US Foods Holding Corp. (USFD) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Q2 Earnings Call. 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] I would now like to hand the conference over to your speaker today, Ms. Melissa Napier. Please go ahead.

Thank you, Angelica. Good morning, everyone. Thank you for joining us today for our US Foods second quarter earnings call. Pietro Satriano, our CEO; and Dirk Locascio, our CFO will provide an overview of our results for the second quarter and first six months of fiscal 2021. 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 second quarter results and first half results to the same period in fiscal year 2020. References to organic financial results during today’s call exclude the contributions from Smart Foodservice through April 23, 2021 as the acquisition closed on April 24. Our earnings release issued earlier this morning and today’s presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today’s call are considered forward-looking statements. Please review the risk factors in our 2020 Form 10-K for those potential factors which could cause our actual results to differ materially from those expressed or implied in those statements. And lastly, during today’s call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website. And I’ll now turn the call over to Pietro.

Thank you, Melissa. Good morning, everyone and welcome. So during today's call, we are going to cover three main themes just like last time. First, the industry recovery that we spoke of on our last call continues to progress. Restaurants are welcoming customers back into their establishment as restrictions have been lifted across the country and US Foods continues to participate in this recovery in a meaningful fashion. Second, a great food made easy differentiated platform is helping to drive market share gains with both small and large customers. And third, our financial results are continuing to recover to pre-pandemic levels. Our improved results are being driven by a recovery in case volumes, improved margins and the performance of our recent acquisitions. So let's begin on slide three, restaurants are recovering at a rapid pace as evidenced by the foot traffic at food-away-from-home establishment shown in the chart on the left. The traffic for the industry has continued to increase over the last several months and is very close to returning to pre-pandemic levels. A nearly full recovery in foot traffic as occurred despite the fact that some markets across the US are still ramping up, which is shown by the chart on the right. This shows our own restaurant volumes for markets that have opened less than three months ago versus markets that have been opened six months or longer. Restaurants in markets have been opened the longest are showing growth rates in the high single digit range compared to 2019, while restaurants that are in markets have recently reopened are still down compared to 2019. We believe our view to be representative of what is happening in the country, which indicates that even with volume above 2019 levels, there's still some headroom for growth for restaurants. Moving to slide four, the benefit of markets reopening can be seen in the improvement and total case volume that we are experienced -- that we experienced during the second quarter. In the chart, you can see that restaurant continue to trend ahead of 2019 levels with both independence and chains ahead of 2019, by roughly comparable margin. We expect this to continue, support in part by the growth from the recently reopened markets that I just spoke about. Most of July was also in line with May and June, but we did see in the last two weeks, a tick down of about a 100 basis points, but it's too early to say whether that small change is due to the impact of the Delta variant. Moving to other customer types, the reopening and the related increase in travel is also benefiting our hospitality business, which is now running about at more than 70% of 2019 case volumes and a large improvement from the first quarter. Leisure travel has returned in a very meaningful way this summer and is driving a large part of the improvement. We expect this improvement in that customer type to continue as other customer types within hospitality catch up to leisure travel. First, even within leisure travel, some large parts are still operating below maximum capacity. Second, large conventions, which have in part returned, typically require considerable lead time of up to a year. And third as we've discussed before, there is a little bit of uncertainty about the future level of business travel. When we consider the impact of these trends, we expect hospitality to recover later in 2022. And when combined with our market share gains, we do expect our hospitality volume to return to pre-pandemic levels. Our healthcare business has remained steady throughout the pandemic. Different factors are impacting different customer types within healthcare. With senior living, for example, occupancy rates are still down in the mid to low single digits, but with aging demographics, we do expect demand from senior living facilities to recover over time. With acute care, some employees are still working from home and it is yet unclear where this was settled over time. So to hospitality, when we consider the above trends combined with our market share gains, we do expect healthcare to return to pre-pandemic levels as well, sometime later in 2022. So in summary, based on what we know today about trends within each customer type combined with our recent market share gains and our strong pipeline of new customers, our best estimate is that we will return to pro forma 2019 total case volume later in 2022. I am now on slide five. A Great Food Made Easy strategy is the primary reason that we win new customers. The Great Food piece of our differentiation strategy is anchored by Scoop, our product innovation platform. Given the labor challenges restaurant operators are facing the latest edition of Scoop features a number of labor saving products that are very much on trend, as well as the number of fresh Robin [ph]. We've also begun rolling out the food groups tender by design beef products to the Legacy US foods markets. Tender by design is a specialized process that produces high quality cut states with customers. The rollout has been met with rave reviews by customers. Our leading technology solutions and expert support are the backbone of the Made Easy part of our differentiation strategy. In past calls we've talked about our ghost kitchen playbook, which have played a big part in helping operators generate additional revenue. The following is a quote from an owner of an Italian restaurant outside Chicago, "they use the ghost kitchen context to diversify to chicken wings. We survived the first 100 days of the shutdown, and I don't think we would have survived this one if we didn't have our ghost kitchen of bakedwings.com, it has literally been a lifesaver for us". Most recently rocks [ph], a restaurant operations consultant have been focused on a series of webinars to help customers navigate the challenging labor environment, including topics such as payroll management and doing more with less staff. Thanks to the benefits of virtual technology we are able to leverage our best rocks and food fanatic chefs across a number of geographies and customers can easily schedule one-on-one conference and simply scan a QR code. Finally, on the topic of technology, I would like to welcome John Tonnison to the US Foods team. John was recently announced as our new Chief Information and Digital Officer. He brings extensive experience leading IT organizations in the distribution space, most notably, the last 10 years as CIO of one of the largest tech distribution companies globally. John's mandate is to continue to enhance our leading e-commerce platform while working with Phil Hancock, our Chief Supply Chain Officer to make our supply chain the most effective and efficient in our industry. Moving to Slide six, last quarter, we spoke about the challenging operating environment for customers distributors and manufacturers alike and while labor and product supply challenges continue to persist, our actions have helped mitigate these challenges. On the labor side, we have made good progress in hiring warehouse and transportation associates. We filled over a third and we reopen positions that we discussed last quarter, and we expect to continue to close this gap of hiring and retention incentives have contributed to improving the pipeline and to reducing churn. In addition, we do expect the labor market to continue to improve. In those states that have ended supplemental unemployment benefits, we have seen a dramatic increase in applicant rates. Lastly, in some select markets, we have made some hourly wage rate increases, especially for entry-level wages. Taken together, these incentives and wage adjustments are having a modest impact on the P&L, which Dirk will discuss shortly. On the product supply side, service levels from vendors are still well below 2019 as a result of manufacturers experiencing the same labor and freight challenges that we are. We are utilizing our scale, our relationships and alternative sourcing arrangements to help secure the product we need to effectively serve our customers. Our net promoter survey confirmed that we are fairing as well as, or better than our competitors on this front. Possibly moving to slide seven, both the Smart Food service and Food Group acquisition are performing at or above expectation. Beginning with cash and carry, same-store sales that are nearly chef [ph] stores open at least one year are ahead of 2019 levels. We call that part of the rationale for the Smart Food service acquisition is that the cash and carry market will roughly twice we deliver market with higher margins. As the reopening continues, we're seeing these pre-pandemic trends take shape again. We are bullish on the outlook for chef store and expect that 2021 EBITDA levels will exceed those of 2019. The other rationale for the Food Group acquisition was the long runway of growth that we see for chef store. We expect to have three new stores open in 2021, all in existing market. 2022 is when we should begin to expand our footprint ultimately doubling our store count, making chef store a meaningful part of our growth story. Turning to Food Group, with dining restrictions recently lifted in Food Group in the Pacific Northwest we are starting to see volume return to those markets. Combined with the introduction of our differentiated scoop, e-commerce and team-based selling we expect these markets to be poised for growth in the future. As you'll recall, we have completed four warehouse systems conversion and now expect to have the remaining systems conversions completed by early 2022. Synergy capture remains on track and we expect to fully achieve the previously announced $55 million of synergies in 2023. As I mentioned a few minutes ago, we are extending Food Groups, tendered-by-design process to legacy food locations. In addition, we're also extending Food Group's fresh produce capabilities to the rest of our customer base. Both of these initiatives will bring synergies to the legacy of the Foods network by providing customers with one of the highest quality product offering in the industry in two very important categories center-of-the-plate employees. I'll now turn the call over to Dirk to discuss our second quarter results and full year financial outlook. Dirk?

Thank you, Pietro and good morning, everyone. I'll begin on Slide nine. Our second quarter financial results improved significantly compared to recent quarters driven by continued volume recovery and strong gross profit results. During the quarter, restrictions on restaurants were lifted and leisure travel increased as Pietro noted. This resulted in group case volume with both our restaurant and hospitality customers and contributed to the significant increase in our adjusted EBITDA. During the second quarter, we also experienced record food and cost inflation across a number of different categories. Our teams did an excellent job of managing that inflation and passing it through to customers. This resulted in very strong, gross profit dollar and per case performance, which also was a significant contributor to our increased second quarter EBITDA. As Pietro mentioned, the operating environment remains difficult, but manageable. We've had success filling many of open warehouse and driver roles, but we like many other companies still have work left to do in order to get the full staffing levels especially, as demand increases further. Inbound product supply from vendors also remains a challenge. We have the processes and the tools in place to manage through these challenges and focuse on minimizing the impact on our customers. However, we do expect these headwinds to persist at least through the end of 2021. Moving to Slide 10, net sales for the quarter were $7.7 billion up 68% from the second quarter of 2020. Food cost inflation for the quarter was 8.2% driven by product shortages and disruptions in the supply chain. We experienced inflation in almost every major product category with the largest increases in poultry, pork and disposables. Adjusted gross profit for the quarter was $1.3 billion up 73% from prior year and our aggressive growth adjusted gross margin improved by 50 basis points. Adjusted gross profit dollars increased faster than net sales despite the high food cost inflation highlighting our very strong gross profit per case performance in the quarter. As a recall, inflation benefits, our gross profit dollars while it is typically a headwind to gross margin rate. As I just mentioned, we had over 8% food cost inflation in the second quarter with much of it in commodity categories. This means our gross margin as a percent of sales is compressed yet our gross profit per case is by far the best we've had since COVID began and in fact, those ahead of 2019 second quarter on our Legacy US food business. This high level of inflation and our ability to effectively manage it increased our second quarter gross profit by approximately $25 million and as inflation moderates, or if we see deflation, we don't expect this gain to continue in Q3 or Q4. We're very pleased with our gross profit performance in second quarter, especially given the freight headwinds, which we expect to continue at least through 2021. Adjusted operating expenses in the second quarter were $940 million up 46% versus the prior year. As a percent of sales, adjusted operating expense was 12.3% down from 14.2% in the prior year. While food cost inflation is headwind to our gross margin rate, it is a benefit to our operating expense as a percent of sales. Just as a point of reference, our OpEx as a percent of sales for our legacy US Foods business is about 60 basis points lower or better than it was in the second quarter of 2019, largely due to the significant food cost inflation I just spoke of. Pietro mentioned earlier that we are seeing additional supply chain labor inflation this year, primarily related to signing and retention policies. The additional inflation this year is about $20 million to $30 million and is above and beyond the approximately $50 million with normal annual supply chain labor inflation we experienced. As the labor market normalizes we anticipate not needing to use these bonuses to the same extent and therefore expect most of these costs to be transitory. We increased the use of these bonuses during the second quarter and as a result, didn't have the full run rate in our second quarter numbers. We have made a lot of good progress hiring warehouse and driver associates, however, are still in the process of filling open positions as our business continues to recover. On slide 11, adjusted EBITDA was $332 million for the quarter, a very strong rebound from the second quarter of 2020. Adjusted EBITDA as a percent of sales was 4.3%. Earlier, as Pietro mentioned, our current best estimate is to return to pro forma 2019 case volume levels later in 2022. We also expect to return to 2019 pro forma adjusted EBITDA expect that to be later than the return of case volume. During 2022, we expect the recovery in restaurant volume plus market share gains will make up for the slower recovery in the hospitality and healthcare volume. While our category gross profit rates are well on their way to recovery, we expect the logistics headwinds to continue into 2022. For distribution costs, the two years of wage inflation, plus the temporary incentives and potentially some higher wage inflation that will require additional productivity and customer margin improvements to offset. For fixed costs, we still expect the $130 million of permanent cost reductions completed in 2020 to flow through to the bottom line. As Pietro said, the integration of Food Group are on track, including expected synergies. Overall, we are very confident about achieving performance 2019 EBITDA levels, but the continued uncertainty with respect to freight labor markets makes the specific timing less certain. We know the actions we have and continue to take will result in us being a stronger company going forward than we were pre-pandemic. Finally, on this page, adjusted net income in the second quarter was $146 million and adjusted diluted. EPS was $0.58 compared to a loss in the prior year. We are now reflecting the additional shares from the preferred equity transaction in our adjusted diluted earnings per share calculation. With these shares reflected, our outstanding adjusted diluted share count is approximately 250 million shares. I am now on Slide 12, operating cash flow for the first six months of the year was $250 million. In the first half of 2020, we had a significant benefit to operating cash flow from working capital. This was a result of reduced inventory levels and extended accounts payables days during the early stages of the pandemic. In the first half of 2021, working capital has been largely neutral for operating cash flow. Our business generates a significant amount of operating cash flow each year as evidenced by the $250 million we generated in the first half of this year, despite our business being in a recovery phase. We will use this cash to reinvest in our business and reduce our total outstanding debt. In the second quarter, we proactively paid down $200 million in total debt in addition to our standard debt repayments. Our leverage ratio dropped by more than two turns due to the paydown and significant adjusted EBITDA improvement. Our target leverage ratio remains between 2.5 and 3 times, and we expect to continue to make progress against this target over the balance of this year, the additional debt reduction and increased EBITDA. We had a very strong second quarter and are focused on the continued recovery of our business. Looking ahead, we expect both Q3 and Q4 EBITDA dollars to be below Q2 as a result of not repeating the approximately $25 million of inflation benefit from Q2, as well as the increased OpEx related to the full run rate of supply chain sign on a retention bonuses put in place during the second quarter and the impact of our continued reinvestment in sales resources as we discussed previously. Our industry is rapidly recovering, and we are participating in that recovery in a meaningful way. Our volume is recovering well. Our gross profit is strong and we are focused on effectively managing the supply chain challenges we and the industry are facing and our acquisition performance is on track resulting in improved results and we're using the cash flow generated to invest in our business and reduce that. Finally, the actions we took during the pandemic have positioned us to continue to gain share with both large and small customers. Operator, at this time, we can now open the call for questions.

Yes, sir. [Operator instructions] Our first question comes from the line of Alex Slagle from Jefferies. Your line is now open.

Thanks. Good morning. Just a question and thinking about some of the incremental headwinds from the accelerated hiring and retention efforts, it sounds like you expect these headbands to continue for a few more quarters. At what point do you think the acceleration in these costs are the peaks and move toward a more moderated case with the cost increases?

Good morning. This is Dirk, I'll take that. It's hard to know exactly, but to your point, I would expect just based on some of the early evidence that we've seen in states that have ended unemployment and as we continue to make good progress in hiring that, as you get toward the end of the year, we should be quite a ways there. So it's hard to know exactly there, but at this point, best estimate would be, as we get towards the end of the year into 2022, you begin to see that moderate and begin to return to a more normal environment. What I will tell you though, is in this environment, some of the labor challenges in supply challenges, vendor, it's also been a really good opportunity for us to engage in discussions with a number of our customers about margin and just other operational factors to improve our ability to serve them. So overall, really partnering with our customers as well as trying to manage through this as best we can.

Sounds good. Thank you.

Our next question comes from the line of Peter Saleh. Your line is now open.

Great. Thank you very much. I believe last quarter you guys were talking about the labor shortage, and I think you had mentioned you were about a thousand drivers and selectors short of where you'd like to be. Can you guys give us an update on where you are today in terms of getting up against that goal?

Yeah, this is Pietro. So we, as I mentioned in my comments, we've covered over a third of that gap and that gap to just to clarify as well to what we anticipate as we move in the future not necessarily the gap today. So we're making really good progress. What I would say is we've really wrapped up the hiring machine for selectors and drivers. We're hiring exactly the right number that we are looking for. The challenge right now is just reducing the churn rate, as I'm sure you've seen in the process, rates are at an all time high and so part of the measures we're putting in place are really aimed at reducing the churn. So we can continue to close the gap and talk about.

Our next question comes from the line of Nicole Miller from Piper Sandler. Your line is now open.

Thank you. Good morning. Also on labor inflation my question is, why just yourself specifically, or the industry at large, do you feel like it's transitory. The total cost might not come in the form of bonus, but why does someone who wants to net that make less. I'm just curious of what circumstance would you see where it's just a total benefit conversation and you try to make it whole going forward in that way. And then at what level would you pass it on? The answer to the first question on the call having engaging the customer would lead me to believe that perhaps that's happening now. Thank you.

Yeah. I'll start and I'll start with the second part of your question. So, as you mentioned, and as Derek mentioned, we have been passing on some of the inflation that we have seen certainly on the product side, but also where possible on the labor side. In terms of your question as to why it's transitory, I think there's a school of thought that is shared by many that the labor supply and imbalance is in itself transitory like with the speed of the recovery, probably faster than many expected. We've seen the demand for labor go up fast and the supply. The partial evidence for that is what I noted in those markets where supplemental unemployment benefits have ended. The hiring pipeline is several times better than it is in those markets where supplemental benefits are still in effect. And so those are some of the reasons why we believe these are transitory in nature.

Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open.

Yeah. Hi guys. Good morning. Hey, Dirk, I wanted to get back to what you, the color that you gave around EBITDA for Q3 and Q4. And what I was hoping that you would do is maybe just a little bit more color to sort of bridge, like the 3.32 of this quarter to the expectation you gave some numbers. But I think we're annualized, but I'm not sure maybe some of them were quarterly. And I don't think you talked about a number around sales resources. So maybe just help us bridge how we think about the back half and I also am not sure what you're assuming for volume within that what you're assuming for inflation. So just any color that would be helpful.

Sure Ed. Happy to. So it's -- the reason was we wanted to provide the additional insight that I did is really because in the second quarter we really benefited from the strong inflation and as you see our ability to pass that through with really with gross profit per case being above 2019. And I think the important takeaway on that one is our second quarter results were strong with or without this additional inflation benefits. And so the thing we wanted to call out with the $25 million is that as the piece, that for the quarter alone helped that we given that there's not an expectation for many the industry and outlets for continued inflation as and even some modest deflation. So, I think that $25 million we stay sort of more modest or kind of flattish on inflation is the piece that we would not expect to repeat in Q3 or Q4. I think that if you look at the sales resources, we haven't talked about specific amounts. We've continued to hire kind of second quarter, third quarter fourth quarter. So I think you probably can get close up there with an estimate there on the impacts per quarter, as we continue to ramp up. We're well on our way there from an adding resources, and then in supply chain that $22 million to $30 million is largely what we expect in year this year with a portion of it in the second quarter, and then the rest of it through the balance of this year and most of that being in a form of these retention and sign-on bonuses that I've talked about. From a volume perspective, we do expect volume putting aside any impact that delta may have, but looking at the trajectory that the business was on, we expect volume recovery to continue there. So there's nothing that I was attending or that we are calling out that's what I would say, derailing the strong recovery, as opposed as just some things to keep in mind that are not as recurrent. So hopefully that helps.

Okay. And then I wanted to ask you about sales growth versus case growth. There was a, 14.5% gap in inflation, but the rest was mix. What's driving that mix and is there incrementality within that mix? It's actually positive the gross profit dollars. So maybe we should be thinking about sort of case growth plus that and how does that look going forward as well?

Sure. So the mix to your point, it can be a category or types of products, people buying as well as customer types. So I'll use the example with restaurants recovering faster than say healthcare hospitality. That's been a net positive when you look at sales. So there's not as direct of a math correlation that you can do from sort of the sales percentage of that mix versus gross profit. However, the thing to take away is with the strong performance, especially as you're looking at the independence and such, there is some benefit in our gross profit. And so that's part of the reason that what even with our strategy in recent years of growing these more attractive customer types. So as independents grow faster than the broader business, they are more accreative and so that helps the overall business. So on that one, I think that the mix, it has been positive. It's going to be more influenced by some of the external factors as healthcare hospitality and such continue to recovery, and depending on the pace of that, but overall gross profit dollars and rate good trajectory and we feel good about the pace of that recovery.

Our next question comes from the line of John Glass from Morgan Stanley. Your line is now open.

Thanks. Good morning. You mentioned that freight in labor is going to stick around, so you may need some additional productivity. I think that's what I heard. Do you have line of sight, is there actually work going on now to increase the productivity that you've already experienced? The $130 net million more than that? And if so, where does that come from? Can you just talk about if you're looking for new areas to save it? And specifically just on the cost of inflation, just as a quick follow up, are you actually seeing the rate of inflation beginning to come down is your expectation that will, but it hasn't yet. Just, we understand kind of where you are exiting the quarter in July on inflation.

Sure. You've packed a lot of that question. So, I'll start with the second one because that's the quicker. So we have seen the rate of inflation slow. We're still seeing some modest inflation in some categories, but then seeing the meaningful deflation in other categories that are netting out closer to zero. So it's last kind four, six weeks. So, that is sort of the assumption is sort of how than more what we've been seeing more, more recently there. As far as your question on productivity, so, yes. I'll just remind, I put out there that the number that we sort of incur in a normal year on inflation in the supply chain, and we typically in a given year, we'll focus on mitigating as much of that as we can through productivity and as you can expect. So we do have some things that are underway in supply chain in particular, however, not near at the pace that we would have in a normal year. And as you can probably appreciate we and others in the industry are directing a lot more energy to running the business and really providing as good of an experience for the customer as we can during this challenging time. So therefore it leaves a little bit less time to focus on productivity. So you do end up with a slowing of sorts there, but we do still have some things going and feel confident in our ability to ramp that up faster under our new Hancock's leadership as we move ahead. Hopefully that helps.

And just to add Derek, the 130 you were referring to in terms of fixed costs, no change to that, as Dirk said the productivity initiatives that Dirk was just referring to an answer on the variable side of things, whereas he said that the focus on customers and the onboarding of a large number of new associates has slowed down the productivity that we typically see on the variable side.

Our next question comes from the line of John Ivankoe from JPMorgan. Your line is now open.

Hi, thank you. That the question is in the context of your gross profit dollar per case ahead of the second quarter of '19. Obviously, the dollar per any market share battles that are going out there. That some distributors, given obviously profitability recovery across the space, are perhaps using these gross profit dollars to gain share whether to existing customers or new customers and whether you think that's actually an opportunity over time for you to use GP dollars per case to drive case volume. Thanks.

Maybe I'll start because we're really talking about market share and volume. So we've continued to make market share gains John. But I think we and others, and you've probably read about this, those markets are gains have probably been held back a little bit by the challenging labor staffing and document, just the desire to make sure that we serve customers in the way that is what they expect has probably held us back a little in terms of making even more aggressive market share gain in the last couple months and when I say, I mean, probably everyone.

The team is always looking at it. It's balancing volume and margin. And so, driving those share gains smartly, and there are categories that from time to time we will choose to invest in that we think are accretive to the overall basket. So as you summarized well, it's about driving more gross profit dollars ultimately to the bottom line. And that's what we're really trying to balance and in this period made progress in gaining market share with small and large customers and very good, gross profit results at the same time.

John Heinbockel from Guggenheim. Your line is now open.

I want to start with where do you guys think your capacity is now? And with volume recovering, is this a good time to think about accelerating the calling of less profitable accounts? How and are you doing that?

So, so it depends how you measure it John. I think what the capacity that's been talked a lot about is, again, as I mentioned in the question capacity as you're drawn to staffing. So if you're short drivers, there's only so many trucks that has hampered our ability to grow more than we have. But we still see us making, we still see we've made market share gains. And so as that kind of stabilized, and as we continue to close the gap, we believe we have the opportunity to continue to gain market share. We've had in a very small number of instances -- done some optimization in terms of resetting terms with customers. In that handful of cases, probably there's been a little bit of press on that. You can see that impacting us and the results have been diminimous when you look at volume growth versus 2019.

And then maybe secondly, right. So I know you were investing in sales. I thought the number was $50 million, but were you sort of in the, you fill the third of the open positions, were you on the sales there's left to go, right? You said that's kind of out in the future. So it doesn't sound like that that's a front loaded investment, right. That, that may stretch out into next year is that fair?

I'll take that, on the sales. So we're, as I mentioned with that what we haven't talked about a specific number, we're good way through that journey as well, and making progress and expected to get to that full investment run rate this year yet later in the year. I think from a supply chain perspective, we would expect to get to that kind of full staffing level yet in 2021, obviously, the market will dictate, but the thing to remember probably all the way back to our fourth quarter pause, I was talking about that or third quarter call last year is just the thing that we want to make sure is we're continuing to press hard on staffing, especially given that the challenging market that's out there and knowing that our businesses recovering and we continue to have the customer wins and share gains. So do expect to get to that level of staffing at some point later in 2021.

Our next question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Hi, good morning. Thanks for taking our questions. Just had a quick one and the comment that sounds like it's maybe moderating a little bit, I'm just curious if there's an opportunity to kind of pass those smaller costs on at a more slower rate and maybe capture some margin as cost moderate or if that's happening across the industry, or if you have any opportunity to do that, just given where some of the elevated supply chain costs are.

Hi Kelly. This is Dirk. Yes. So there is some moderate opportunity to do that, but that ends up being relatively short in timeframe because of you remember us talking about a large portion of our contract resets, which can be from weekly to monthly generally speaking. So a little bit of opportunity. The reason that I wanted to call out in the second quarter was just the combination of the inflation plus product shortages, etcetera, really combined with our processes tools enabled us to have really outsized gross profit gains, very pleased with that, and just highlighting that all of that was really strong and the quarter was strong with or without that we wouldn't expect that level of gain to continue going forward.

Got it. That's helpful. And just another one in terms of gross margin, we were kind of estimating gross margins about maybe a 100 basis points below pro forma levels with the acquisition positions, is that accurate? And can you help us maybe think about just the factors that get back to that kind of full gross margin?

Kelly, do you mind clarifying what you're saying an estimated a 100 for the current quarter or…

Yeah, just the 15.5, we were thinking that's kind of about a 100 basis points below, the kind of full pro forma estimate for the total company, just curious, what are the factor, how far below is gross margin today relative to kind of full potential and what are the factors that get that back over time?

Thank you for clarifying. So the thing that makes it a little harder to talk about specific just with the outsize inflation we've had and the amount of a commodity is it actually, it makes gross margin look worse than it really is because with a lot of this inflation being in these categories that have fixed cost mark ups, or where you are passing it along and they look like there's compression, even though you're making more per case. What I will tell you is if you look at -- so we would expect gross margin to largely return this 2019 levels over time is even though the level of inflation gain, does it continue inflation as is I think you know does benefit us over time. So that's helpful. The customer and product mix headwinds, we talked about continue to improve as case volume returns. So we expect that to return and then logistics or freight the other big piece that, as we look at it, we've made some progress there but what expect also just as they return to a more normalized environment for that to reverse at or close to 2019. So at this point, there's not anything that gets in the way of us getting back to and then growing from the 2019 gross profit per case. I think the thing on gross margin, even just to put it further into context, but I'll say it, if you stripped out the impact of inflation on sales is outsized actually even gross margin would be above for the second quarter above 2019. So it's a harder question to answer right now, giving the inflation we're seeing, but feel very good about gross profits dollar and per case growth over time as to gross margin, I think that the last thing to remember is any impact that it has negative on gross margin has an equal positive impact on OpEx. So it is a really, really a net impact on adjusted EBITDA. And as you saw, we improved that in the quarter as well.

Our next question comes from the line of Lauren Silberman from Credit Suisse. Your line is now open.

Thank you. So industry supply challenges in shortages, well-documented you spoke to them, are you seeing customers stockpiling inventory, just given concerns on the supply chain and a related question to that? I think you noted a 100 basis points ticked down in restaurant case volume over the last two weeks of July. Do you think that stockpiling has anything to do with it, or do you see it more related to underlying deceleration a bit?

I don't believe there's stockpiling happening. There's just enough inventory to be stocked pies. I think I can sure recall one way or the other in terms of what I think there's a chance that may be related to delta, but I haven't seen restrictions go up and maybe a small percentage of consumers who are, here's what we do know whenever we've had a wave of COVID and this is I think a fourth one, and two things tend to bounce back even better than they were that way then more quickly.

Great. Thanks. And if I could just do a follow up on the inflationary commentary, you had a pretty big life over reserve adjustment at the impact to adjusted gross profit dollars, or I guess, gross margin in future quarters, if at all.

So you're right. I think the as you saw, I think in my 12 years here, I don't recall a LIFO charge in a quarter being anywhere near where it was, and it really is directly related to the same thing because the sheer amount of inflation that we had in the period just because of the way LIFO works is you're still valuing that inventory at the, sort of end type of cost. It just, it results in a charge. And so what I think you would, I don't think I would correlate that any more to sort of from an adjusted gross margin, gross profit, etcetera, it is they're sort of different inventory methods. So when you think about that, I focus on the inflation is a positive to. In LIFO, what will happen is if we see inflation moderates it's stays pretty neutral. If you start to see some deflation, it's a likely -- you would start to see some form of offsetting a credit to that in the second quarter -- sorry, second after the year.

Our next comes from the line of [indiscernible] from UBS. Your line is now open.

Good morning. Thanks so much for taking the questions. How has the competitive environment shaking out as the recovery has ramped up? Have you see any smaller distributors, finally start to go out of business, give them much flexibility on inventory and fluctuations in demand. And have you've seen any meaningful wallet share increases in your independent customers? Thanks.

So the competitive environment has, I would say, been pretty stable in terms of the number of competitors. Again, the recovery happen as quickly as it did over the course of the last year, I that's helped a lot of smaller competitors. When we look at our net promoter score, there's clearly some are more challenged than others with respect to being on time or fulfilling the orders that customers have. In terms of can you remind me of the other part of your question if you don't mind?

Just in terms of any meaningful wall chart increases.

Yeah. So we are seeing so our cases per line are up about 7% on prior year, which is quite good. I think that's probably a combination of things. It's a combination of probably smaller share gains as well as the recovery losses theme lines per customer go up a little bit with independence, which is probably a good proxy for wallet share gains, otherwise restaurants continue to expand their menus and that going on. So same overall story, as I would say, as well as results driven by combination patient recovery and our market share games.

Got it. That's really helpful. And just one quick follow-up, there's been some news that unemployment benefits are less likely remain pass September 06. Could you see that happening?

It's hard to question. I think we've really focused on, I think what we've seen in tablets that are decades in the making of consumers really well, embedded and entrenched and the combination of digital ordering the vaccine has allowed these tablets to re-establish themselves. So I think there may be some potential over the long term, so some home to continue to increase share at the expense through that home, just as we've seen over the course of time.

Our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.

Thank you very much. One follow-up clarification and then a question. Just want to clarify Derek I know you mentioned the third quarter date that it was strong to start July, but slipped a 100 basis points last couple of weeks, but I think you mentioned the second half of the year, the volume recovery is going to continue, which I guess would imply the 100 base point pullback as maybe as a blip, just trying to understand what the common themes are maybe that you've seen out of those recent pullback, whether it's by market or what would give you the confidence that it's not something more sustainable, I guess, and then a follow up.

Pietro a general noted, is in a little bit of decline. And I think the way to bridge those two comments is, if there's an impact from delta or such that's one, it's harder to know. So if you kind of put that aside, and I think on that one, in fact, from delta that I come back to as a Pietro said, is we've seen this in multiple waves as even though we could have a shorter term impact, the demand is there, and we would expect the recovery to be right back on track, even if there's a bit of a delay. I think overall, just the demand externally seems to continue to be there. We have seen consistently in the markets, that chart that we included here that as reopening occurs, we're seeing a continued demand increases in improvement, and you still have a number of markets that have only reopened in the last three months or so now closer to full capacity. And we would expect those that the demand in those markets to continue to increase. So I think from our perspective overall, expect you think of independence as an example, expect that to continue to strengthen as that demand gets there more and more markets and overall, again, no matter if there's a short-term impact with delta or not expect that it's really just timing and not whether the demand is there and the return is there that strong demand we expect to be there and the growth to continue.

Understood. Then the final question was I guess, Pietro if I look back a year, and like there was excitement among the distributors on a couple of fronts, one just for the penetrating existing accounts coming out of this crisis. And it seems like you've achieved that with, I think you said your cases per line up seven, but obviously adding new accounts who might shift to a larger distributor just for comfort. So I'm just wondering to the start of the COVID in terms of the ability to continue to add new accounts and maybe add growth by M&A or whether you shy away from the latter in the short term, thank you?

So in terms of new accounts, I think where we've really demonstrated that is with the large accounts that we've talked to in the part of the call about a billion dollars of new business over the course of, since the pandemic started and we expect to continue to add to that level or customer side and that accounts, the temporary staffing challenges we've seen have held us back a little bit in terms of being able to grow market share a little bit more the way we would have liked, or as aggressively as we would've liked. In terms of the third part of your question, and M&A, you're right. That's been one of the things that perhaps didn't pan out exactly as we would have expected in terms of sort of the consolidation of third distress. I think I owe that to what should we back to the speed of the recovery, which has been good for the industry, but there have been some select markets where we've seen some distress competitors and really taken advantage of that in terms of hiring their sales force and they're going after new customers. So we've kind of found a different way to take advantage of perhaps slightly less distress situation than you'd envision in the beginning.

[Operator instructions] Our next question comes from the line of Edward Kelly. Your line is now open from Wells Fargo.

Hey guys, thanks for letting me back in here. A couple of things for you, I guess first, I just want to go back to commodity inflation and the expectation of, I guess, no inflation in the back half of the year. I am just kind of curious, really the question is sort of how's that possible because it does seem like everywhere else, you'd CPG vendors, etcetera. Everyone's talking about inflation. I'm just kind of curious what we're missing here?

So at the way that I would think about it is continued inflation because if that continued in place and that drove the incremental gains. And I think that when you, if you look at it, we don't have additional inflation. You still on a year-over-year basis, you will see inflation show up, but it's incremental that sort of drives the kind of outside -- drove the outside gains in the second quarter. I think that what we've seen so far in the last few months is sorry, last few weeks is you see some of your commodity categories. So the center of the plate as good examples where they had a lot of inflation in the second quarter began to show some deflation in more recent weeks and that you have set up some modest inflation continuing and a few other grocery and other categories. So I think that's the piece that, we'll kind of wait and see, but maybe that's how to bridge the difference between what maybe some of their comments are and how I talked about it in the context of how it's increased our Q2 earnings.

So year-over-year, still some inflation, which should by the way benefit gross profit dollars. But to the extent that we saw that in Q2, that's not likely to continue at that rate.

Correct. And that's why we wanted to conduct third quarter and fourth quarter as opposed to close to that outside gain in the quarter and like I said, with or without that game we're very pleased with the strong improvement we saw in the quarter versus Q1.

Okay, excellent. That makes sense. And then just one last one for you, because you did sort of mention on the call, post COVID profitability and my question here is that I kind of calculate pre COVID pro forma EBITDA at around $1.3 billion, $4 billion or so. Is that your cost saves, the synergies from the two deals, which combined is probably a little bit more than a couple $100 million. So we're kind of at like $1.5 billion, $1.6 billion and if there's underlying in eighborhood of like $17 million, $20 million. But there is, share gain. There is -- is there any reason to think that when sort of like all is said and done, and I'm not trying to nail you down on a date or a year, but when all is sort of said and done, and the business is back to normal, that you wouldn't?

And I think you're thinking about all the right elements to your point, that gets to that $1.3 ish billion in grows from there. I think that sometimes people don't focus on is just that cost inflation that we incur in a given year. So I think when you factor that the other people that talked about just with all of the onboarding of new associates in the current market, just a little slower productivity than we would normally have in a period, but we don't think there's a reason that we don't continue to get back to that in a 1.3 ish number and then grow from there after the higher numbers that you were talking about. You have pieces that you're thinking about how you've been captured in inflation as well.

Okay. And just the last thing for you. So, when we go back to like this 1% increase in driver, again, I think it was probably $17 million, maybe $20 million. To offset that, your EBIT margin pre COVID forget about incrementally the EBITD margin, but just regular EBIT margin. That's only about a 1.5% of case growth over '19 levels. So there are offsets even to underlying wage inflation, if we are optimistic that the business will be higher from the numbers, right.

You're, definitely in the right neighborhood. And I think that the way you're thinking about it, it's sort of, it's good logic. And I think, the thing I'll come back to on that is just when you think about any incremental inflation, I think the key message to take away is and I think it was, Lauren had asked that earlier as well, but it's that -- it's hard to know if all the pieces that we think on labor inflation are transitory.

If you do get to some portion of it that remains permanent as conversations with a lot of customers. And so it's an environment that customers are understanding they want, we're trying to be very good partners with them. They want to be good partners with us. And in some of those cases, it's really, if they were discussing with them about either changes in the way operations that we serve them, or in a number of cases some level of economics improvement in order to mitigate or offset portions of this. So it's not that we don't have any levers. We actually think there are some good opportunities for us to offsets.

I will now turn the call back to Mr. Pietro Satriano for the closing remarks.

Thank you, maybe a couple of takeaway since we spent a lot of time talking about the P&L, look a very good quarter, volume was strong and you see a path to full recovery on the volume side. Margins inflation, as Derek said on the really nice spot. Well our challenge is to a variable distribution costs that we believe we have a handle on them. And acquisitions are performing well and we're paying down debt. So I think overall, a very good news story. I'll close by thanking our 26,000 of results we've covered today. Thanks to all for tuning in.

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