foods teams also sent thousands of cases of product to disaster relief organizations across the impacted footprint.

Additionally, we announced a national partnership with the Military Family Advisory Network, or MFAN, this July and made a $250,000 contribution. This organization's mission is to understand and amplify the needs of military connected families who face food insecurity. Our contribution will help MFAN distribute 500 pantry restock boxes per month, designed to get transferred military families start in their new homes with essential items typically discarded during the move. The MFAN collaboration is our first National Hunger Relief partnership supporting military families, a group disproportionately impacted by food insecurity.

Turning to Slide 6, our second pillar, service. Again, this quarter, we delivered year-over-year improvement with on time and in full service levels. We also remain focused on delivering improved distribution productivity through our Descartes routing technology, which is now live in 15 markets. By year-end, we expect to launch an additional 11 markets and remain on track of approximately 50% of our routed miles on Descartes. We continue to see this technology produce incremental improvement in cases per mile. And we continue to enhance the user experience of our proprietary leading digital platform, MOXe, which enables our customers to place orders, track deliveries, pay bills and seamlessly manage inventory. Given the significant portion of total cost that food represents for our customers, we introduced a new food cost calculator feature embedded in the MOXe. This tool tracks and manages food costs over time, providing customers with valuable insights to help them with their menu prices, inventory and product selection. This innovative solution is available to all US Foods customers and further enhances our digital leadership position.

Now let's turn to growth, our growth pillar on Slide 7. Pronto, our small truck delivery service continues to gain steam and is now live in 40 markets. We're excited about this rapidly growing opportunity and its ability to reach hard-to-service customers in dense geographies. Pronto provides these previously untapped customers for US Foods with smaller more frequent deliveries and later cutoff times.

Earlier this year, we launched Pronto penetration in 2 pilot markets. This service builds a nonroutine delivery date for our existing independent restaurant customers, leading to further wallet share for US Foods. In these pilot markets, we are seeing an approximate 20% uplift in case volumes while showing no cannibalization in broadline delivery size or frequency. The successful launch and early learnings gave us confidence to expand Pronto penetration from 2 pilot markets to 6. We remain on track for Pronto to deliver nearly $700 million of annualized sales this year.

Moving to national sales. Our targeted business development activity drove new wins during the quarter, and we onboarded more than $100 million in annualized sales in health care and hospitality.

Finally, in September, we launched our Scoop team to Barn Grill and Beyond. Our fall Scoop highlights 24 new on-trend products designed by US Foods product development experts, who leverage a wealth of culinary expertise, industry experience and data-driven insights to bring new product innovation to our private label brands. Many of you saw this in action at our Investor Day last June. My favorite from the fall lineup is the Chef's Line natural smoke port, which tastes amazing and is prepackaged in a boiling bag and saves customers approximately 40 minutes of labor per case.

Turning to Slide 8, our profit pillar. Our go-to-market strategy and strong execution drove a 7% increase in adjusted gross profit to $1.7 billion. This was primarily driven by total case volume growth and improved cost of goods sold. We grew adjusted gross profit 240 basis points faster than adjusted operating expense driving a 27 basis point of adjusted EBITDA margin expansion.

We also made additional progress on cost of goods through our strategic vendor management efforts, realizing more than $70 million year-to-date. We now expect to deliver more than $230 million in cost of goods savings in our current 2022 to 2024 long-range plan, which is nearly complete. On the productivity front, we delivered 3.5% improvement in warehouse productivity in line with our goal of 3% to 5% annual productivity gains to offset wage inflation.

Regarding CHEF'STORE, a quick update. As a reminder, we are actively exploring strategic alternatives for this business and have recently begun discussions with several potential buyers. We remain fully committed to supporting the business, our associates and our customers through this process. And we will continue to keep you informed as we make further progress. As we have previously said, in the event of a sale, we would expect to deploy the majority of the proceeds to repurchasing shares.

Before I hand it over to Dirk, in September, the International Foodservice Distributors Association inducted 20 US Foods drivers into its Truck Driver Hall of Fame. This honor recognizes the foodservice industry's top drivers that have exceptional safety record and length of service, each with more than 25 years of service at US Foods. It's a highly coveted honor for truck drivers in our industry. With Veterans Day just around the corner, I want to highlight 2 of the Hall of Fame drivers, both of whom are veterans that serve in the U.S. Armed Forces and hail from our Fort Mill, South Carolina facility.

The first is Orlando Smith, who has 30 years of service at US Foods. The second is Larry Boyer, who has been a driver for us for 34 years. I thank them both not only for their decades of service to our company, but especially for the bravery and courage in serving and protecting our great nation. Finally, I also thank all veterans within and outside of U.S. Foods, who have served our country and protected our freedom. We owe you all a huge debt of gratitude that can never be repaid.

Let me now turn the call over to Dirk to discuss our third quarter results in more detail and our updated 2024 guidance.

[Dirk Locascio, executive]

Thank you, Dave, and good morning, everyone. Our double-digit adjusted EBITDA growth is the result of consistent execution of our strategy to capture market share and expand margins.

Starting on Slide 11. Third quarter net sales increased 6.8% to $9.7 billion, driven by total case volume growth of 3.8% and food cost inflation and mix impact of 3%. We drove solid case growth and captured share gains in each of our target customer types. Our independent restaurant volume grew 4.1%, including 170 basis points from acquisitions. Health care growth remained strong at 5.7%, and hospitality growth accelerated further to 3% as we onboarded new business. Adjusted EBITDA grew 13.2% from the prior year to $455 million, and we expanded adjusted EBITDA margin by 27 basis points to 4.7%. As we continue to execute our profitable growth strategy and proactively manage gross margin and operating expenses, we see these actions drive margin expansion.

During the third quarter, as Dave mentioned, we made further progress on our strategic vendor management work and now expect to achieve more than $230 million in cost of goods savings from 2022 through the end of this year. We also remain on track to realize the $120 million of annualized operating expense savings that we highlighted last quarter. And we are on track to deliver more than $20 million in savings this year from the indirect spend work that we previously discussed.

This highlights our team's strong ability to execute initiatives regardless of the macro environment. We are pulling the appropriate levers to sustainably grow gross profit rate and drive operating expense productivity. As a reminder, a significant portion of our operating costs are structured as variable to provide us flexibility to match expense to volume in different market scenarios. Finally, adjusted diluted EPS increased 21.4% to $0.85, demonstrating our ability to grow adjusted diluted EPS meaningfully faster than adjusted EBITDA. We expect this to continue as we deploy our strong free cash flow towards share repurchases, which I'll talk more about shortly.

Moving to Slide 12. We made significant progress in growing adjusted gross profit per case faster than adjusted operating expense per case again this quarter. Adjusted gross profit per case grew by $0.24 or more than 3% versus prior year. This growth was primarily driven by executing initiatives within our control, including our strategic vendor management work and continued focus on private label penetration. Adjusted operating expense per case increased $0.04 or less than 1%. We're offsetting a significant portion of operating cost inflation with productivity, including improving supply chain productivity, streamlining administrative processes and costs and realizing indirect spend procurement savings. This all led to adjusted EBITDA per case of $2.12, up $0.17 or 8.7% from the prior year. We expect continued adjusted EBITDA per case growth as we execute our initiatives.

Moving on to Slide 13. Our strong cash flow generation was evident again this quarter. Year-to-date, we've generated $891 million of operating cash flow and $658 million of free cash flow, driven by increased profitability and disciplined working capital management. Our robust cash flow creates financial flexibility to deploy capital strategically, enabling us to invest in the business for growth and return capital to shareholders via share repurchases. We invested $236 million in cash CapEx for the first 9 months, mainly focused on projects to support growth, including information technology, property and equipment as well as maintenance of our distribution facilities.

During the quarter, we significantly accelerated the pace of share repurchases in line with our commentary last quarter and repurchased 10.4 million shares for a total of $580 million. In the fourth quarter to date, through November 4, we purchased an additional $160 million of shares. We have $238 million of remaining funds authorized under our $1 billion share repurchase program. We will remain disciplined in continuing to execute our share repurchase program in addition to continued investment in the business for organic growth and opportunistic tuck-in M&A.

Turning to net leverage on Slide 14. We ended the quarter at 2.8x net leverage, within our 2x to 3x target range. Net leverage is unchanged from year-end, even with the significant share repurchases this quarter. Subsequent to quarter end, we addressed the next maturity in our debt structure. We issued $500 million in senior notes due 2033 at 5.75% and used the proceeds to repay a portion of our term loan facilities. We also extended the maturity of the remaining balance of our term loan due 2026 to 2031, lowered the interest rate margin on both of our term loan facilities by 25 basis points and eliminated the credit spread adjustment of 11 basis points on the facility due 2031. As a result of this, we capture approximately $9 million in annualized interest savings. Our debt structure is strong, and we have no long-term debt maturities until 2028.

With that, let me now turn to our updated outlook for 2024 on Slide 15. Given our year-to-date performance and outlook for the remainder of the year, we're updating our fiscal year 2024 guidance. We now expect net sales to be in the range of $37.7 billion to $38 billion. We're increasing the bottom end of our adjusted EBITDA range to $1.72 billion to $1.74 billion. Finally, we're tightening our adjusted diluted EPS range to $3.05 to $3.15.

Moving to modeling assumptions. For 2024, given the continued soft macro environment and the unanticipated hurricane impacts, we now expect total case growth of 4% to 4.5%. We're also updating our sales inflation assumption, which includes mix to a range of 2% to 2.5%. Interest expense is projected to be lower than our previous forecast and is now expected to be in the range of $310 million to $320 million. Finally, depreciation and amortization is at the higher end of our range, partially due to M&A and is now projected to be in the range of $435 million to $445 million. Despite the softer macro backdrop, we continue to strengthen our execution and remain confident in our ability to grow volume, gain share with target customer types, increase profitability and return capital to shareholders. I'm pleased with our strong progress this year as we've driven balanced profitable growth. We remain well positioned to achieve our current long-range plan and 2024 financial targets. And I look forward to getting off to a strong start for our next long-range plan beginning in 2025.

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

[David Flitman, executive]

Thanks, Dirk. Not only are we a market leader but we have significant sustainable competitive advantages that position us well to win in any environment, as we are demonstrating. We are the only pure-play, U.S.-only food service distributor with national scale. Our focus is to grow volume and gain share with the highest value customer types in the industry, independent restaurants, health care and hospitality. We are focused on executing and delivering the outcomes of our new long-range plan, which comprehends significant upside from our self-help initiatives. Many of these are in the early innings of deployment and have a long runway of profitable growth. We are the industry leader in digital innovation and have built a strong competitive advantage that we will maintain. And we are confident in achieving our 2025 to 2027 long-range plan.

As a reminder, our growth algorithm introduced at our June Investor Day includes a 5% sales growth CAGR, 10% adjusted EBITDA growth CAGR, at least 20 basis points of annual adjusted EBITDA margin expansion and a 20% adjusted diluted EPS growth CAGR. This will generate at least $4 billion of capital to deploy against our capital allocation priorities over the 3-year period, including approximately half towards buying back stock.

Our third quarter results of net sales growth of 6.8%, 13% adjusted EBITDA growth, a 27 basis point increase in adjusted EBITDA margin and a 21% adjusted EPS growth affirmed my strong conviction that we have the right strategies in place to deliver our next long-range plan. And our team is 100% aligned and excited about our future and ability to achieve exactly what we say we're going to do over the next 3 years.

Finally, I sincerely thank each of our 30,000 associates for their dedication to executing and to serving our customers well as we continue to pursue our ambition to become the undisputed best in the industry.

And with that, Rochelle, please open up the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Brian Harbour with Morgan Stanley.

[Brian Harbour, analyst]

Can you talk a little bit more about sort of private label penetration, where that's tracking and just what you continue to see there as well on the independent side?

[David Flitman, executive]

Yes. We're excited about our private label brands, Brian. we've had continued increase in penetration there, particularly with our independent restaurants. We're running roughly 52%. And as I say all the time to our team and externally to you guys, there's no barrier to increasing that. I see no near-term ceiling.

I talked a little bit here this morning about our new Scoop launch. We're leading in innovation, very strong adoption in all those products. We continue to take those products really across the portfolio in all of our customer types, and we've got great momentum.

[Brian Harbour, analyst]

Okay. Great. Maybe talk about just independent health as well, right? It sounded like sort of some of the uplift you've seen recently after the weather impact was similar for independents and chains, if I understood that correctly, but could you talk about that customer? And how do you sort of expect the trend through this quarter and into early next year?

[David Flitman, executive]

Yes, we're encouraged by what we've seen. And just a little context, the foot traffic challenges are well documented really beginning in the second quarter of this year. Importantly, foot traffic decelerated in the third quarter. You heard me say this morning that our market share gains actually accelerated.

We had a hurricane last week in September. We had another one in early October. And once we cleared all of that, I'm very encouraged by the momentum that we've seen, more than 100 basis point acceleration in case growth, both, as you mentioned, with our independent restaurants and also chains.

And importantly, in our health care and hospitality, where we took share again this quarter and our differentiated portfolio remain very strong. Both of those have very strong pipelines. And I couldn't be more excited about the way we're going to finish the year and what that means for 2025.

[Operator]

Your next question comes from the line of Lauren Silberman with Deutsche Bank.

[Lauren Silberman, analyst]

First on the guidance, you're guiding to the high end of the full year EBITDA guide, lower end of the case growth guide. So it seems like you're outperforming within the P&L relative to your initial expectations. So can you just talk about where that's coming from? Have you pulled forward any initiatives?

[David Flitman, executive]

No, we really haven't pulled anything forward, Lauren. As we've been doing for a long time now, we're just continuing to execute that portfolio initiative -- of initiatives that we have, which really span the entire spectrum of the P&L, from top line to gross profit expansion. You heard Dirk comment this morning on our continued momentum that we're gaining on operating expense and productivity. All of that will continue. I feel like we're in the very early innings of a lot of that work, and that's what gives me great confidence and excitement for the new long-range plan.

[Dirk Locascio, executive]

I think, Lauren, what you continue to see is come to fruition this balance of the control the controllable focus that we've had. So solid top line growth, not only in independents, but health care and hospitality and overall growth. And then our margin expansion has been very strong, and you see us -- EBITDA growth is one thing, and we're very pleased with 13%. But being able to get that down to EPS is important, and we've leveraged that now for multiple quarters. In this quarter, you saw from 13% EBITDA growth to 21% EPS growth. So pleased with that.

[Lauren Silberman, analyst]

Great. And just a follow-up on the independent case growth trend. Outside of the Southeast, are you also seeing improvements in underlying traffic trends? Just trying to understand, are you communicating that you're currently running close to that 2% organic?

[David Flitman, executive]

No, I'd say we're running higher than that, Lauren. And yes, I think we've seen some acceleration really across the country in independent case growth, and I'm actually very encouraged. We talked last quarter about a little bit of the pucker factor, if you will, given the presidential election. We've got that behind us now. I see the consumer gaining confidence a bit, and I think that means good things for 2025.

[Operator]

The next question comes from the line of John Heinbockel Guggenheim Securities with Guggenheim Securities.

[John Heinbockel, analyst]

Dave, can you talk to sales force growth or expansion is running what about now, 5% or so? And maybe talking about productivity of recent cohorts and then I think you're still, right, all of your -- all of the case growth coming from new accounts? Do you -- are there any green shoots with regard to drop size?

[David Flitman, executive]

Yes, John, and we're running in that mid-single-digit as we expected to for the year. We'll see how that finishes for the year. But I will tell you, I talked to all of our new incoming sales training classes. We just had another one here, Tuesday, we were bringing in very strong sales talent. I'm actually as excited as I've been since I've been here about our ability to bring in high-quality new sellers, along with an increase in competitive sales talent here over the past several months. So really excited about that.

And yes, the lifeblood of our growth has been, and I think will continue to be, new account generation. We're excited about that, but we're also managing loss. Well, penetration has been a challenge with the foot traffic. I wouldn't say we've seen any great acceleration in the penetration yet. Although we have seen some green shoots here over the last 3 weeks, I mentioned that the overall case growth has begun to accelerate. So I think the consumer is going to gain more confidence. I think we'll get past those foot traffic challenges here soon and just continue to strengthen that momentum.

[John Heinbockel, analyst]

And then where are we on the rollout right? And I know you said warehouse productivity is up 3.5%. I don't know what you're seeing with regard to miles driven productivity. Is that sort of in the same range?

[David Flitman, executive]

Yes, that's a big enabler in the delivery productivity. And I mentioned last quarter that we're basically back to pre-COVID levels with that. We're not quite back there yet in the warehouse, but we did see an acceleration in warehouse productivity from the second quarter to the third quarter. That's why I called that one out this morning in my prepared remarks. Very, very encouraged with what we're seeing both in terms of reduction in stabilization and turnover and how that's translating to improved productivity.

[Dirk Locascio, executive]

Specific, John, to your question. So we're in 18 markets, so we've got 6 more. So that continues to roll out and will continue through 2025. Continue to be pretty pleased with the results that we're seeing in that. It really is the foundation for a lot of the other things that we're driving in supply chain.

[David Flitman, executive]

And having exactly the desired effect in terms of standardizing those operating practices and driving a consistent uplift in productivity across the company.

[Operator]

Your next question comes from the line of Kelly Bania with BMO.

[Kelly Bania, analyst]

I wanted to just ask a little bit about the COGS initiatives. It sounds like that initiative continues to go quite well. I think you maybe slightly exceeded your goals for this last 3-year plan. But can you just talk about the confidence in the plan there over the next 3 years, how vendors are reacting to your strategy there and working with you and just how volume-dependent the savings could be there in the coming years? And just a little bit more detail on that as you look to 2025.

[David Flitman, executive]

Yes. So thanks for the question. Very confident in what we said we would deliver the new long-range plan, which was $260 million over the 3 years. We just heard us wrapping up the year saying we're going to deliver $230 million. And importantly, Kelly, this is a piece of work that we've been at for a very long time inside the company. And as I've commented previously, we do this in a highly collaborative manner with our vendors. We've been doing it for a long time. It's really a win-win approach in terms of our ability to outpace the market with market share gains and not just with independent restaurants, which is the most important piece, but also health care and hospitality.

They want that volume growth. Everybody is looking for that growth, and they're more than willing to engage with us and do this in a way that makes sense for both organizations. In fact, we just had our annual vendor forum in the last couple of weeks, probably the best ever attended and a lot of excitement coming out of our vendor community about our future. So we feel great about it.

[Kelly Bania, analyst]

Great. That is helpful. [indiscernible] health care business, you mentioned the new $100 million, I guess, that came on during the quarter. Just can you elaborate on that? And the pipeline that you have over the next couple of years in health care, in particular, and the capacity to take on those kinds of accounts.

[Dirk Locascio, executive]

Sure, Kelly, it's Dirk. So we're pleased with that. So we have always have a strong pipeline across both health care and hospitality. Health care, I think you're pretty familiar, as we've talked about, our leadership position there and also largely because of the value that we can bring customers from both the partnership, the service model as well as the economic value. So I'm confident that we can continue to grow at a rate that's very healthy and above market and gain share in each of those customer types.

I think with health care, you see is at the almost 6% that we continue to grow. The thing that is good about growing with health care and hospitality is the same versus, say, over-indexing on change is typically, when you're bringing those customers on, they are buying the same products you already have in your distribution facilities. So they're far more [indiscernible] effective than bringing on a lot of chain business. And that's why you see us continue to focus on over-indexing with independent health care and hospitality and being thoughtful and optimizing around.

[Operator]

Your next question comes from the line of Mark Carden with UBS.

[Mark Carden, analyst]

So I want to start off with Descartes. You're rolling that out now to some of your more impactful markets. How has that rollout gone relative to your expectations? And any incremental learnings from your latest batch markets?

[David Flitman, executive]

Yes, Mark. It's going extremely well, and we were very thoughtful about how we roll this out across the company. And that's why we spent a lot of time early on in those pilot markets, and there are a tremendous amount of learnings around that.

And just as a recall there, you can't do this work without engaging your customers, right, around delivery windows and all that. And we've done a great job of getting ahead of that now as we've rolled Descartes out to new markets and actually doing that work before we bring the technology into the space. And it's really enabled a great dialogue with our customers, actually gotten them a lot more confident that we're going to deliver exactly in the window that they need and when we say we're going to deliver. And so that's why we're confident about rolling this thing out now as aggressively as we are and we'll have half our miles on the card by the end of the year here and finish it up next year. So we're excited about it.

[Mark Carden, analyst]

Great. And then on hospitality, you've been benefiting from some nice new business wins. You guys are seeing market share. How did overall hospitality industry demand shake out for 3Q relative to your expectations? Did you guys see much hurricane impact there? And how is your business with your existing customer base?

[Dirk Locascio, executive]

Mark, it's Dirk. So I'd say, for the third quarter, outside of sort of the underlying demand and the weather, it shook out largely as we expected. It had very similar impacts from the storms from the overall underlying foot traffic. Foot traffic impacts in hospitality often is pretty similar to what you see in the restaurant space. So we saw the same pressures and then similar start to the quarter and have seen the improvement that Dave talked about, and independence and chain is show up in hospitality as well.

So we're encouraged. I think at the same time, our team continues to be very active working the pipeline for net new business and again, feel good just as I answered the previous question on our ability to grow and take share there as well as in health care.

[Operator]

The next question comes from the line of Jeffrey Bernstein with Barclays.

[Jeffrey Bernstein, analyst]

Great. Two questions. The first one, just trying to clarify the total case growth for the full year is now 4% to 4.5% tempered from the 4% to 6%. I was hoping you could maybe prioritize what drove the reduction. I know weather was clearly a component. But in clarifying an earlier question, I think you said something was running currently greater than 2% case growth. So just trying to get at least directionally, sounds like 3Q was better than 2Q, further improvement in 4Q, all x the weather. Just wondering if you could provide any specifics in terms of numbers to support kind of that reacceleration you've seen through the third quarter into the fourth quarter.

[Dirk Locascio, executive]

Jeff, it's Dirk. Really, the adjustment was a combination of the weather, as you pointed out, which toward the end of the third quarter and then to start the fourth quarter. And given our size in the Southeast, it had a an impact on us.

The second piece is the overall traffic environment in the third quarter stayed softer for longer, although we did see as we were coming out of the quarter before the storm said, we saw some positive signs. And as Dave mentioned, we've seen that -- those signs show up again in more recent weeks. So it's a combination of those things. But I think the important part is even during that period, we gained share in the quarter again in each independent health care and hospitality, which is our sort of guidepost that it is sort of the macro environment and the storms versus us losing share. I think the other thing it does is it sets us up to be confident in our ability to deliver what we committed for 2025.

[Jeffrey Bernstein, analyst]

Great. And then in terms of the new wins, I know you highlighted health care and hospitality, very encouraging. I'm wondering whether there's any big gains or changes maybe accounts that you've given up with on restaurants or maybe how the pipeline is looking going into next year in terms of new business.

[Dirk Locascio, executive]

Well, I mean, independents being small, that's always a constant pipeline. And so that when Dave talks about net new accounts, we're constantly winning and you're seeking to win a lot more than you lose and that. And so our teams are doing that well, given that we continue to grow and take share in an environment that the industry tells us is now from a traffic perspective.

I think from a chain perspective, we've onboarded and our expectation is to continue to onboard some new business as we head into 2025. Pipeline remains very robust. We are thoughtful in what we're focus on for chain business, but I feel good about the pipeline there as we head into next year. And the health care hospitality pipelines remain very, very strong.

[Operator]

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

[Edward Kelly, analyst]

Nice quarter. I wanted to ask you, if you look at this quarter, right, like volume growth was a little soft because of like, obviously, like weather, macro-related stuff, but you still delivered EBIT growth that's above the algo. As we think about like the go forward in the 25, and I'm not looking for guidance on 25, but what does the gross profit per case and the OpEx per case opportunity look like in '25 versus what you saw in '24.

I want to ask that question because it certainly seems like industry volumes have the potential to get better. And you have clearly the potential to deliver better volume numbers next year. I'm just kind of curious the composition of the P&L in this quarter, what it says about like the outlook.

[David Flitman, executive]

Yes. Great point. And that's what gives me excitement about entering 2025. The fact that the well-documented industry challenges devastating weather that impacted so many people in the third and early part of the fourth quarter, and we still delivered our new algorithm. Just gives me great encouragement and confidence importantly that our team is ramping up the right activities.

To your point on the GP per case and OpEx per case, as I said, we're in the early innings of this work. I think you can expect that work to continue roughly the way it did this year because our team is focused on it. And each quarter that goes by and as we're ramping up these initiatives and we continue to deliver, just the momentum continues to build. Our team gets more confidence in these pieces of work and the way we're executing them. And I'm very encouraged going into 2025 in all parts of the P&L, including the topline.

[Edward Kelly, analyst]

Great. And just a quick follow-up on the share repo. You've talked about half of the $4 billion going the repo, but I mean, you did [ 20 ] [indiscernible] of that this quarter, and then you're buying back more stock in Q4.

How do we think about like the cadence of [indiscernible]? I mean it certainly seems like it may be -- end up being much more front-end loaded. And are you still targeting to take the leverage ratio down to the level that you talked about at the Investor Day?

[David Flitman, executive]

Yes. Well, thanks for the question. First of all, we did -- we're doing in the back half of the year exactly what we told you we would do, which is lean into share repurchases, given what we believe is significant undervaluation in our shares. But importantly, what we delivered and bought back during the quarter doesn't impact the next algorithm. [indiscernible] $4 billion is between '25 million and '27, okay? And if we generate above what we said there in terms of capital cash flow, we just expect us to go roughly with half of what we generate deploy to share repurchases.

If you think about where the stock ought to be as we deliver that algo in 2027, we're still undervalued, significantly undervalued. And you heard me talk about all the confidence and the momentum that we have in the business, we'll lean in. And as we've also said, we'll toggle between M&A and share repurchases, dependent upon the M&A opportunity, and that pipeline remains strong. But as we said, we really can't dictate the time line of when those things are going to pop out of the pipeline. So what we're doing what we said we're going to do. We're confident in the algorithm we put forward and continue to drive that outcome. Dirk, anything to add there?

[Dirk Locascio, executive]

No. Just to reiterate what you said on the -- that's one of the things we like so much about the share repurchase is that ability to toggle as M&A comes up in a particular quarter where you may repurchase more or less depending on that. And but -- we're pleased to have made a significant portion of repurchases, given that they've said the share value relative to what we expect it to be in the future.

[Operator]

The next question comes from the line of Jake Bartlett with Truist Securities.

[Jake Bartlett, analyst]

My first was just a clarification. I just want to make sure I have the trend right in terms of the near term and the cadence. So in the third quarter, organic independent case books was 2.4. You're saying that, that would have been roughly 3.4 without the impact of the hurricanes. Has the trend improved 100 basis points since that, so basically you're running 4.4 in October? Is that the right way to think about?

[Dirk Locascio, executive]

Jake, it's Dirk. Now what it means is instead of the 2.4 after we got past the first couple of weeks of October with the storm impacts, it's been 100 basis points higher than what we had in Q2. So back to that mid-3s range.

[Jake Bartlett, analyst]

Sorry. So October is 100 basis points stronger than 2Q?

[Dirk Locascio, executive]

The last -- yes, last 3 weeks or so.

[David Flitman, executive]

Once we lap the storms. And we're expecting that to continue to improve.

[Jake Bartlett, analyst]

Okay. Got it. Just want to make sure I understood the trajectory because it looked like you were just kind of benefiting from lapping the storms in the third quarter. That's helpful.

My other question is about just your operating cost efficiencies, and your productivity improved by 3.5%, which is great. Your long-term guidance is 3% to 5%. So my question is the path on -- your visibility on the path towards more in middle or even the higher end of that 3% to 5% range. Is that something you're working towards? And might we expect to see in 25, maybe some increased productivity gains, increased momentum on that side? What's the trajectory of the productivity gains?

[Dirk Locascio, executive]

Jake, it's Dirk. So we -- I'm not going to give specifics on 2025, but within that 3 to 5 is what our goal is. And the visibility, we have good visibility on what's driving it, and it's really all the things that we talked about at our June Investor Day. And it spans across supply chain, people and nonpeople. It's across admin, across indirect spend savings. So each of those things we will expect to drive the initiatives that will drive productivity.

Our goal is to offset or largely offset the inflation that we faced so that the strong gross profit gains that we generate flow through in the form of the 20-plus basis points of market expansion that we've talked a lot about. And again, it comes back to the concrete things that we are doing is why we believe it is so sustainable to continue to grow at a very healthy rate that we have and that we've talked about for the next 3 years.

[Operator]

The next question comes from Peter Saleh with BTIG.

[Peter Saleh, analyst]

Great. Congrats on a strong quarter. I wanted to ask about the sales force compensation. I think you guys made some changes earlier this year, it's been, let's call it, 3 quarters or so since that change. Can you just talk about how that's been received so far? And if you're contemplating any other changes to the compensation structure in 2025.

[David Flitman, executive]

Yes. Great question. It's been received very well. I think our sales force is excited. They understand the linkage between what we've modified there. And again, the key pieces of those changes were relatively minor. But I think directionally exactly in line with what we expect to happen in terms of performance, that was to variabilize more of their pay to increase them. They're being very, very hungry.

And secondly, to lean in more aggressively on our exclusive brands. So I always cash these as tweaks, and we didn't fundamentally change the structure. We just made some tweaks here to align with what we expect to have happen in our growth algorithm going forward.

It's having the [indiscernible]. The expected behavior changes are there. Our sales force is excited and we're growing it. And good things are going to happen here on the top line going forward.

[Peter Saleh, analyst]

Understood. And then just, Dirk, real quick on the indirect costs. I think you mentioned $20 million of savings or at least maybe the run rate. Are you still on track to achieve the, I think, $60 million of run rate savings by 2027 that you guys highlighted at the Investor Day?

[David Flitman, executive]

Peter, yes, we are. We are on track for that. And this work to achieve the $20 million this year has been underway. We've talked about it for -- I talked about it for a number of quarters. And as the sort of the actual projects have come to fruition and the savings have come in, pleased with the early start we have in 2024. And yes, well on our way to that $60 million plus.

[Operator]

[Operator Instructions] The next question comes from Andrew Wolf with CL King.

[Andrew Paul Wolf, analyst]

I just wanted to ask you to drill into the Pronto business a little. So it's a $700 million annualized run rate budget for this year. Obviously, it's still growing and maturing. Could you give us a sense of how much of that is incremental, given it was in existence last year, but I'm sure less mature and so on, so we could maybe figure out the growth rate. Also if you want to speak to your expectations going forward?

[Dirk Locascio, executive]

It's Dirk. I'll start on that. So it's -- I'd say 20% or so of it is incremental. It is a complement to our existing. And as we've talked about that being sort of an opportunity for up to $1 billion or around $1 billion. But I'll tell you, that is really the penetration piece that we've talked about, that Dave mentioned, that has moved, just moved from 2 markets to 6 markets. is contemplated pretty conservatively in there.

So with the early positive results we're seeing there, I think there's a lot of runway, probably potentially north of $1 billion there. So that business and that opportunity to continue to access more of the new customers plus our existing customers, we think, has a lot of opportunity for growth for a number of years to come.

[David Flitman, executive]

And Andy, as we said before, [indiscernible] Pronto penetration, it really opens up a part of the market that we're not able to compete against in our broadline business today, that being the smaller delivery, more specialty suppliers. And again, we've got all those great products inside our distribution centers today. But before Pronto really didn't have the service model with those more frequent deliveries in those urban areas. And so now we've got that and we were thoughtful about the piloting work that we did on because we want to be sure, and that's why I commented at this point that we weren't cannibalizing our core broadline business in any way.

And we've proven that we're not now and that's why we're excited and ramping up from 2 to 6 pilots there. So I couldn't be more excited we're pleased with the progress we're making with the pronto.

[Andrew Paul Wolf, analyst]

Great. And I just want to clarify on penetration. So it's your existing broadline customer. It's not really a Pronto customer. And secondly, it's a different kind of product, like a specialty product, not like a fill-in like we need more catch-up or something.

[David Flitman, executive]

Well, first of all, it's -- we had this model for a few years now. And until this year, it was exclusively to go after new customers. We did not allow our existing broadline customers to lean in on Pronto. Now we are. And yes, we're competing against -- when you think about specialty suppliers, think about produce, think about seafood, think about pure meat, specialty suppliers. And again, we've got all those products. But if we've got that truck going to the customer and they run out of a core item, that's not a specialty product, we're happy to throw it on the Contour going to be there. So it's really going to open up some additional volume growth that incrementally we weren't able to gain with our existing customers.

[Andrew Paul Wolf, analyst]

Okay. So the real governors have to be within the route more or less to make it economically viable?

[David Flitman, executive]

It's 100% economically viable. And again, the customers who bought from specialty suppliers, they're used to paying a premium for that service. And as we've said before, Andy, Pronto was at or above the margin profile that we've got in our broadline business. So I'm not concerned about profitability at all there.

[Operator]

We'll take the final question from John Ivankoe with JPMorgan.

[John Ivankoe, analyst]

I wanted to revisit the underlying assumption of local case volumes, which I think was 2% on a market level, and you guys thought that you would do 5% to 8%, in other words, outperforming kind of the base. So I wanted to ask a couple of questions. One, do you still feel good about that 2%, especially for what we've learned this week, what are the really important macro factors that we should look at that could potentially drive a return to 2% local growth?

And as we think about your outperformance is getting back to 5% to 8% type of growth, does that happen regardless of the baseline assumption? Or should we just focus on the 2.5 to 4x the market as we think about our own assumptions over the next couple of years?

[David Flitman, executive]

Yes, John, thanks for the question. There's a lot to unpack it. Let me try to do my best. So yes, back in June, we had a core base assumption of about 2% market growth over time. And again, that wasn't any in any quarter or any particular year, but we thought over the 3-year period of time, that was a reasonable assumption because, historically, that's about what the market growth has been.

And so yes, I'm confident in the 5% to 8% range. I'm confident in our ability to do that even if the market is a little bit soft. If we're in that 1% to 2% range and market growth, I'm confident of that. And I'd point to a couple of things as we've talked about all year. First of all, the election is behind us. The consumers had a lot of inflation over the past several years. Interest rates are starting to come down. I think we're going to see continued return to normal kind of consumer activity as we go into the future.

And the other thing I'd just wrap that with that underscores my confidence. If you look in 2023, in all 4 quarters of 2023, we were at or above the targeted range, okay? We hit first quarter of this year. Don't forget, we had a strike that impacted more than 20 of our DCs in the first quarter on top of a pretty significant weather impact in January. By the way, we still gained share in the first quarter. We entered the second quarter with foot traffic challenges. The foot traffic got worse. We had storms in the third quarter, been a lot of noise over the last couple of quarters. I'm encouraged by what we're working on. I'm encouraged by the enthusiasm and our additions to the sales force. I am 100% confident in our 5% to 8% range in 2025 to 2027.

[Operator]

That concludes our Q&A session. I will now turn the conference back over to Dave Flitman for the closing remarks.

[David Flitman, executive]

Thanks, Rochelle. Thank you all for joining us today. Look, this was another quarter that underscores the momentum that our team is delivering regardless of the macro, regardless of what the weather impacts are, I couldn't be more excited about the momentum we have in the company and our ability to deliver what we say we're going to do over the next 3 years. Thanks for joining us. Have a great week.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.