US Foods Holding Corp. (USFD) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the US Foods Third Quarter Business Performance Update. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you. I would now like to hand the call over to your speaker today Ms. Melissa Napier. Please go ahead.

Thank you, Grace. Good morning, everyone. Welcome to our third quarter fiscal year 2019 conference call. Joining me for today's call are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an update on our results for the third quarter and the first nine months of fiscal 2019. We'll take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. During today's call and unless otherwise stated, we're comparing our third quarter results to the same period in fiscal year 2018. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. Also during today's call, we will refer to certain organic financial results. Organic results exclude contributions from SGA's food group of companies, which we will refer to as The Food Group. Food Group acquisition was closed on September 13, 2019 and is included in our financial results from this date through the end of the third quarter. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our latest Form 10-K filed with the SEC for these potential factors which could cause actual results to differ materially from those expressed or implied in these statements. And lastly, I'd like to remind you that during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP measures are included in the schedules on our earnings press release. And now I'll turn the call back over to Pietro.

Thanks Melissa and good morning to everyone. We'll begin our third quarter earnings call on slide two with an overview of this quarter's results. First, as Melissa mentioned, we completed the acquisition of The Food Group and with the divestitures behind us, our integration efforts are off to a good start. I'd also like to take this opportunity to welcome the 3,000 Food Group associates to US Foods. Our core business continued to deliver both volume and profit growth. Case growth for the quarter was 3% while organic case growth was 0.9% led by organic independent restaurant growth of 4.2%. We expanded our operating levers for the 15th consecutive quarter. In this quarter, gross profit per case exceeded operating expense per case by $0.09. Growth in private brands and strong freight performance were the main contributors to the gross profit per case expansion, while distribution costs remains in line with our full year expectations. Our focus on profitable growth help deliver organic adjusted EBITDA growth of 6.7% or 8.5% when we included the two weeks of the Food Group into our results. Lastly, we are raising our adjusted EBITDA guidance and now expect to deliver 6% organic adjusted EBITDA growth for fiscal 2019. Moving to slide three, let's now take a closer look at our volume growth for the quarter. As I mentioned, total organic case growth was 90 basis points, up for the quarter, driven by organic independent restaurant growth of 4.2%. Growth with independent restaurants was solid, albeit down slightly from the first half. We attribute this to a combination of a slight slowdown in the industry and selected markets slowing down. We expect fourth quarter volume growth of independent restaurants to be in line with our Q3 results, and for full-year results to be at the midpoint of the 4% to 5% guidance we gave earlier this year. Our outlook for independents remains strong, and we expect to continue to profitably grain share while growing at roughly twice the market using Technomic's the most recent market forecast of roughly 2%. Continuing on slide three, organic healthcare and hospitality volume was up 60 basis points for the quarter. Our growth was impacted by the loss of a large hospitality customer during the quarter, which means that growth for the fourth quarter will be slightly above flat in around 1% for the year. Having said that, we continue to feel good about our position with this group of customers and the strengthening pipeline leave us confident that we will improve growth in healthcare and hospitality customers in many years. Last in our discussion of volume for Q3, organic growth with the all other group of customers was down 90 basis points, consistent with the decline in same-store sales that we saw Black Box report for this quarter. We also experienced some minor delays in onboarding some new chain business, business that has not shipping. And so, as a result, we do expect positive case growth for the fourth quarter and roughly flat case growth for the full year. Overall, in terms of the macro environment, we see no change on the horizon and the competitive environment remains stable. Let's now turn to slide four, our profitable growth with independent restaurants does demonstrate that our Great Food. Made Easy. strategy is continues to resonate with customers. So, I'd like to take a minute or so to update you on our continued innovation on that front. Let's start on the left-hand side of the page with an update on the long-standing pillars of our strategy, product innovation and e-commerce. We now have 61% of independent restaurants sales in more than 70% of total sales coming through our e-commerce site. Recently completed research that we commissioned indicates that US Foods' online ordering tools continue to be weighted and easiest to use in the industry. And that same research indicates that online ordering continues to grow in importance with customers. We believe that our technology remains a key differentiator and competitive advantage for us. Scoop serves as a high-profile platform for us to launch new innovative products under our private brand. If you recall, our Summer Scoop focused on products that help operators to meet the growing demand for on-the-go dining, such as compostable takeout containers, and if deliver a trial rate of 42%. This was a third consecutive lunch with the trial rate of our exclusive and innovative products was over 40%. Our Fall Scoop, which launched in September, highlights global flavors and foods and many of the products were developed in collaboration with Chef we know for pioneering work in their respective cuisine. And finally, we continue to expand private brands as a percentage of net sales at a rate of approximately 100 basis points per year. In this quarter, 36% of net sales dollars came from our private brands products. Let's move to the right-hand side of this page where I’d like to give an update on our more recent efforts to create an omni-channel approach that complements our Great Food. Made Easy. Strategy. Pronto, Pronto allows us to reach customers in dense urban areas that are not easily serviced with larger trucks. Pronto uses vans and smaller straight trucks, which are able to more easily maneuver around crowded areas like Miami Beach. And allow us to meet the requirements for smaller jobs sizes in these dense areas. Pronto is helping us attract, new independent restaurant customers, in these markets. If you remember, we piloted Pronto, in 2018. We've now expanded service from three to eight markets in 2019. We're pleased with the results. And we try to continue to expand Pronto to new markets in 2020. Second, is US Foods Direct which we rolled out nationally to independent customers in August. This provides our customers with access to an endless aisle of products, non-stop in our local warehouses. Customers can access 25,000 items in addition, to the 10,000 that are typical DC might provide. And our goal is to continue to add categories and vendors to this platform. Customers like the ease-of-use. They can order that in the regular orders and drop shipped directly to their locations. And we like the model because it is a no-touch model, which allows us to compete more effectively with specialty distributors. The third leg of our omni-channel strategy is, CHEF'STORE, our cash-and-carry channel. These retail locations allow us to increase our share of wallet with existing customers, while also reaching new customers. Our original four stores all of which have been open seven years, it's continue to show same-store increases in the high-single digits, while our newest stores continue to prove the merits of this omni-channel approach. Existing customers, not only from this channel but increase their purchases that are delivered from us. With this success, we're planning to add to our footprint, in the coming years. I'm now on slide five. We completed the acquisition of the Food Group in September and completed the mandated divestitures of the three facilities in Kent, Boise, and Fargo in mid-October. This means that within 30 days we were able to successfully move over 1,000 customers from the Kent facility to our network, with no notable service disruptions. A seamless execution of these divestitures, arbores well for innovation work that lies ahead. We are in the early stages of our integration efforts. And we are off to a good start. Our new Northwest region leadership team is in place. And we have converted the Food Group financial systems to the US Foods fiscal calendar. We've also completed the setup of Food Group products and customers in our systems, which are a key first step in the systems conversion process. Our efforts in the next few months, will be focused on building excitement with customers and associates alike, including launching some of our best-selling school products to Food Group customers and completing a re-branding of the facilities and fleet in that region. We'll continue to update you as the integration progresses. Before I turn the call over to Dirk, I'd like to talk about supply chain for a moment. We did communicate a few weeks ago that, our supply chain officer had left the company and we have begun to search for his replacement. On an interim basis, Jake was Nick, got one of my direct reports will assume responsibility for supply chain is the VP of local sales and Field Operations and the P&L reports to him. And he brings 25 years of experience with us, including prior roles as a division president and manager region president. We remain committed to the supply chain roadmap that we presented a few months ago. And Jason really already with the operations, the team and that roadmap will ensure we continue to make progress. Service levels to customers continue to perform above last year, as evidence Mark continued growth. I'll now turn the call over to our CFO, Dirk Locascio for a walk down of our financial results.

Thank you, Pietro and good morning. In the third quarter, we continued to grow with our target customers and we produced strong earnings growth. As Pietro noted, total case growth for the quarter was up 3% with organic total case growth up 90 basis points. We grew organic independent restaurants 4.2%, which is approximately twice the market rate. We continue to operate in a higher-cost environment, but have been able to offset a portion of the higher distribution wages with our expense control initiatives and have continued to expand our operating leverage, this resulting in organic adjusted EBITDA growth of 6.7% and strong adjusted diluted EPS growth of 12.1% for the quarter. The Food Group contributed $0.01 or approximately 2% to our adjusted diluted EPS growth for the quarter. As a result of the business performance, we're raising our full year organic adjusted EBITDA growth guidance to 6%, and raising the lower end of our full year adjusted diluted EPS guidance range by $0.05 resulting in a new range of $2.35 to $2.40. On slide six, third quarter net sales were $6.5 billion, an increase of 6.1% from the prior year. We experienced 3.1% year-over-year inflation in product mix and 3% case growth. The addition of the Food Group contributed 2.1% to case growth for the quarter. Inflation was broad based across multiple product categories and remains manageable while providing a modest tailwind to gross profit dollars. On slide seven, we delivered strong gross profit results again this quarter. Gross profit was $1.2 billion, a 4.3% increase over the prior year period on a GAAP basis and 5.3% increase on an adjusted basis. As a percent of sales, gross profit was 17.7% on both a GAAP and adjusted basis. This is 30 basis points lower than the prior year period on a GAAP basis and 20 basis points lower an adjusted basis with the larger decrease in GAAP results due to an unfavorable year-over-year change in our LIFO reserve. The 20 basis point decline in adjusted gross margin is due to inflation on items that we sell with the fixed gross profit dollar amount per case. As inflation occurs on these items, we make the same amount of gross profit dollars, but the margin rate can compress. The impact of inflation on gross margin for the quarter was approximately 25 basis points, meaning our adjusted gross margin for the quarter would have been up slightly if not for inflation. Our gross profit performance continues to be driven by private brand growth and inbound freight optimization as we previously discussed. And also as Pietro mentioned in the third quarter our private brand growth reached 36% of net sales continuing our growth of approximately 100 basis points per year. Moving now to operating expenses on slide eight, OpEx increased 4.2% from the prior year quarter to $968 million driven primarily by higher distribution and acquisition-related costs. Adjusted operating expenses increased $30 million or 3.7% over the prior year quarter and as a percent of sales was 13%, a decrease of 30 basis points. Adjusted operating expense as a percent of sales would have increased approximately 30 basis points without the impact of private -- product inflation on net sales. While we continue to manage through a tougher supply chain operating environment, we started to see a modest reduction in fuel costs and expect to continue to see a modest favorability in fuel on a year-over-year basis in the fourth quarter. Our supply chain road map which consists of several warehouse and delivery productivity initiatives continues to progress. We believe our strategy to improve supply chain is the right one, and we continue to execute against this road map with the goal of further improving operational efficiencies and continuing to embed continuous improvements in our operations. On slide nine, our operating leverage gain for the quarter was $0.09 per case, which is an improvement over the first two quarters of the year. The work we're doing around gross profit and OpEx continues to consistently drive meaningful expansion in our operating leverage. We're on case for our fourth straight year of high single-digit per case expansion in our operating leverage. As we begin incorporating the Food Group into our results, we do expect to show a moderate decline in gross profit per case and a small improvement in OpEx per case for the next four quarters. If you recall, the Food Group's adjusted EBITDA margin is lower than ours. We expect to improve this margin over time as we implement the synergies we previously discussed. I am now on slide 10, third quarter adjusted EBITDA was $307 million, up 8.5% over the prior year and organic adjusted EBITDA was $302 million, up 6.7% over the prior year period. As a percent of sales, adjusted EBITDA was 4.7%, an increase of 10 basis points over the prior year. Adjusted diluted EPS increased $0.07 or strong 12.1% to $0.65 per share for the quarter as we continue to grow adjusted diluted EPS faster than adjusted EBITDA. Inclusion of the Food Group had approximately $0.01 positive impact on adjusted diluted EPS for the quarter, as I mentioned earlier. As we highlighted in September, we're also now excluding intangible amortization from our adjusted diluted EPS number and have revised our historical numbers to reflect this change and ensure all prior years are on a comparable basis. For a full year 2019, existing yield includes tangible amortization. So excluding the amortization from the Food Group acquisition is roughly $39 million. And finally, on the far right, third quarter GAAP net income decreased 7% while adjusted net income increased 13%. The decline in GAAP net income was primarily due to a $10 million higher LIFO charge, prior year current tax expense and the addition of Food Group integration-related expenses. Prior year tax expense is lower as a result of one-time deductions allowed under the Tax Cuts and Jobs Act. Turning now to cash flow and net debt on slide 11, operating cash flow for the first nine months of 2019 was $559 million compared to $444 million in the prior year. The increase is related to a prior year pension contribution of $70 million that we discussed last quarter, but did not repeat combined with the improved operating results. Our business continues to produce strong operating cash flow, which supports our ability to deliver from the $1.8 billion of debt incurred to finance the Food Group acquisition. Net debt at the end of the quarter was $4.8 billion, an increase of approximately $1.5 billion from the year end 2018 due to the acquisition of the Food Group. Our net debt to adjusted EBITDA leverage ratio at the end of the third quarter was 4.2 times. The calculation of our leverage presented on slide 11 includes two weeks of adjusted EBITDA for the Food Group, which coincides with the amount of time we owned the Food Group in the quarter. If you were to do the same calculation with the trailing 12 months of adjusted EBITDA for the Food Group, our leverage ratio would have been approximately 3.8 times. As a reminder, we expect to return to three times leverage ratio prior to the end of 2021, and we'll continue to demonstrate a disciplined approach to delevering based on our solid operating cash flow. Now moving to slide 12, as I mentioned before, we update our full year fiscal 2019 guidance. Total case growth is expected to be between 4% and 5%, with organic case growth now expected to be 1% and 1.5%. Adjusted EBITDA growth inclusive of Food Group is expected to be 8.5%. And as I mentioned, we are raising our organic adjusted EBITDA guidance to 6%. We are also raising the lower end of our adjusted diluted EPS range by $0.05, resulting in a new range of $2.35 to $2.40. Our updated interest expense guidance of $185 million now includes the additional debt, related to the Food Group acquisition. And changes to our guidance number, is related to our CapEx and depreciation and amortization, are also shown on the slide, and are inclusive of the Food Group impacts. In summary, we are pleased with our results for the quarter. Solid organic EBITDA growth of 6.7% and double-digit adjusted diluted EPS growth highlight our commitment to profitably growing the business. We continue to grow independent restaurant volume faster than the market rate, while focusing on executing our supply chain road map in a challenging operating environment, and at the same time, working on successfully integrating the Food Group. I would like to now open the call for question and answers.

All right. [Operator Instructions] Your first question comes from John Ivankoe of JPMorgan. Your line is open.

Hi. Thank you. The question is on, just overall consumer credit quality, at this point in terms of your restaurants in particular. With some of, I think, some unevenness in terms of independent restaurants that may have happened this past quarter especially may have regionally happened this past quarter. Are you beginning to see any signs of, of stress in terms of independent restaurants are you beginning to see any signs of stress at all in terms of credit quality? Are you asking your salespeople, your account representatives to be more careful with credit going forward? Just trying to look for some signs of kind of late-cycle change that you may be noticing from a credit worthiness perspective in terms of your customers and I have a follow-up.

Good morning, John. This is, Dirk. I'll take that. So, overall we're not seeing a significant change, in the credit environment. You do have restaurants that are opening and closing at any point in time. And we do continue to see that. And from a process perspective, what -- our credit process is quite robust. So, there's really not a lot of change that we have to do in that space. We're always trying to manage through effective process while at the same time serving our customers, by having timely reactions to them as far as approvals, so overall, not a big change.

Okay. Thank you. And then secondly, in terms of US Foods Direct, which is an interesting announcement, it does look like those products are going to be shift via UPS and FedEx. Are you going to be more or less a marketplace where the products are going to be drop ship, directly from the manufacturer? That's kind of the first point. And secondly, would it make sense at some point to broaden or not to overall consumers outside of your larger registered restaurant customers?

So, I think marketplace is a good analogy or a good word to describe it. We chose direct because I think that given that we're in the delivery business, direct kind of conveys what that value proposition is. But it's got the attributes that I think you're implying in terms of a broad assortment. In terms of expanding it, we always want to make sure that we can meet the promise -- a brand promise and we started independent restaurants. We prototype this last year in four markets, we’ve now extended independent restaurants before we would go to the consumer. And I’ll be honest, we haven't contemplated that we still have other customer types within our own environment that we would roll out to first.

Thank you.

And you next question comes from the line of Christopher Mandeville from Jefferies. Your line is open.

Hi. This is Blake on for Chris. Can you talk a little bit more about why you lowered your organic case growth expectations? How much is due to that? How much of that is due to the hospitality customer loss you mentioned? And then you mentioned some delays with the chain accounts, I'm just wondering how much that factored into it?

Sure. So, I think there's as I mentioned Blake, the loss of this one customer in the hospitality segment which is -- significant for us all the categories unusual obviously had a part to play. If you look back at Q2, we were I think 1.6%. We were training very close to the lower end of guidance that we’ve talked about and unfortunately this setback has set us back but -- we still feel good about the pipeline we have in healthcare and hospitality and value proposition. On the all other side, which you referred to, we feel that we're really on track there. And there's always some timing differences in terms of when customers come on board. Onboarding is a complex process that we feel like based on the customers that are shipping now; we should be in positive territory in Q4. The only factor that really could impact that up or down is the environment for change which as you saw was a little bit worse than in the last few months and it's been for the year. But we feel that we're right on track. And the thing worth reminding folks is the customers we are bringing on board all other segment are considerably more attractive to us not only than those that we’ve exit over time, but the average of the customers within that pool of customers. So, the customer optimization strategy that we talked about for a couple of years now is really yielding kind of benefits that we are looking to achieve.

Got it. Thank you very much.

Your next question comes from the line of Marisa Sullivan from Bank of America. Your line is open.

Good morning. Thanks for taking the question. I wanted to touch on independent case growth and just see if you could comment on the exit rate for the quarter and quarter-to-date trends? And I think it may sound like the -- your outlook for kind of continuation of 3Q trends could imply maybe a little bit of a choppiness expected in fourth quarter. So, I wonder if you could just give a little bit more color on that. Thanks.

Yes. So, I think we expect this fourth quarter to be in line with the third quarter based on where we sit now. I think in terms of the trends that might be informing that maybe add a couple of words on that. So, from an external perspective, I think the thing to remember is it's still a very positive outlook for independent restaurants. If you look at the demographic factors that underlie that you look at food that's consumed away from home, continues to gain share stomach as I like to say from food consumed at home. We expect those two lines to cross next year or the year after. And the macro environment in terms of unemployment, disposal [indiscernible] and food prices is very positive. I don’t know if you remember Marisa, on the last call, I talked about Technomic lowering its outlook by about 30 basis points. Shipment data, first half versus second half for the industry seems in line with that order of magnitude. So, there's a little bit. From environment perspective, it's still very, very positive. But from our end, we'll always look at -- as I talked about the value proposition of customers continues to resonate. We always have a portfolio better performing geographies and less performing geographies, and we had a few kind of step-back, particularly we’ve a few step-back and that's kind of normal course of business and we take all that into consideration. That's why we’re callings quarter to be in line with the third quarter.

Got you, and that's helpful. And if I could take you to the organic EBITDA growth guidance, I think that implies a bit of an acceleration in the fourth quarter. Can you just give a little more detail on what the main drivers of that would be?

Sure. Good morning. This is Dirk. So, when you look at where we are year-to-date and talking about the organic, it’s actually implies more in line for the fourth quarter with where we've been running with this year 6%.

Got it. And then, can you just talk about what the puts and takes would be that could drive it higher or lower than what you're guiding?

Sure. I think probably the main thing that I would call out is, I think we found as Pietro made mention, the operating environment although it remains a tougher environment has been fairly stable. Our turnover has stabilized albeit at a higher level than historical level. So, we think that this pretty consistent with the fourth quarter. And really it would be more probably macro factors as far as the environment or things of that nature that would impact it more than some of our internal initiatives or our focus areas.

Got you. Thanks so much.

And your next question comes from Jeffrey Bernstein from Barclays. Your line is open.

Great. Thank you very much. Two questions. First one just on the independents, I know you talked about gaining share with this target customer group and maybe grown twice the rate at the broader market. But assumingly your peers are pursuing similar accounts, I'm just wondering if you were to prioritize the factors leading to your success in this outsized growth. Is it just leading with lower pricing or is it more kind of pushing the better service or technology? Why do you think you're having the success you're having gaining these independent accounts and everyone's pursuing similar?

Yes. So, first it's a very fragmented industry, right? So, I think the fact that we're having gains that we're having a lot of -- because of the fragmentation. I don't know that you folks feeling impact of that which I think is some time some other concern that underlies the question. In terms of what's leading to the growth? It really gets down to our value proposition, product innovation technology. That's why if you spend a few minutes talking about it. We’ve brought down this path many years ago for an outstanding scale. We continue to evolve how that value propositions shows up to customers in terms of products or technology or how we cover those customers. And that mousetrap, the term I'd used in the past, I think is primarily responsible for the outsized growth, and then our focus on sales excellence is what we focus on to make sure we can achieve returns even higher than we're seeing. We always strive for higher than what we're seeing today.

Got it. And then the other question was just on the M&A, environment. Happy to see the Foods Group acquisition complete, but seemingly with regulatory challenges or maybe not challenges maybe we delays completing that acquisition I'm just wondering, your outlook for future, sizable acquisition, maybe the pipeline for that. Whether or not, your leverage levels currently, temper your enthusiasm for it. Or whether you're aggressively looking for other similar-sized or large-sized acquisition?

So, on the larger broad line acquisitions. So SGA, as we said before, was our top choice. And that also filled the main white space we had in the Northwest and the West. So, very pleased and I just say we're very happy to have that. We are so close now and to be able to work on the integration. I think the -- as far as other larger outliers, and I'm not sure that any other will be more attractive. But at least for the near-term our focus is really successfully integrating the Food Group into our business. And then, being very selective on the tuck-in M&A, where it would be more around, some of the things around our meat our produce where it's about filling in our white space in certain areas and that part of the business. So, now that, that we will be fully out of the game but, that would be where we'd be targeted alongside the successful integration.

Understood. Thank you.

And your next question comes from the line of Kelly Bania from BMO Capital Market. Your line is open.

Good morning this is Steve on for Kelly. I just have question about the, your view on the labor market and where you see that going heading forward. And also any impact that the investments that you guys are made in technology and other areas of efficiency over the last several of quarters? How much that play if we see start to see some improvement in labor?

Okay. Thanks. And I presume a later time that the fact that outside of labor the warehouse and distribution. Look I think, Dirk alluded this in his comment, the labor -- the operating environment from a -- labor perspective is still very much challenging compare to what we've experienced in the prior years. If we look at, wage rate increases, that we've experienced. Wage rates have gone up at a higher rate than last year and last year. And last year higher rate than the prior year, as result of the labor tightness that we've experienced. Having said that, our strategy that we've got in place is, still a strategy to continue to make gains, in terms of operating expenses and to mitigate that environment, when we look at turnover, turnover has stabilized and adjusting our wages has probably had an impact on that. We also are in a better position as result of that as well in terms of staffing. And staffing really matters because if you fall behind on staffing and that an impact in two ways that’s why is over time is up, that’s why turnover is up. So from a staffing perspective we are probably in the best position, we've been in a while. From a technology perspective that you asked about, so the one technology that we presented our Investor Day is, making good progress. We're talking about the technology by which we are -- that our selectors pick from the products that goes to the customer. We've got that deployed in about one-fourth of our DC's right now. So, we're on track and we'd like to find ways to accelerate that because we're very pleased with the impact it had both on reducing the time to onboard the new selector which again matters if you have turnover, and in terms of the level of service for customers in terms of reducing the specs. And the third thing, I would talk about first was -- the second was the technology and first was the environment hit, our focus on continuous improvement. We've now rolled that out fully across the company. And I think that over the long-term can have the biggest impact on driving local efficiencies and effectiveness and creating the kind of engagement that leads to a really high retention rates with your workforce.

Thank you. That’s very helpful. And then just a quick follow-up. I know its early days, but could you talk about any competitive responses that you've seen in some of the markets where you made the SGA acquisition if there has been any change in the last month or so since you completed the deal?

You know so far since we closed that we really haven't seen any meaningful change in the competitive environment. What I'd say is more so we're focusing on is there is the uncertainty that always comes from extended period of getting a transaction like this approved. And so we're pleased with how well the Food Group's case growth and business held up during that extended period. And now we're very excited to move forward and helping accelerate the growth in that business and also bring some of the tools and product innovations that we have to those marketplaces and successfully bringing them further into the US Foods business.

Okay. Thank you.

And your next question comes from Edward Kelly from Wells Fargo. Your line is open.

This is guys. This is Stephanie on for Ed. Thanks for taking my question. I wanted to ask you first about your Head of Supply Chain. Is there any additional color you could give on his departure? How long you expect it will take to find his replacement? And is there anything that’s changed either from like an operational or strategic standpoint that we should know about?

So, his departure was disappointing. I mean there's really no additional color we can provide. The good news Stephanie is we continue to make good progress against the road map that you presented 18 months ago both in terms of some of the fundamentals that we talked about then in terms of improving our processes like routing or selecting also in terms of the what we call small key technology. I gave an update on that just in prior question in terms of that. And then lastly long-term in terms of automation, we've actually now got a small dedicated team to exploring automation something we didn't have in the past. So, from the strategy or the road map we presented feels very much the road map that we are continuing to work and in terms of the team to rescue that roadmap -- as I talk about Jay is very familiar with the roadmap, the people because of his role, you know, how supply chain works so that combined with the existing team below him but we’ve actually -- the staff. We feel pretty good. So, however long it's going to take to find a suitable replacement and these things typically take six months to nine months in our experience.

Okay. Thank you. And just following up. A question on gross profit dollar growth. First off is there anything you can share on how much SGA contributed? I know you mentioned their margin from an EBITDA standpoint but just curious about the impact from gross profit standpoint. And also any impact from ASF or any color on your outlook for inflation.

Sure. So for the quarter, it impacted our gross profit and OpEx per case each by about $0.03, so offset. So, overall no impact on our leverage. The thing that I would caution against this with two weeks like that where you end up is, I wouldn't take and extrapolate that impact over the longer term. As I mentioned that because of the lower EBITDA margin, we would expect it to have more of a negative impact on our gross profit per case in OpEx. And as we guide in 2020, we'll reflect properly that impact as we go forward into there. And then over time, we expect to improve their EBITDA margins as I talked about as we integrate them and bringing to fruition the synergies that we’ve talked about.

From an ASF perspective, we continue, as you would expect us to monitor that quiet closely. And at this point, we haven't seen any broad-based inflation. I know there is some expectation of some more potential inflation over the next six months or so. And as we watch that and if that does occur, we’ll work closely with our customers and suppliers to effectively manage through that. I think another important thing is that we learned a number of things as we worked our way through the avian flu impacts in past years. And as a result positioned us to better deal with anything that may happen from an ASF perspective, you know things like working with vendors on Guaranteed Supply Agreements, a robust communication process with customers and sales. And then also, in the case working with our customers to reformulate their recipes and switch to different protein products, should we see that level of increase in inflation because as we’ve talked about in the past, one positive is when it’s a particular protein like that customers do have more flexibility as far as menu and portion sizes.

Got it. Thank you.

Your next question comes from John Heinbockel from Guggenheim Securities. Your line is open.

Morning. This is Steve Forbes on for John. I wanted to touch on the cadence of synergies you expect from the Food Group acquisition. When we’ll start to see those flow through the model and whether the timing of recognition will be different between the COGS and SG&A components.

Sure. So we'll -- this is Dirk. So you’ll begin to see synergy show up in 2020. And we'll include that in our outlook when we provide guidance in February for the 2020. So, I think that kind of more to come on that. I think from the cadence -- yes, so cadence -- again, we'll talk about this more as time goes on. But a number of the COGS pieces will come a little sooner than some of the head count because again that's more tied to some of the IT conversions in that that we've talked about in the past. I think the other thing is, it'll happen over multiple years, and as we’ve talked about in the past so, more to come on that as we give our 2020 guidance.

Great. Then maybe as a follow-up with the healthcare account. Is there any read-through from that account or you see some other accounts or risks or is that just a one-off situation? Thank you.

So, with that one, there is, you’re always going to have some wins and losses. We haven't had a loss of this size in a number of years. And I think it's -- there's not anything to read-through on that. We feel still very well-positioned with our healthcare and hospitality customer base with the value that we bring both economic to them and from the tools and that so still feel very well-positioned about our ability to grow with this customer type. And you do have from time to time something like this.

Thank you.

And your next question comes from the line of Rebecca Scheuneman from Morningstar. Your line is open.

Good morning. Thank you. So, you did mention that during the approval process that you were pleased with client retention and from SGA side. I'm just wondering like now that the acquisition has closed. And we're getting into integration are you seeing clients maybe shift a portion of purchases away to avoid disruption nor are they kind of holding steady with previous purchase patterns?

Sure. So, I think, actually it'd be more the opposite I think what we see is we're using our own experience badgering a few years back, its customers not knowing was going to happen will tend to either diversify prior to a transaction. And so now it's too early to really talk about, case growth trends post close. But we've all the team is very well positioned to really accelerate growth in that part of the balls and Food Group got a strong base and continue to accelerate now from that especially as we bring technology and innovative product and the Food Group markets which will happen here coming up.

Okay. Thank you.

And we have Judah Frommer from Credit Suisse. Your line is open.

Hi. This is for [Indescribable] for Judah. Thanks for taking my question. I know it's early but if you could update us on the initial customer reaction, especially as it relates to having access to your -- private label brand and technology. And also how are your conversations with vendors going? Thanks.

Well. Let's say, it is like I'll let you, it's very early on. So in many cases, this technology as an example, other than some of the preparations of carving off locations and something is like bringing them on to our e-mail and converting their financial calendar hours. So, we've some strong success in those things. We're very pleased from there but from a customer perspective, they haven't seen a lot yet. So I think that'll be more appropriate to does for us to comment on as we go forward. But early on, those things are more behind the scenes from an integration perspective. We're very pleased with how well it's going.

Got it. Thanks.

And we do have a follow-up question from Marisa Sullivan from Bank of America. Your line is open.

Just to squeeze in a follow-up. Just want to touch on Pronto. Do you think there's anything you could share with us in terms of like what kinds of sales growth, what you're seeing in the markets you're able to and now you're able to margins versus the overall business. Thank you.

So, we're -- I mean the best I can do Marisa is to say, we're pleased with the incremental sales and the margin associated with, the first market. And that's why we're continuing to expand the number of markets that are served in pronto. But we're pleased from both sales and margin perspective.

Okay. Thank you.

And no further questions at this time. We'll be turning the call back over to Mr. Pietro for closing comments.

Thank you. So I'd like to thank everyone for their questions. In summary, we had another good quarter. We closed on the acquisition of The Food Group. We're pleased with -- we're off to a good start. And I like to close by thanking all of our associates across the company whose hard work and commitment make these results possible. Thank you for joining us this morning, and have a great day.

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