US Foods Holding Corp. (USFD) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the US Foods Third Quarter 2020 Performance Review. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Melissa Napier. Thank you. Please go ahead, ma'am.

Thanks Cara. Good morning, everyone. Welcome to our third quarter fiscal 2020 earnings call. Joining me on today's call are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an overview of our results for the third quarter and the first nine months of fiscal 2020, as well as provide some details on volume trends that we saw during the month of October. 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 2019. Our earnings release issued earlier this morning, and today's presentation slides can be accessed on the Investor Relations page of our website. References to organic financial results during today's call exclude contributions from Smart Foodservice, which we acquired in April of 2020 and also exclude contributions from the Food Group for the time period prior to the anniversary date of the closing of the acquisition. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2019 Form 10-K and our last quarter's 10-Q filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website. I'll now turn the call over to Pietro.

Thank you, Melissa. And good morning, everyone. Before we get started, I would like to thank all our associates for their dedication and commitment that they have displayed in helping our customers navigate this challenging environment. Their efforts have truly been second to none. I'm going to begin on Slide 2 with an executive summary of what we'll cover today. First, as evidenced by the continued appetite of consumers to eat out and take out, as well as the continued ingenuity of restaurants across the country, we remain confident that our industry will return to pre-COVID levels over time. Second, the third quarter saw a marked improvement in our business. Case volumes have steadily improved, and we’re profitably gaining market share. Third, Recent acquisitions of Food Group and Smart Foodservice have performed in line with expectations and the integration of Food Group is on track. And finally, the steady improvement in our case volume combined with our cost reduction actions led to adjusted EBITDA that was a marked improvement over the second quarter. Dirk will cover this fourth point in his review of the financial results and I will cover the first three. Starting with our perspective on the industry. Moving to Slide 4, the chart on the left compares consumer visits at food away from home establishments like restaurants to visits at food-at-home establishments like grocery stores. As you can see, pre-COVID food away from home visits were roughly 50% of total consumer visits. After stepping down in late March and April, consumer visits at food away from home establishment has consistently increased and are trending back towards the 50% level that the industry experienced pre-COVID. This recovery illustrates the desire of the consumer to purchase from food away from home establishment, a habit that has been shaped over decades, and helps we affirm our belief that our industry will ultimately recover to pre-COVID level. One of the drivers of this recovery has been off-premise dining, which continues to grow in importance. As we said on our last call, for full-service restaurants, 55% of traffic in June was off-premise compared to 19% pre-COVID. A more recent survey state that 68% of consumers in this country are a takeout at least once a month post-COVID compared to 45% pre-COVID, an increase of 51%. The continued growth in off-premise dining also gives us the confidence that restaurants in the colder climates will be able to navigate the winter months. Over the past several months we have seen restaurants embrace those kitchens, also known as virtual kitchens, a way by which operators can use their kitchen space to create new brands focused solely on takeout and delivery. In addition, some operators are experimenting with tents, igloos and heaters as a way to prolong outdoor dining, and others are promoting air purification mechanisms such as UV lighting as a way to build consumer trust for indoor dining. The ingenuity of restaurant operators has checked the permanent closure rate at a low level. And we've even begun to hear about some well run and well capitalized operators looking for opportunities to open new restaurants as the external environment improves. Let's now go to Slide 5, and take a look at our own volume performance across different customer types. Throughout the third quarter and into the early part of the fourth quarter, we have seen a steady improvement in case volume across most of our customer types. The green line on the chart shows total restaurant case volumes, including both independent and chain restaurants. The uptick you see in the month of August and September is both a result of an improvement in the industry as well as US Foods gaining share. Organic restaurant case volume for the week ending October 24th was down just under 10% compared to prior year, which was remarkable given that we were down almost 60% at the beginning of the pandemic. When we compare independents to chain over the last few weeks, organic independent case volume has been down approximately 11% to 12% year-on-year, while organic chain case volume has been down approximately 7% to 8% year-on-year. Moving to other customer types, our case volume with both healthcare and hospitality has also improved. Healthcare designated by the blue line has picked up as hospitals have started allowing visitors to return in a limited fashion. Hospitality designated by the yellow line has also picked up, as hotel occupancy rates have improved, especially in some geographies and formats, as leisure travelers have substituted one kind of travel for another. Last quarter, I commented on the $500 million of new business we had won in the first half of this year. This business is now fully on-boarded, and I'm happy to report that on an annual run rate basis, we are on pace to on-board a total of over $800 million of new business by the end of this calendar year. Several of the new wins since we last spoke, are in the healthcare arena, demonstrating the strength of our new business pipeline across the multiple different customer types. The pipeline remains strong. And as we look ahead to next year, we expect to continue to gain market share. And as we have previously discussed, the new business win across these multiple customer types, had good contribution margins, helping us grow overall profitability. Let's move to Slide 6 and a discussion of the factors that have led to these market share gains. As we see it, US Foods has 4 distinct advantages over many competitors. The first is our scale and our scope. Our national footprint and consistent approach to servicing multi-geography customers are particular appeal to large customers who are looking for a stable distribution partner like US Foods. Second is our digital leadership. Our e-commerce offering has been particularly important during these times as customers are able to shop our extensive product offering and place orders online. Third, is our suite of value-added services or CHECK Business Tools. One of our more popular value-added services has been ChowNow, a platform that allows customers to do takeout and delivery with much more favorable economics than competing services. Since the pandemic began, the number of customers using ChowNow has increased 50%. Now not only does this drive more loyalty to US Foods, but we have seen that customers who use ChowNow are buying more, approximately 80% more than customers are not using that platform, which also confirms how much off-premise dining has grown in importance. A new addition to our portfolio of value-added services is our Ghost Kitchen playbook, supported by proprietary analytics, and this has helped customers mitigate the impact of COVID by extending their off-premise reach, both geographically and into new menu concepts that are particularly suited for delivery. And the fourth advantage is our growing portfolio of innovative products. In September, we launched our Fall Scoop, focused on off-premise dining. The launch featured new items such as Tamper-Evident containers, cleaning and sanitizing products and individually packaged ingredients that allow restaurants to create home meal kits. Response to this food launch was just terrific, and customer penetration was comparable to rates that we used to see pre-COVID. Last week, we launched our Holiday Scoop, which features more new items, many in keeping with current customer needs, including the only EPA-registered 2-in-1 sanitizer that is effective against the virus that causes COVID-19, thereby helping operators keep their environment safe and building trust with diners. This Holiday Scoop also features items for off-premise dining with solutions that are perfect for family meals, including several sustainable items to add to an already strong line of products that serve the platform. These differentiated products and solutions are a great example of how we continue to be the leading and most relevant distributor to operators. Lastly, on Page 7, I want to provide an update on our 2 recent acquisitions. As we discussed last quarter, the Food Group's national chain business continues to perform well, benefiting from some of the recent favorable QSR trends we have seen play out in the industry. On the integration front, systems conversion required to enable some of the expected synergies are also progressing well. In August, we completed the first systems conversion in the Seattle market, and that went without a hitch. Over this past weekend, we completed our second systems conversion and early signs point to another successful conversion. As a result, we have made up most of the temporary pause due to COVID, and we are on pace to achieve the previously communicated $65 million of annual run rate synergies on the original time line, of which we expect to realize $10 million of those synergies this year in 2020. Moving to Smart Foodservice, case volumes continue to outperform our delivered business, with comps down in the low to mid-single-digits over prior year. The cash and carry business typically performs well in economic downturns as customers look to the value offering it provides. The Smart Foodservice stores are also open to the public, and this has allowed us to capture some of the shift to food-at-home over the last several months without changing our business model. Adjusted EBITDA remains on pace with our expectations, and we expect to achieve the synergy target that we have previously discussed. Lastly, I'm pleased to announce the opening of 2 new Smart Foodservice stores in the fourth quarter of this year. This is just the beginning of our store expansion plan, with the ultimate goal to double the existing store count. I'll now turn it over to Dirk for a discussion of our third quarter financial results.

Thank you, Pietro. I'd like to begin on Slide 9, where I'll cover the highlights for the quarter before taking a deeper dive into our financial results. Our third quarter results showed significant improvement from the prior quarter and highlight the work we've done to position the business for success post-COVID. As Pietro mentioned, we saw consistent improvement in case volume as the quarter progressed. This improvement is attributable to our ability to gain market share as well as improvement in the underlying fundamentals of the industry. Our adjusted gross profit margin improved 70 basis points from the second quarter and was stable throughout the quarter. We expect our adjusted gross profit margin will continue to improve as our case volume recovers and our customer product mix returns to pre-COVID levels. On the cost side, we enacted a series of permanent cost reductions in the second and third quarters that will position the business for higher EBITDA margins post-COVID. On an annualized basis, we eliminated approximately $180 million of fixed costs from the business, and we'll continue to manage our variable costs in line with case volumes. These fixed cost reductions are mostly in the corporate and back office areas of the business, and I'm pleased to report that we continue to see strong collection efforts on our outstanding accounts receivable. And as a result, we’ve further reduced the uncollectible account receivable reserve by $30 million again this quarter. Our incremental COVID-related uncollectible account reserve now sits at $65 million and we have not seen a degradation in the quality of our receivables since COVID began. Moving to Slide 10. Our third quarter financial results improved significantly from the trough we experienced in the second quarter. Net sales compared to the prior year were down 10.5% for the quarter, driven by a combination of lower case volume and negative customer mix, which is a significant improvement from the 29% year-over-year net sales decline we saw in the second quarter. Inflation for the quarter was 220 basis points, primarily driven by inflation in the beef and cheese categories. Our adjusted gross profit margin was down 100 basis points compared to the prior year but improved 70 basis points from the second quarter. Changes in our customer and product mix and lower inbound logistics income were the drivers of the year-over-year decline. Lower inbound case volume resulted in us needing to reoptimize our freight network to compensate for the loss of scale that we benefit from at higher inbound case volume levels. This work is in process, and we expect our inbound logistics income to improve as the reoptimization works take effect and inbound case volumes improve. As I previously mentioned, we expect our adjusted gross margin to increase as our case volume recovers and customer product mix returns to more normal pre-COVID levels. Gross margin at the customer level remains similar to pre-COVID rates, and we continue to see a rational competitive environment. Adjusted operating expense increased 20 basis points compared to the prior year. However, this was a 100 basis point improvement compared to the second quarter. We experienced a 20 basis point year-over-year increase despite experiencing fixed cost deleverage from lower case volume. During the quarter, we successfully managed our variable cost to be in line with case volume while enacting the permanent cost reductions I discussed earlier. In the third quarter, there were a couple of items that had a net benefit to adjusted operating expense of approximately 20 basis points, the largest of which was a $17 million gain on the piece of excess land in Southern California. We don't expect these items to repeat in the upcoming quarters. Even with the benefits factored in, we're extremely pleased with the work we've done on the cost side. Our cost structure remains flexible, allowing us to quickly adapt to changes in our case volume. On Slide 11, I thought it would be helpful to spend a few minutes discussing our operating leverage and adjusted EBITDA margin. Prior to COVID, our adjusted EBITDA margin, which is the difference between adjusted gross profit and adjusted operating expense, is running in the mid-4% range and increasing annually. At the trough in the second quarter, this delta shrunk to 190 basis points, but has quickly expanded again to 3.6% in the third quarter. This is a direct result of the improvement in our customer mix and the cost actions we've taken. And if you notice, our adjusted operating expense as a percent of sales in the quarter is largely in line with where it was pre-COVID. This is despite the fixed cost deleverage from lower case volume. As our case volume improves, we expect the organization to operate at lower adjusted operating expense level than we did pre-COVID. And on the adjusted gross profit margin side of the equation, the recovery in our independent restaurant case volume is helping us to drive improvements. And as I just mentioned, we continue to work to reoptimize our inbound freight network. This work and an increase in our independent case volume will help adjusted gross profit recover to be in line with pre-COVID levels. The net effect, we believe, will be an expansion of our adjusted EBITDA margin post-COVID. Moving to Slide 12. Our adjusted EBITDA results for the third quarter improved meaningfully from the second quarter in both dollars and EBITDA margin. Adjusted EBITDA was $209 million for the quarter, which means based on this run rate, the business is generating approximately $800 million of adjusted EBITDA on an annualized basis despite case volume being down in the high teens. This is another indication of the flexible cost structure and operating model that exists within the business. In the third quarter, we returned to positive earnings, generating $32 million of adjusted net income and $0.15 of adjusted diluted earnings per share. Since we had a GAAP net loss for the quarter, the additional preferred equity shares are not included in the share count for the third quarter. When we do return to positive GAAP net income, those shares will be factored in to the earnings per share calculations. If these were included in the Q3 earnings calculation, our adjusted diluted EPS for the quarter would have been $0.13. Turning to Slide 13. The business remains in a strong liquidity and cash flow position. We ended the third quarter with $1 billion of cash on hand and $2.7 billion of total liquidity. In the second quarter, we had a large working capital benefit, which we expected to reverse in the third quarter. As of the end of the third quarter, this reversal is largely complete. During the quarter, we reinvested in inventory to support current case volume levels and return vendors to a normal payment schedule. Going forward, we'll manage working capital in line with the recovery in case volume. In the current case volume levels, the business is cash flow positive, and we expect to return to the strong cash flow levels we experienced pre-COVID as case volume continues to recover. We remain focused on reducing our net debt balance and lowering our net debt leverage ratio, which stands at 5.9 times at the end of the third quarter. Over time, we expect to reduce our leverage ratio through both an improvement in EBITDA dollars and a reduction in our outstanding debt, as we've consistently demonstrated the ability to do in the past. Overall, I'm extremely pleased with the progress we've made during the third quarter and the benefits we expect the business to experience from a continued recovery in case volume. With that, operator, we can now open the call up for questions. Thank you.

[Operator Instructions]. Your first question comes from the line of John Heinbockel with Guggenheim Partners.

Pietro, two things I wanted to dig into. The $180 million, how much of that did you see in the third quarter? And is that -- now that is a run rate beginning in the fourth quarter. And how did you go about sort of safeguarding? It sounds like it didn't impact the field at all safeguarding that would not impact your top-line.

You talk about the $180 million in cost reductions, John?

Yes.

Yes. So the -- primarily -- and Dirk can add more on this, the focus has been primarily on the back office. We did make some small reductions in the sales force as you know, John, back in April, aligning the size of sales force with the expected customer count over the long-term. And so we -- and as a result, as you can see by the market share gains and by the success we've had in terms of bringing on large customers, the reductions we've made have not impacted us. We've learned to operate in a kind of more lean, more agile fashion as a result of COVID. And as Dirk said, we think that over the long -- mid to long-term, that also presents -- will result in a higher EBITDA margin. Dirk, anything you want to add?

I would just add, Pietro is just, again, a reminder on the sales reduction that Pietro mentioned were the ones that happened earlier in the year and the more recent reductions were mostly back office types of roles. And John, to your point, we do expect to be at a full run rate here in the fourth quarter.

All right. And then maybe as a follow-up, right, the idea -- it makes sense, right, that the business would be more profitable on a margin rate basis given the $180 million plus synergy. When you think about returning to pro forma, right, sales and profitability, how quickly do you think -- it would seem like profit would come back maybe faster than top-line. Is that fair? And would you think -- could it be a year sooner that profitability, again, given the $180 million on the synergy, the profitability would come back before you got to a pro forma revenue number or no?

So with that, John, I think it is a reasonable assumption that it would come back quicker. It's hard to predict exactly how much quicker. But to your point, as volume recovers, that does help profitability. But given the actions we've taken on cost that go into effect essentially now, it is reasonable to expect the profitability would come back quicker.

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

Just a couple of questions. First on the Smart Foodservice and SGA. Wondering if you could just talk a little bit more about how those are performing and the contributions there? It sounds like Smart Food performing quite strong. And then just another question on the efficiency as you're bringing on some costs back as trends improve and how you see that trend continuing?

I can start and then Pietro can add as appropriate. I think some -- as Pietro indicated earlier, for the acquisitions, they're performing well relative to the environment we're in. To your point, Smart holding up quite well as a business. So starting with Food Group, their sales were slightly better than US Foods, organic for the quarter, really driven by a higher mix of chain business. And the overall EBITDA decline was a little bit better than the organic business, in large part because of some of the synergy benefits that have begun to flow through. Also, just from a Food Group, as Pietro noted, with the second successful system conversion, we continue to make good progress on the integration of that business and are pleased at the pace now in which we have reaccelerated to move ahead with that. From a Smart Foodservice, you're exactly right. So that business has held up quite well for some of the reasons Pietro talked about. The case volumes being really down in the low to mid-single-digit range, and EBITDA not much off from prior year levels. So we continue to be excited by what that presents from an existing footprint as well as expansion opportunities from this highly profitable business. So we're pleased today with both of them and continuing to work to strengthen our footprint and our penetration in both of them and continue to build on that.

The only minor point I would add, Kelly, is that the performance we've seen with Smart Foodservice in terms of the low to mid-single-digit comps -- negative comps is very much in line with our 6 CHEF'STORE in a different part of the country. So it just goes to reaffirm the resilience of this channel and the appeal of this channel, especially in these kind of more challenging economic times.

Perfect. And just the efficiency, just as you've kind of brought back some costs as sales have improved, and just if you can just tie that in maybe with the size of the sales force of where it is now? And how much of that contributes to the $180 million in cost savings?

Sure. So the reason that we tried to separate out the $180 million from variable costs is one of the things that -- so I used -- maybe start with distribution is that our distribution labor pool is flexing up and down and depending on what the results and the case volumes are in different markets. And so we've been pretty active in managing that, and we'll continue to do in order to match volume. So that's the main area where you see labor moving around a lot. From the other selling and admin, we have brought back some sellers from the original reductions. But I think in that case, we're pretty pleased with the size of where we are and the one thing that we've talked a lot about in the past and have demonstrated that, in that case, as volume improves in certain markets as needed, we will bring sellers back in order to profitably grow sales. But the bulk of the $180 million that we've talked about is more admin and back office type rules, which we would expect to largely stay in place as this continues to recover.

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

I want to start with just current case growth trends, and maybe if you could provide a bit more color around what you're seeing currently. I know you have through -- it looks like, I guess, the week of October 24, it looks like total organic case is maybe down somewhere in the high teens. Just curious if you've seen any change in that more recently, just given the rise in COVID cases and the cooler weather? And then we are seeing globally restrictions kind of rising here, which maybe we start to see some of that in the U.S. Do you think that we could see some step back in the recovery as we sort of like get deeper into fall and winter?

It's Pietro. So in terms of the pattern, I mean, you could see the -- from -- after which pages -- it's been a slow and steady increase throughout the fall, the increase has slowed a little bit from where it was this summer, not surprisingly. But it's a slow and steady increase kind of versus where we were the week before, the week before that. In terms of the possible headwinds we might head into that you mentioned, I mean, the thing I would also ask you think about is the offsetting positive tailwinds. So let's walk through, I think, the things you mentioned. So the number of increasing COVID cases, one of the things we did do is, there was -- what was characterized as a second wave in the Sun Belt this summer, and what we did is we looked at the sales in those states, primarily Georgia, Florida, Arizona, Texas, and what we found was there was a bit of a step back for a little bit of time. But then what we found is sales bounced back, and they recovered at a higher level than they were before that second wave. So the long-term trend or mid-term trend continues to go up and just kind of overcome the COVID cases. So yes, so people might -- consumers might go on the sidelines for some period of time, but then they come back and they come back in even greater numbers than they were pre that spike. So I think that's encouraging. I think in terms of colder climate, I talked about that a little bit in my comments. In some parts of the country, obviously, there's not as much outdoor dining that can happen. But I think the wildcard is the continued growing importance of off-premise dining, whether it's takeout or delivery. And there's a number of things restaurants are doing to both make diners feel more comfortable about indoor dining and as well trying to prolong the outdoor season. In terms of restrictions, you're right, there's a couple of places in the last week that have put restrictions in place. There's still also places in the country that have restrictions in place that haven't come off like California. So I think those might have offset across the portfolio of geographies. So what I would say is short-term, there may be as many positive tailwinds as some of the headwinds that you described. And I think medium to long-term, the trajectory continues to remain positive.

Okay. And then I was curious, I guess, Dirk, if you could provide some color on the cadence of sort of EBITDA by month. And I'm asking this question because just taking a step back, the Q4 consensus estimate looks to be around $270 million or so, which to me seems a little high. I'm just kind of curious as to how we should be thinking about Q4?

Sure. So the overall -- just in broad terms, the cadence wasn't all that different. You end up with a little stronger EBITDA as volume recovered throughout the quarter. But beyond that, there's not a whole lot I have to add. I think the other incremental piece is, we would expect a little more of the cost savings to show up in Q4. But otherwise -- sorry, the timing of the cadence in the quarter, nothing specific to call out beyond that as far as the specific timing.

So where you were sort of running end of Q3, maybe a sprinkle in a little bit more cost saves, and that's kind of how we think about EBITDA by month in Q4. Is that fair?

There's always some things on seasonality and timing of things. But I think when you think about the core business, that's a good way to think about it. And I think that -- I know there's just interest in the coming few months, I think so we're trying to balance that as you would want us to, but at the same time, trying to make these decisions to balance for this timeframe that post-COVID in order to make sure that we're doing the things of really setting ourselves up for success on the other side. Pietro talked about this of gaining share on small and large customers, and we've had very strong success in the last few months on that and are going to continue to push ahead to really help prepare the business further for the near-term as well as the mid-term.

Okay. If I could just squeeze one more and this for you Pietro, I guess. You're optimistic that profitability can exceed pre-COVID levels. Some of this depends, I guess, probably on making the right decisions on the business that you take in today. Can you just talk a bit about how you're balancing the desire to drive near-term EBITDA growth, with sort of the focus on post-COVID margins and the $800 million that you brought in, those margins kind of look similar to what the company would earn pre-COVID? Just curious as you're thinking about all that.

Yes. So as I tried to allude to in my comments, the margins for the new business that we have brought in are very healthy, for large customers are obviously lower than independents or small customers. But there -- if you look at that spectrum of large customers that come in, in the upper quartiles of the margin profile of the large customers that we historically had in our portfolio. So we've been very judicious in terms of the rate at which we bring on those customers. I think the factors that are driving the interest of customers to make a different decision about who to partner with, that's probably more to do with some of the advantages I talked about. The scale, the stability we provide, some of the value-added, especially some of those smaller multi-unit local customers, those value-added still make a big difference. And I think that's really what is driving those profitable market share gains.

Your next question comes from the line of John Ivankoe with JPMorgan.

I wanted to revisit the $180 million of cost savings, which you said the majority of which are in via back office and corporate. That's not a small number as -- obviously, I know that you know. Are there any future investments or functionality that you've kind of taken off the front burner that maybe you're losing as some of those cost cuts? And were there any major department consolidations, other type of structural work that kind of happened to hit that $180 million? And the final question, just in case I get cut off, some companies have kind of talked about regionalization of their business, changing the way their sales force is compensated, just kind of taking the opportunity of doing a broader restructuring, not just on the corporates and back office, but also the -- what's facing the customer. Is that on the table? Is that off the table? Where are you in that process?

Maybe Pietro, I'll start with some of the initial costs, then maybe you can comment on some of the business model things. So I think on that, John, with -- out of the $180 million, so most of it being people-related costs. But what I would say is we took an approach to really try to balance so that we weren't making decisions that we felt negatively impacted the customer, our ability to service the customer. In fact, our focus on customer and service levels to customers is more relentless, I would say, in the last 3 to 6 months than it was prior to COVID really, in fact, in some cases, investing more in inventory as we really strive for that. I think as we've gone through, there's a lens we've applied across these different areas, some of it because in some of these admins, if you do have volume lower, you can take some of this out. We have found some ways through using some of our continuous improvement process to streamline some processes. So -- but as you think about big investments in the way our priorities are structured, we have applied a prioritization and are not sacrificing the future and our top priorities at the expense of this cost and still feel very good about our ability to maintain and expand on leadership in many areas coming out of their side of COVID.

Yes. And then in terms of some of the other things you've said, are they on or off the table, John. I presume you're referring to a couple of things. One is, move to multi-site area. And you'll remember, we moved to that management model in 2015. We're very happy with it. We think it served us well. Most areas have a presence that overlooks 2 markets, we think that's the right number, and we aligned our region structure at that time to be consistent with that span. So we think we did that work a number of years ago, and we're happy with the results of that work in terms of our operating model.

And anything on the sales facing part of the business just in terms of how the customer is being served, whether it's rethinking the way that they're being compensated or what the coverage are and how the territory managers are integrated just within the selling organization. I mean, if there are any changes that the customer could see that could also make you more efficient?

Right. So thanks for that reminder. The team-based selling approach is, again, one we put in place many years ago. As you know, we modified our approach to compensation slightly a couple of years ago. So again, those are changes that we made, have already made, and we want to make sure that they settle. The only thing that has been pretty different in this environment compared to where we were before is the ability of, in particular, our restaurant operations consultants, right? We have specialists who are focused on product, and then we are -- we have experts or specialists, we call them ROCs, restaurant operation consultants, who are focused on the back office of the restaurant, and we've been able to really increase their reach through the webinars and through virtual technology. So what we've been able to do is, as opposed to have one ROC or a couple of ROCs in the market try to learn everything about, especially with respect to the reopening blueprint or with respect to back in March or April, how to best apply for the government support, we were able to specialize and give people a much broader reach, which results in a better customer experience with customers. I suspect some of that will persist, John. You're able to kind of expand the reach and provide a better experience for the customers. So when it comes to more of the product specialists, which is more hands on, I don't expect a lot of change on that front.

And I'm sure everyone is looking forward to getting the food shows back on the schedule. That'd be a nice reminder that COVID is over.

Your next question comes from the line of Lauren Silberman with Credit Suisse.

Can you dimensionalize organic independent case growth for the impact of restaurant same-store sales declines versus net new restaurant customer acquisition versus wallet share gains? So to what extent have seen store sales decreases amongst existing customers and closures been offset by wallet share gains and on-boarding of new customers?

So what I would say, Laura, is some of the gains, as I said, have come from market share gains and market share is -- we've recently been able to try to triangulate around that. There's not great data on that. We're starting to get better data. Of course, some customers, especially those where there's -- remained to be indoor restrictions, had same-store sales fall, but some have compensated, as I've said, through off-premise dining and throughout the dining, of course, the summer and the colder climates. So it's really -- there's a number of different factors, and I think it would be hard to generalize. I don't know that we have all the data, and I think it would be hard to generalize to -- specifically with respect to your question.

Fully understood. Just to follow-up on the near-term organic case growth. It looks like restaurants about down 10% the last few weeks. So I know you felt some of the near-term headwinds. But as we think about further sales gains from here, are they largely predicated on increases in capacity restrictions? Or do you really see the most meaningful opportunities for continued recovery near term, assuming the current environment is status quo?

So I think over time, so the next 2 to 4 months, I don't know if anyone -- as Ed was implying that the current environment may improve, may very well deteriorate, it depends on different parts of the country. And as I said, there are just as many potential positive forces as headwinds with respect to the near-term environment. I think what I would focus on is more of the medium to long-term environment, Laura, where we think that consumers -- if there are some consumers who are obviously perhaps staying on the sidelines, who perhaps haven't replaced other dining out occasions with off-premise, that over time, especially once there's a vaccine in place, I think that those consumer habits go back to where they were. And what we're really encouraged by is just the steady -- the slow and steady increase in organic performance despite the second wave, despite some of the other things. We're just seeing -- what's really encouraging over the medium to long-term is the slow and steady increase in organic performance amongst new tenants.

We've seen a pretty significant disparity in performance in urban and suburban market. So what's your relative exposure concentration in urban versus suburban areas?

I don't know that we're able to quantify that, alright, but I think you do raise a point. That's another example of where some of the more urban markets have been hit hard, but we've seen the offsetting shift to some areas. And again, when you cover the country like we do, it's like a very well-diversified portfolio of stock, a bunch of puts and takes and we're making sure our local leaders to make sure they shift appropriately, whether it's to different menu types that are more resilient, or different sub-geographies that are experiencing growth.

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

I wanted to follow-up on the margin commentary. And gross margin improved a solid 70 basis points quarter-over-quarter this quarter. Just wondering how we should think about the dynamics heading into the 4Q, which historically is a pretty high-margin quarter. Obviously, this year faces some unusual circumstances. If there's any factors we should consider in our 4Q view?

Sure. I think that when I start with the core customer margins, as I mentioned earlier, they've been quite stable, and we continue to see a pretty rational competitive environment. So at this point, it doesn't indicate that as something to consider changing. I think the main thing is really the mix again, and it plays out any differently than historically or recent run rates. But as far as the core underlying health, there's nothing specific that I would call out there. And we would expect the gross margins as volume and mix recovers to continue to improve as it has in more recent months. Like I said, from the -- at the second quarter call, I called it out the last 2 months of that quarter versus this and we have seen improvements as volume and mix has recovered. And as volume recovers over time, we expect that to happen, and it's kind of hard to predict exactly, which that happens in Q4 versus the coming quarters, but we are seeing that positivity happen as volume recovers.

And then a follow-up on the Smart Foodservice business. It sounds like you opened a couple of stores so far in the 4Q. Do you have a rough idea on what you think the pace of development will look like into '21?

So on those, we've opened one. We have one more that will be opened. And we haven't talked about a specific near-term pace. One of the things that we do have more in the pipeline for opening next year. And as Pietro commented earlier, our plans continue to be to double the footprint over the long-term. We're working to integrate that in the business and really allow us to have that strong omni-channel presence that will be difficult to match. And as you may remember, we've talked about in the past is the positive that we see with our own smaller footprint of CHEF'STORE is not only do we get the incremental business from those stores, and delivered customers who shop there are also buying more. So it's not -- it's accretive on that front. And so we look forward to as we continue to expand to likely see the benefits on that as well. So exciting future for Smart Foodservice as part of the US Foods' family.

Your next question comes from the line of Carla Casella with JPMorgan.

I'm wondering, given the changes that you've made, the new contracts that you've gotten and the acquisitions, can you give us a sense for the breakdown of your business, what percentage of your sales overall are to key categories like either the restaurants, the independents versus hospitality and healthcare?

Do you mind repeating that one more time, please?

I'm looking for the business mix where it stands today, given the acquisitions and the new business you've added, if you could break it out. If it's changed dramatically between restaurants, hospitality and healthcare? Or you can tell us how much of the business is still independents?

Sure. So at this point, we haven't quantified specifically, what I would say, though, is because there's also some shifts, as you're well aware, with current changes in volumes. So for example, hospitality being lower. But what we expect is when you look at the core business and the customers over time, we wouldn't expect that to shift meaningfully from where we had been historically. You end up with hospitality being a little bit less than the spend historically just because of the -- it is recovering, but taking a little bit longer to recover than otherwise. But as you think about the business recovering over the long-term, I would think about the mix similar to where it's been.

So as you said in the past, what percentage of your sales are to independent or to restaurants?

So what we've talked about is we've said -- I'm trying to remember that roughly -- Melissa, you have to keep me honest here, is it roughly…?

About a third to independents, about a third to healthcare hospitality, about a third to what we would call all other. And then, Carla, we've also said about 50% of sales are to restaurants. So that would be independent as well as chains.

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

This is actually Jeff Priester on for Jeff Bernstein. 2 questions for you. Can you just give us a sense of how your inventory levels and inventory management is trending kind of as you've rebuilt your inventory following the second quarter, maybe kind of positioning it relative to your pre-COVID levels? And then second, do you have a sense of whether or not your customers on average are still running simplified menus? Are they back to running their full menus, maybe through SKU count per customer or any other metrics you want to provide?

Sure. So what we're -- as I've mentioned earlier, we're actively managing our inventory just because of the pace at which certain inventory items or SKUs are moving. We're running a couple of days higher on DIOH. But pretty, I'd say, not that far different. And our replenishment sales teams are actively monitoring. And we're really striking the balance between the cost -- I'm sorry, the -- having the inventory levels and the service levels. And because we have some vendor challenges of getting the product in on time, getting the product that we order here, it's a matter of, we've chosen to invest a little bit extra in inventory in order to serve our customers. So again, a little more, not all that different and monitoring closely. I think to your question about the menus, it does indicate that customers are still running more simplified menus, and I think that's a way for them I think you know, for them to manage their own inventory and risk scope in a loss or spoilage in this environment. And I would expect that, that will continue for a while until we return to a more stable environment.

Got you. And then is there any update on the number of customer -- of your customers that are not taking deliveries right now, whether it be temporary or permanent closures?

So it's -- what we've talked about is that we expect that the level of closures sort of in the single-digits. And we do have -- that we will work with our sellers on sort of some of them being temporary and some permanent and -- but expect, at this point, the level of closures to still remain in the single-digits. I think the thing that gets harder to tell over time is how that trends. But at this point, one of the things that we've seen is operators do continue to be very resilient. And as we've talked about before, I think get through and Pietro talked about it in a few different ways today as operators really expand the offerings they have through takeout and delivery that they're much better positioned now as a general group, it appears that when we first entered COVID as far as dealing with some of the uncertainty and some of the restrictions are in place.

Your next question comes from the line of John Glass with Morgan Stanley.

First, if I could just go back to gross margin. You had last quarter provided some helpful detail around year-over-year change related to volume declines, acquisition puts and takes, customer mix, et cetera. Do you have those details for this quarter, what the pressures were by those sort of various buckets?

For gross profit, specifically?

Correct.

Sure. So what I would say is, so out of the roughly 100 basis points, it's entirely driven by the combination of mix and the impact of sales inflation. Sort of the acquisitions were pretty benign this quarter as far as an impact. And so it really is the combination of those mix and inflation. And actually, as I commented earlier, across our customer margins and the balance, it really is quite stable of a backdrop of an environment. So that's what gives us the -- but the positivity, optimism of the continued return as volume continues to improve. And even across the mix, we've seen improvement in the third quarter as we've seen those volumes recover.

And then just as a follow-up, the -- do you have a sense or can you sort of quantify what you think your wallet share has changed among independent customers? Some talk about gaining wallet share among their existing customers are holding aside perhaps new customer acquisition. Can you give a sense of how much improvement you've seen in wallet shares such that maybe someone's switching in a secondary distributor to the primary distributor? However you measure that wallet share among independent customers.

Sure. So we haven't talked about a specific number, but we do believe we are gaining share among the independents. And there is, as Pietro comment earlier, not great industry data. There's some industry data through NPD that we use that does on a more [blind] basis, our share in each of the markets compared to others. And that data indicates in the more recent months that we are gaining share versus the rest of the industry, pretty broad-based across our regions in the independent space. And then with the larger customers in national sales, with the wins that Pietro talked about, also believe we're gaining share on that as customers continue to engage with our team about conversions.

Your next question comes from the line of William Reuter with Bank of America.

I just have 2. In your prepared remarks, you talked about how permanent restaurant closures seem to be relatively benign at this point. But I guess, if you could talk about sequentially between the second and third quarter, if you did see an acceleration of some of those closures? And then you discussed [800] gross store openings that you've achieved this year. Are there any offsetting customer losses that were meaningful? That's all from me.

Sure. So in that case, from a closure, there's nothing that I would call out as far as any meaningful change from Q2 to Q3. And I think, in fact, in many cases, operators that were closed in Q2, we started to see some openings as they adapted through the environment that we're operating in. So it's nothing meaningful to call out specifically there. And then, do you mind repeating your second question again, please?

Yes. The second question was just you gained 800 gross new doors, the 500 of chains. And then if there's any losses to offset those?

Sure. So there's -- the number, I think it's roughly $100 million or so that offset that. On a net basis, in fact, this is one of the strongest years our national sales team has had in a number of years. And again, as Pietro, just literally said earlier, for us, when we talk about profitably growing sales, that is we're taking that serious. And with these wins, it's not coming because we're just bringing in cases. It's about attractive economics on these and our sales team, bringing forth some of the differences we have from scale, consistency of operations, tools, et cetera, and are very, very pleased with the growth and net levels of wins in the pipeline on that business remains very strong.

And your final question comes from the line of Carla Casella with JPMorgan.

So I had a follow-up. On the cash flow side -- actually, 2 follow-ups. You're currently paying your preferred in time or picking it. Do you expect to continue to do that? And then you also sold some assets in the quarter, and I'm wondering if you have much more that's slated for sale and what actually you sold?

Sure. So we expect to play through pick the first year, that's the way the agreement was structured, and then I would expect that we were paying cash post and that then is just one of the instruments we're focusing on. One of the things over time that we have consistently demonstrated is focused when we talk about delevering of really following through and executing on that and getting back to our 2.5 to 3 times, which, in fact, we had achieved right before the 2 recent acquisitions, and I would expect us to continue to use strong cash flow post COVID in order to do that as we move ahead. The -- to your point on the sale. So the piece of property we sold was an excess piece of property in California that we had that we bought a number of years ago. We, from time to time, will buy pieces of property for potential future distribution centers and in this particular case, as time has gone on, and we looked at our footprint, we determined that we would not need it. And thankfully, the market has improved since we bought it and so that's why we had the $17 million gain and ultimately left that in our operations because we do buy and sell -- or sell excess properties from time to time with the kind of gains or losses, but we wanted to make sure we called out in our script and earnings release, et cetera, in order to be clear of what was in the results. As far as your question about do we have many others? I wouldn't expect. I mean, typically, in a given year, we may have 1 or 2. There's just nothing -- there's a couple of smaller ones that potentially we have on the market now. And if we have progress on those, we would give updates as we move forward.

And there are no further questions at this time.

Okay. Thank you. I think that, unfortunately, right toward the end there, Pietro was kicked off the call. So just in closing. Just -- I hope as you leave today's call, really you have 3 takeaways. First, just the industry is resilient, expected to return to pre-COVID volume levels. Second, that our scale and differentiation as a company are leading to market share gains. And third, that our financial results significantly improved from the trough in the second quarter. And for this, I just want to reiterate and thank all of our associates who have really worked tirelessly since the beginning of this pandemic to serve our customers. So with that, thank you all for joining our call today, and that ends our comments. Thank you. Have a good day.

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