Good day, everyone, and welcome to the US Foods Third Quarter 2023 Quarterly Earnings Call. Today's call is being recorded. And I would now like to turn the conference over to Mike Neese, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lisa. Good morning, everyone, and welcome to the US Foods third quarter fiscal 2023 earnings call. On today's call, we have Dave Flitman, CEO; and Dirk Locascio, our CFO. We will take your questions after our prepared remarks conclude. Please limit yourself to one question and one follow-up. Our earnings release issued earlier this morning and today's presentation slides can be found on the Investor Relations page at our website at ir.usfoods.com. During today's call, unless otherwise stated, we are comparing our third quarter results to the same period in fiscal year 2022. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2022 Form 10-K for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated in those statements. We are excited to announce that we will host an Investor Day here in the Chicago area on June 5th of next year, where we will outline our strategy and the key drivers of our new long-range plan beyond 2024, along with our cash flow generation and capital deployment plan. More details will be sent in the following months. 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 presentation slides posted on our website, except that we are not providing reconciliation to forward-looking non-GAAP financial measures. Now, I'd like to turn over the call over to Dave.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Before jumping into our Q3 highlights, I want to officially welcome Mike Neese as our new Senior Vice President of Investor Relations. Mike brings 25 years of Investor Relations experience to US Foods, including time with Performance Food Group and Builders FirstSource. I'm thrilled to team up with him one more time. Additionally, Martha Ha joined US Foods in late September as Executive Vice President and General Counsel. With more than 30 years of experience, Martha is a seasoned business advisor with exceptional expertise in corporate governance, commercial and M&A transactions and leading high performing teams. I look forward to Martha's many contributions to the company. And now, let's turn to today's agenda. I'll start by sharing highlights for the quarter and our progress against our strategy and long-range plan before I hand it over to Dirk to review our financial results and updated fiscal 2023 guidance. In the third quarter, we continue to make significant progress against our long-range plan broadly across the business. We are improving the safety of our associates, growing our independent cases, while accelerating market share gains, enhancing our margins, driving increased cash flow, and meaningfully reducing our net leverage. Our strong third quarter and year-to-date performance are a result of our continued growth and market share gains on our target customer types, accelerating operational efficiencies, and the dedication of our 29,000 associates. I am proud of their relentless focus on delivering best-in-class service to our customers and executing strategic initiatives under our long-range plan. Building on our differentiated team-based selling model, industry-leading digital innovation and continuing momentum, our team delivered strong case volume growth. Each of our target customer types, independent restaurants, healthcare and hospitality, had year-over-year market share gains. Importantly, we…

Thanks, Dave, and good morning, everyone. Let's turn to Slide 10. The execution of our strategy is driving sustainable operating leverage improvement as we deliver strong adjusted EBITDA growth again this quarter. Net sales were $9.1 billion in the third quarter, an increase of 2.1% over the prior year, driven by total case volume growth of 4%, partially offset by year-over-year food cost deflation and product mix impact of 1.9%. Our independent customer case growth was nearly 6% for the quarter. Renzi added approximately 80 basis points of growth for our independents. CHEF'STORE volume negatively impacted our total independent cases by about 80 basis points. The system conversion is largely behind us. We are laser focused on driving volumes back into our stores. We expect CHEF'STORE volume to be flat to modest growth as we exit 2023 and accelerate that growth in 2024. We saw modest year-over-year product cost deflation of approximately 1.3%, which continues to be driven by center-of-the-plate as grocery still show year-over-year inflation in the quarter. We continue to make progress executing our long-range plan initiatives. Our gross profit per case increased 3.6% during the quarter compared to the prior year. Our adjusted gross profit dollars grew 7.7% from the prior year, driven by an increase in total case volume and cost of goods sold optimization. Adjusted gross profit as a percent of sales was up nearly 90 basis points to 17.3%. Our adjusted operating expense per case was only up 1.1% for the quarter which is our best per case year-over-year performance this year. The 5.2% increase in adjusted OpEx dollars was largely driven by increased volume. Adjusted operating expenses as a percent of net sales were up approximately 40 basis points to 12.9%. We are pleased with our gross profit per case growth exceeding OpEx…

Thanks, Dirk. The continued improvement in our results reflects our team's hard work over the past few years to build a differentiated platform that positions us to win in any environment. I am pleased with the progress we are making as we execute the four pillars of our strategy, which is driving improved safety, productivity and profitable growth despite the lack of market tailwinds. And we'll continue to be at the forefront of technology with our MOXē platform and our overall digital strategy. Our focus on continuing to improve our customer value proposition has resulted in strong case growth and consistent market share gains, specifically within independent restaurants, healthcare and hospitality. We are growing our adjusted EBITDA and enhancing our margins. Our leverage is now below 3x. Even with this tremendous progress, we have a long runway of profitable growth and shareholder returns in front of us. Assuming stable macro backdrop, we believe our long-range plan will lead to further margin expansion over time, and we remain committed to be at or near $1.7 billion of adjusted EBITDA in 2024. And I want to be very clear, this is not the ceiling for future earnings growth. We have a lot more sales and earnings growth potential in 2024 and beyond, and we look forward to highlighting our exciting future at the upcoming Investor Day on June 5. We are just getting started, and we will continue to execute our strategy, gain profitable market share within our target customer types, enhance our margins and strategically deploy capital. We are in a great position today, and we believe we have sustainable competitive advantages to outperform the market well into the future. It's an exciting time at US Foods, and we appreciate your interest. With that, Lisa, please open up the line for questions.

Thank you. [Operator Instructions] We'll take our first question from John Heinbockel with Guggenheim.

Hey. Dave, let me start the sales force investment or the investment you're making in sales, right. How would you parse that out between the various pieces of team-based selling, right? You've got different positions. And then secondly, the org change having those guys report to the Regional VPs, what do you think that will do operationally?

Great. Well, let me take the first question that you asked there, John and good morning. We're excited about the investments we're making in the sales force as we've been doing that for a while. And we continue to accelerate that investment, and we'll be at that low-to-mid single digits for a long time to come. It's mostly TMs. But I'm excited about our team-based selling model, where we have our consultants and specialists as well as our chefs teaming up in front of the customer. We'll make fractional investments in those other two groups relative to TMs just to continue to make sure they have the support they need in front of the customer. And then in terms of the org changes, really excited about where we're going. Jim, his retirement just gave me the opportunity to think about differently how I want to think about the organization and efficiencies. And as you know, any time there's handoffs between corporate and the field, it creates slower decision-making opportunities for inefficiency, and we just need to continue to move faster. So it's an opportunity for me to rethink it and moving our local sales organization back into the field where the customer interfaces just make all sorts of sense. So a small change, but I think it will prove meaningful through the course of time.

All right. And then my follow-up, the three target types, how would you parse out the case growth between new accounts and drop size, right? And my guess is it's different independent versus healthcare and hospitality, the composition is different, correct?

Yes. No, I think that's right. And on the independent side, let me start with that first. our cases per line are relatively flat, given what you've heard broadly about some of the foot traffic, but we are continuing to increase our lines per drop up in the low single digits. So we continue to penetrate those customers both when we get them initially, but also through the course of time, and that's an exciting opportunity for us to continue to drive in terms of growth. And as I mentioned, in hospitality and healthcare, we're generating a lot of net new customers and new business. And as we've talked in the past, we believe we've got a highly differentiated model there. Particularly in healthcare, we've got great technology differentiation to help our customers, not only in their back office from a cost productivity standpoint. But also with our customers and the folks that are seeking the care to help manage their nutritionals to be efficient in how they bring in inventory and to do that automatically. No one else has the capability that we have there. And then the same-store sales, I would say, contribute more that growth to healthcare and hospitality relative to independents. So we've got a differentiated model. We're winning in all those places as we continue to tell you, we're taking share in all of them. And we've got a long runway of growth ahead of us. And I think this really speaks to the power of the differentiated model that we have. We've got all these target customer types that many of our competitors don't have. And I think that will prove to be a very resilient model for us through the course of time.

Thank you.

Thank you.

We'll take our next question from Kelly Bania with BMO Capital Markets.

Good morning. Thanks for taking our questions. Just wanted to touch a little bit more on gross margin, obviously, quite strong. Can you just help us break out maybe the inflation, deflation impact? And then also just talk more broadly about strategic vendor management and your cost of goods initiatives, your reduction initiatives there and what you're learning as you work through this initiative with your suppliers?

Let me start, and I'll ask Dirk to fill in the details here. But the point I want to make, Kelly, and I appreciate the question. As we've been through periods of large inflation here and now two consecutive quarters of deflation and what you've seen us continue to do regardless of what's going on there is continue to expand our gross margins and particularly our gross margin per case. And as Dirk highlighted, we're going that at a much faster rate than our operating expense per case is growing. That's a winning model. We expect that, that will continue. Specific to your SVM question, it's a piece of work that the company has been doing for quite some time. As we said, we'd be through about 60% of our COGS by the end of this year. We're maintaining that. And we're making very good progress. So that element of the gross margin improvement, along with our penetration of exclusive brands, which we said were up 140 basis points in independents this quarter, along with our work to continue to optimize our freight lanes and improve our mix. That's the winning formula to continue to expand our gross margins. And as we say, we control our own destiny in that regard, and we're doing a nice job of it.

Hi, Kelly. The only thing I would add is just to reinforce Dave’s point that inflation, deflation, really a moot point when we think of year-over-year, as he said, it's been relatively flat to some modest deflation, but those are in categories that aren't impacting earnings. So the improvement you're seeing is really all back to our point of control and controllable things that we're doing in our four walls as opposed to the external marketplace.

Great. Thanks. And then just wanted to give you an opportunity to maybe touch a little bit more on the $1.7 billion long-range planned target. And as you get closer to 24 how those different components of that may be working towards reaching that, whether parts of it are ahead or behind or where there's maybe more opportunity. Just wanted to give you the opportunity to kind of talk through that a little bit more?

Yes, great question. And I'll just say we'll say more about our guidance for next year on our fourth quarter call, obviously, but I'm very confident to be at or near that $1.7 billion. And just through the course of time here in my first 10 months, I've gained nothing, but increased confidence Kelly. And the momentum and what I love about the way we're delivering our results is we've got great balance across the P&L. We're working in the right target customer types. We're delivering the right amount of growth profitably. We're improving our expense ratios and importantly, driving the outcomes that our customers need. So there's not one area that's outsized, I would say, in terms of the impact there. We've got great balance. I expect that balance to continue into 2024 and beyond.

Thank you.

Thank you.

We'll take our next question from Peter Saleh with BTIG.

Great. Thanks for taking the question and congrats on the quarter. I wanted to ask maybe first on the independent restaurants. The environment is changing a little bit here. We're starting to see a couple of quarters now of deflation that you guys are seeing. Restaurants have taken a lot of price, and we're seeing some more discounting among the larger chains. Are you seeing any change in behavior among your independent restaurants? Or just help us out in terms of their health and their trajectory going forward?

Yes. I think the health is very solid. We've had some foot traffic challenges through the course of the third quarter there, particularly with the chains, which continued to see lower foot traffic sequentially, while our results improved. I think the health of the independent is very stable. And as you've heard me say in the past, I believe they're going to win out in the long run here. And importantly, we continue to have a differentiated model that enables us to continue to take market share and support their businesses, not only with our great products and service with our people, but also our technology. So we think we're differentiated there and regardless of what's going on in the macro, we're going to continue to penetrate that healthy customer base. And importantly, I think overall, there's less restaurants out there than there were pre-pandemic. But we've seen sequentially new openings of restaurants. And I would say our penetration is largely probably equally split between new openings of locations, as well as penetration and taking share from others in the marketplace. So it's a pretty well-balanced approach at this point. I would expect to see continued openings in locations through the course of the next few quarters here. So we're seeing that part of the customer base pretty healthy and stable.

Great. Very helpful. And then just on the indirect spending. I think you guys have mentioned past couple of quarters, some cuts that you would be making there. Can you just talk to us a little bit about where the progress is on some of those indirect spending cuts? Is that more of a 2024 event? Or have you started cutting some of those expenses? Thanks.

Good morning, Peter. We have started to see some small savings begin to accrue already. We do expect that to accelerate as we go through 2024. But that's moving along well and really as we planned. So it's good to see some things come to fruition now, but more to come next year.

Thank you very much.

Thanks.

We'll take our next question from Alex Slagle with Jefferies.

Thanks. Congrats. I wanted to follow-up, it looks like the gap between the chains and independents slightly narrowed a bit quarter-over-quarter. I mean, is there any stabilization or relative improvement in the chains that you're seeing or any more improvements to come, you think?

Well, I think just broadly in the market, the foot traffic was slightly down sequentially Q3 to Q2. And as I've said in the past, really the performance is relative to who you have in your portfolio relative to the winners and the folks who are going as well. We outperformed what was going on with foot traffic this quarter. I think that's relatively stable. We have some things in the pipeline and I think we'll continue to show improvement through the course of time and into next year, middle of next year. We're targeting the right change that we believe are going to win. And as we've said in the past, we'll continue to look for optimization opportunities within our portfolio.

A question on Pronto. I guess it's grown to cover about 35 markets now. What's the broader TAM of this opportunity sort of where it can go and timeline to think about?

Yes. We made aggressive investments in Pronto. You'll continue to see us do that as an opportunity to serve our customers better. The frequency of deliveries, particularly in these urban areas that are difficult to reach. Customers want fresh products delivered more frequently, and that's the great platform for us to do that. So we'll continue to be thoughtful about where we take it but we see a long runway of opportunity there to continue to penetrate across our portfolio with Pronto. We love that model. We're excited about it, and it's getting great traction.

All right. Thank you.

Thank you.

We'll take our next question from Lauren Silberman with Deutsche Bank.

Thank you. And congrats on the quarter. I wanted to ask about capital allocation. So $250 million or so in buybacks year-to-date, stock trading at a big discount to history, had really strong fundamental momentum. So can you expand on your willingness to further lean in how you're thinking about capital deployment and allocation of buybacks versus M&A or debt paydown? And then specific to M&A, just how you think about the most accretive opportunities for the business.

Yes. So let me start to say we will always invest in organic growth in our company first. We think that's the highest return and supporting our customers is paramount. We continue to look at expansion opportunities across our network, and we'll be thoughtful about those, but we'll continue to drive that first. And as you heard me say, we don't need to do any acquisitions in this company. I love our footprint. We'll take opportunities like we did with Renzi and the one we announced this morning to help us with efficiencies, taking miles out of the system and local market density. So let me just say a word about Saladino's since you brought up M&A and the way we think about it. We're very excited about that acquisition. We said $600 million in revenue. It gives us an opportunity in the Central Valley where Saladino's is roughly half chain and half independent, where we don't have a footprint to serve the independent customer in that Central Valley, really none of our competitors do. So we're excited about it from that standpoint. We're excited about it from the standpoint of helping us optimize the chain business that we have in that Central and Northern California footprint. So we'll take miles out and serve that part of the customer base better. But I guess I would say I'm most excited about the multiple we're paying for that, which is a fraction of what we paid for Renzi, and a fraction of our trading multiple. So as we said, we will be thoughtful and disciplined about any acquisitions, and we won't do any that don't make sense, and we won't overpay for them. And Saladino's is another great example of that. In terms of your question around share repurchases, we're obviously under trading our potential and hugely undervalued in my view. You've seen us ramp up our share repurchases. I think we'll be thoughtful about that going forward. Returning capital to shareholders is important. After we do the things we need to make sure we're growing and supporting our customers well. Obviously, more to come on that through the course of time. But we've been leaning in hard on share repurchases, and we'll continue to do that.

Great. Thank you for that. And then just a follow-up, really impressive case growth trends. Can you talk about anything around the cadence of trends you saw throughout the quarter? And to the extent you're willing to provide any color on October? And similarly, anything you can provide on – you saw inflation throughout the quarter and trends into October? Thank you.

Yes. Thank you. I think sequentially through the quarter, we saw things soften a bit in the market, as I said earlier. And that's why I'm so excited that our independent case growth actually accelerated sequentially from Q2 to Q3, and we continue to accelerate our market share gains. So it underscores the importance of the differentiated model and the differentiation that we have actually in the marketplace. And in terms of the start to the fourth quarter, I think it's largely in line with what we saw in Q3. I would say October started a little slower for us as we were lapping a strike from one of our large competitors in the first couple of weeks of October. We saw that volume bounce back as we would expect in the back half of the quarter, and we expect to be relatively in line with Q3 and importantly continue to take market share in those target customer types.

Okay. On deflation. So we actually saw the year-over-year deflation improved or lessen as we went through the quarter. And in October, we actually saw a modest year-over-year inflation. And the improvements are primarily coming from center-of-the-plate. So as that begins to become modestly inflationary and then grocery is still very modest, but levels of inflation. So we think that's encouraging.

Thank you guys very much.

Thanks.

Thank you.

We'll take our next question from Brian Harbour with Morgan Stanley.

Yes. Thanks. Good morning guys. Dirk, just on that comment, would you expect that there is now going to be kind of modest inflation across the business in 4Q and then into early 2024?

Good morning, Brian. Well, I’ll use P10 as a good indicator that at least it's back into the black or some modest inflation. I think as we see since it's been more driven by proteins, which can be more volatile, I think that's the part that's harder to predict. But I think what's encouraging is you see the stabilization of proteins, you see still modest inflation in grocery. And so I think that indicates more likelihood of some level of inflation here in the quarter I think that the most important part that I had come back to is what we talked about earlier that even with really modest deflation that our gross profit still remain quite strong. It just, I think, demonstrates the durability we've talked a lot about and why we are so bullish in our GP being able to stay strong and an expectation that in future years, we continue to expand further.

Yes. Okay. Makes sense. And then OpEx per case, like you talked about in keeping that in check. How would you kind of rank the main drivers of that at this point? Do you think it's mostly about just kind of continued improvements in productivity. And are you seeing much yet from kind of digital expansion, flex scheduling, et cetera? Like how do we think about which of those drivers might become more important as you go into the subsequent quarters.

Well, I'll just start with, we're quite pleased with the performance. As I said in my prepared comments, our best year-over-year per case performance that we've had, and that's really driven by distribution to supply chain costs. And so I think that is a key unlock. I think when you think across other parts, yes, we'll get some leverage. We'll continue to take some actions on productivity. But the – I think all the things also what you see when we talk about the improvement as flex scheduling is coming to life as year-over-year productivity continues to improve for delivery and warehouse. All those are translating into per case improvements. And so that gives us good confidence that we are making traction. We still have plenty of runway ahead, but ultimately are pleased with that and see a lot of opportunity remaining.

All right. And we'll take our next question from Edward Kelly with Wells Fargo.

Hi, guys. Good morning. Nice quarter. Just a follow-up on OpEx per case. Obviously, very good results. But productivity on a worker standpoint, I don't think it's back to 2019 levels. You talked about things like the routing, the flex scheduling. How do we think about the growth in OpEx per case going forward on a sustained basis in terms of modeling? And then specifically, as you think about Q4, you look OpEx doesn't increase very much Q4 versus Q3, which would suggest that it might actually be down year-over-year. I don't know if that's too aggressive an assumption, but maybe speak to that as well.

Hi, Ed. So ultimately, I think with distribution and the productivity, so we actually – for the third quarter, our delivery productivity was about 2019. Warehouse isn't quite there, but it's making progress. So we're pretty encouraged. And I think the – whether it's a flex scheduling, you heard Dave talk about our cases per mile from the routing work we've done over the best in the company history. And what I think we each like about the work we're doing is it's not all just about taking costs out. It's about the customer experience, customer service and things that then are taking – are making our company more productive. So it really is a good balance there. I think the – as you look ahead to the fourth quarter, whether it's sort of in line with prior year, a little bit higher, a little lower. I think the encouraging part is that we're seeing very modest levels of increase in per case. And I think that comes back to what you've heard us say from the beginning of this year is when if we have inflation, cost inflation of 3% to 5% a year, our goal is to offset as much of all of that as we can. And I think you're seeing that as we make progress coming more and more to fruition. So our goal remains that from quarter-to-quarter, that could bounce around a little bit. I'll use an example for OpEx you may end up with a little better performance in the fourth quarter and – but we're pleased with the progress we're making.

Okay. And then, Dave, just a follow-up for you. You are making some adjustments to the sales compensation model, hiring salespeople. We're hearing this from competition as well. Obviously, the large players seem to be a bit more focused on gains with higher margin customers. My question for you is can everyone win in that environment, meaning the larger players. And how confident are you in the differentiation of what US Foods is doing that allows you to continue what we're seeing today in that type of backdrop?

Yes. Great question. I'll take your second part first. I'm highly confident in the differentiation of our model. And it's the winning model, I believe we can drive growth effectively and productively with our sales team. But that team-based selling model, as you continue to hear me say is a real differentiator. I see it working every single day for our customers. And we're going to continue to drive it hard. And I think that's why you may hear us talk about sales head count growth at a slightly lower level than you hear from some of our competitors. I think that really is a differentiation in our model, and we'll continue to lean in around that. And the first part of your question, remind me again.

Well, it's just – I guess it really pertains to the idea that the large three players are all sort of investing in salespeople. Is there enough opportunity beyond that everybody can win? If the market looks at this as you versus your other publicly traded players or some game, how inaccurate is that at the end of the day?

I think this is still a very highly fragmented market, as you know. The big three have 40% nominally roughly plus or minus of share. So that's still very highly fragmented. I think you continue to see us take share collectively from some of the smaller players. When I think about our business relative to others, we still have a relatively small share of the independent market space. So the runway is long, I think, for growth. We all have different models. They all have their pluses and minuses, but I think there's room for everybody to continue to win in this market.

Hey, guys. One other thing just that I'd highlight that I think is a differentiator in our go-to-market and our focus is with our three customer types that we're targeting. I mean what you see is it's not just about the independence. We had 8% growth almost in healthcare. We're at 6% hospitality. We've continued to do that. We continue to have an excellent new business pipeline and converts in healthcare and hospitality. So if you look at how that translates into in those most attractive or key customer types, that led to overall the strongest case growth out of any of the competitors, and we're pleased that we have with the model we have, the ability to continue to grow at accelerated and gained share in all three of those types leading to overall solid case growth.

Great. Thank you.

Thanks, Ed.

We'll take our next question from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. The first one, David, I think we've confirmed the industry data and the restaurant commentary showed that there was a slowdown to close maybe this summer, maybe August, September. And I think you confirmed that the chains foot traffic slowed in the third quarter. The question we've been getting a lot is just why? I think a lot of people immediately jump on the idea that the headwinds on the consumer are finally taking hold. But then many of our restaurants have actually said less of consumer concerns and more does a return to normal historical seasonality in terms of month-to-month or quarter-to-quarter. In fact, some have actually said the industries recovered somewhat in October. So I'm just wondering your thoughts. One, are you surprised that maybe you're not seeing a similar uptick in October? And do you think there's any credence to the thesis of a return to seasonality. Just wondering your thoughts on whether or not we should be concerned of a broader consumer slowdown or whether the seasonality does hold some water? And then I have a follow-up.

Yes, I think that probably is something to the seasonality piece, although we don't spend a lot of time thinking about that, Jeff, because relative to our model and the things that we're winning in around – we actually telling our team to focus on the things we can control and whether there's a broader slowdown in the market. There's still a lot of cases out there for us to go get. People are still going out to eat. It's going to ebb and flow just like it always has. It's been a difficult time to get a handle on things with the rebound since COVID and restaurants that have gone offline and then coming back. It's really – it's been a little bit helter-skelter here, as you know, for the last year or so. But regardless of all of that, I think what I'm seeing and what I said earlier is stability. I think that's the key right now is stability and our ability to lean in where we want to in those three target customer types to continue to support our customers to share.

And on that note, it seems like you've got strong momentum across your business lines. I'm just wondering you kind of blessed the – at or near $1.7 billion for next year. But what's your greatest concern as we look to 2024 I'm assuming maybe it's more macro versus your internal plans, but what are you looking at to get a gauge for your outlook for 2024? What's the biggest concern you have or among your team?

I think from a macro standpoint, that would probably be it, but it would have to be a major significant macro thing to give me a lot of concern. I've got a lot of confidence and our ability to hit that target for next year, given the momentum that we have and what I can see coming in the future in terms of continued share gains, productivity work that we have underway in our ability to control that outcome. So yes, I guess I'd have to point to a macro, but it would have to be more than just a minor slowdown.

Got it. And then just lastly, the M&A, just a follow-up. It seems like the discussions maybe are a little bit more productive. You've completed a couple of them. I know peers are talking a little bit more about it. Do you think both sides are coming to more reasonable terms in terms of valuation? And how do you think about it in terms of your opportunity? Is it more of a geographic opportunity? Or is it just a particular line of business that you'd be interested in focusing on? Just trying to get your sense?

Yes. Ours have been more geographic focused in both cases, both with Renzi and Saladino's now where we're serving those markets in some capacity, but not very efficiently. So there's still ample opportunity for that across our network to strengthen our position in local markets. There may be something that we do product portfolio-wise, that's opportunistic. I don't see any major gaps in it. But if the right thing comes along at the right time, we'll certainly take a look at it. But I think you can think about it in a similar fashion than what you've seen us do with the two that we've talked about so far this year. And in terms of valuations, what you heard me say is that Saladino's was extremely reasonable, and a fraction of what we paid and elsewhere. So we're going to do the things that make sense because we don't have to do M&A. We really don't. So it's going to be thoughtful. It's going to be the right one for us to solve a problem for us. And at valuations that make sense for us every time.

Thank you.

Thank you.

We'll take our next question from Jake Bartlett with Truist Securities.

Great. Thanks for taking the question. Mine was on – it pertains to you, but as well as your larger competitors. You're all increasing your sales forces pretty aggressively. And I guess I'm wondering, it seems like there's a disconnect, the overall market growth, macro pressures are there, it doesn't seem like the market's gotten much bigger than expected. So how should we interpret the kind of the wide scale increase in the sales force given the macro background that doesn't seem to be better than expected?

Yes, I think you can interpret at least – I can only speak for us and how we're thinking about it, Jake, but I think it speaks to the underlying opportunity that we see in terms of growth. And look, as we continue to take share, we're going to grow somewhat with the market. That's going to be very low-single digits. We're going to continue to penetrate the market and take share, and that's going to drive an incremental growth in that low to single-digit – low to mid-single-digit headcount increase, we'll add another incremental growth on top of that. And so that's the way we're thinking about the algorithm. Given the relatively fractured nature of this market and this industry, there's still ample opportunity for us to take share regardless of the macro.

I think, Jake the other thing, keep in mind, if we're growing independent at 6% on a regular basis as we have for the last number of quarters, you do want us to be adding sellers because that's also – we're getting good leverage as we're adding sellers by growing cases faster than that, but at the same time, making sure that we're reinvesting and reinvesting, especially in those areas where we're growing faster.

Got it. Great. That's really helpful. And then in the context, and I know it doesn't – certainly doesn't seem like it's happening so far as gross profits per case remain robust and have been robust for your larger competitors as well. But with a lot of these salespeople coming on industry-wide the macro is still somewhat under pressure. Do you expect price competition to increase? It seems like that's still a risk to the gross profit per case story out there. It hasn't come to fruition. But how much of a risk do you think that is that all these sales guys, people hitting the market are going to have to start competing a little bit more on price?

Yes. I think this has always been a competitive industry, and it always will be. And things changed during COVID. And I think I would describe the competitiveness out there now is back to pre-COVID levels. It's very fragmented. There's a lot of competitors out there. Jake, that doesn't deter us at all. We've got a differentiated model. But I think it underscores the importance of two things. One is all the initiatives that we have underway that we control to continue to drive that improvement in gross profit per case and then looking at ways to continually get more productive and take cost and waste out of our system. That's why this 3% to 5% productivity target is so important to us. That's why the MOXē penetration is important because it allows our sales team to be much more productive in front of the customer. Not chasing the back office stuff, but selling the value that we bring, selling great products and importantly, helping our customers solve the problems.

Great. Appreciated.

Thank you.

We'll take our next question from Mark Carden with UBS.

Good morning. Thanks so much for taking the questions. So CHEF'STORE was a bit of a headwind in 3Q to a slightly greater extent than it was in 2Q. Is this simply being driven by residual effects from the systems conversion issue and the need to win back some of these customers? And then how should we think about the impact here over the course of the next few quarters?

Yes, I think you're hitting right in the center of the target there, Mark. As we've said now, the systems change is largely behind us. We've had some lingering effects in terms of lost business through the course of that, which started in the third quarter of last year. Encouragingly, we are seeing month-over-month sequential improvement and more recently, week-over-week improvement. So I'm encouraged by the ramp-up. As you heard Dirk say, we expect to be in a position to flat to growth by the end of this year, exiting the year with the goal of driving strong topline growth next year. And I think largely, we're on track to do that. So I'm very encouraged by what I see. We continue to invest in the business. We've opened one new location already in the fourth quarter in Virginia, and we've got a couple of more planned in the Carolinas here before the end of the fourth quarter. So progress continues, and I expect that, that ramp rate will continue here as we exit 2023.

Okay. Great. And then on Renzi, I know it's still early, but how is the integration fare relative to your expectations? And then in context with Saladino's, do you think you may have capacity to acquire at a faster pace while also, of course, understanding that you don't necessarily need to lean on M&A?

Yes. I think Renzi has gone even better than I could have imagined. It's gone extremely well on the integration front. We put a very strong leader in place there. We've had a great cultural fit. Importantly, we haven't lost any key talent, and it's been very transparent and a non-event for the customers in the market. So we love it. There's not enough good, I can say about how Renzi has gone. It's all very, very positive. And then the second part of your question again?

Just the second part, basically, with your new acquisition, do you guys think that you might have the capacity to acquire at a faster pace, again, understanding that you don't necessarily have to acquire?

Yes. I think, as I said, it filled a geographic void for us, particularly on the independent side there where we were serving that market. It's kind of hard to get to the Central Valley from San Francisco or L.A. very efficiently. So it solves that problem for us. And importantly, we have plenty of chain business in that part of the country and the half of that business that we're acquiring that was chain related will help us serve that segment of the customer base also more effectively. So we're excited about it from all those angles. It just makes sense at the right time. And importantly, as I've said a number of times this morning, a great multiple that we paid for.

Great. Thanks so much. Good luck.

Thank you.

[Operator Instructions] We'll take our next question from Andrew Wolf with CL King.

Thanks. Good morning. I'd like to follow-up on some of the questioning on the labor productivity. And you've experienced accelerating case growth in the quarter and sort of for the year as well. You're in a tight labor market and you had good results. So that's pretty impressive. But to what extent can you measure or just anecdotally talk about to what extent hiring more fresh people who've obviously come in relatively low in terms of productivity as you're growing. How much of that impacts the labor productivity metrics that we're able to discern.

Well, I think attracting talent is important. And I would say the inflow of applicants for our jobs has increased to the point where I would say it's relatively the same as it was pre-COVID. It's always been the challenge to retain those folks through the course of time. And that's why we leaned in so hard around this flex scheduling pilot. And while initially as you start those pilots, you need to add a little bit of headcount, it actually hurts your productivity. What we're seeing is double-digit improvements in turnover. Obviously, that leads to reduce overtime and improve productivity in the long run. And we're seeing that everywhere we've taken that model. So I think we've got a unique approach that makes a lot of sense for us and will help us retain people, which is the key here to driving productivity over the long haul. And as Dirk said, we're pleased with our driver results, both in terms of turnover and productivity being back to pre-pandemic levels, and we'll continue to drive improvement from there.

Okay. And just regarding the guidance, I think because you mentioned Saladino's is going to close late in the year. Does the guidance update exclude Saladino's?

Would be a very insignificant amount for the fourth quarter. So at this point, it really demonstrates the core strength of the overall business.

Okay. Great. Thank you. That's it for me.

We'll take our next question from John Ivankoe with JPMorgan.

Hi. Thank you. The question is actually on current price competition, if you're seeing any, the current slow restaurant case volume environment, COGS, which obviously have moderated the labor market, cost of distribution, which has moderated. I mean it would seem that if there was going to be a time for price competition, we would probably already be seeing it. So I just wanted to get your comments, anything that you're hearing on a specific market level to maybe there's been a change in recent times. Thank you.

Yes. I would say that there's been a change since the pandemic getting back to pre-pandemic competitiveness. And as I said, it's always competitive. I wouldn't point to any market or geographic area of the country where it's more or less competitive than it was pre-pandemic. It's always competitive. It's a thing we all have to deal with every day. And that's why we work so hard to sell the value that US Foods brings to our customers.

Thank you.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to Dave Flitman for any additional or closing remarks.

Well, thank you all for joining us today. We are excited about the momentum in the business and importantly, the exciting future that we have. We look forward to talking to you again and importantly, our Investor Day on June 5th. Have a great day.

Thank you. And that does conclude today's presentation. Thank you for your participation today, and please disconnect.