Executives: Melissa Napier - IR Pietro Satriano - CEO Dirk Locascio -

CFO
Analysts: Marisa Sullivan - Bank of America Merrill Lynch Ryan Kilbane - Guggenheim Ajay Jain - Pivotal Research Group Kelly Bania - BMO Capital Shane Higgins - Deutsche Bank John Ivankoe - JPMorgan Vincent Sinisi - Morgan Stanley Zach Fadem - Wells Fargo Andrew Wolf - Loop Capital Karru Martinson -

Jefferies
Operator: Good morning. My name is Carina, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal year 2017 earnings conference call. [Operator Instructions] Thank you. Ms.

Melissa Napier, you may begin your conference.

Melissa Napier: Thanks, Carina. Good morning, everyone, and thanks for joining us today for our second quarter fiscal year 2017 earnings call. Joining me are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide the business update and speak about our performance in the quarter and for the year-to-date.

We'll take your questions after management's prepared remarks conclude. [Operator Instructions] During the call and unless otherwise stated, we'll be comparing our second quarter and first six months results to the same periods in fiscal 2016. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website at usfoods.com. We expect to release our 10-Q later this afternoon. In addition to historical information, certain statements made during today's call are considered forward-looking statements.

Our actual results may differ materially from those expressed or implied in these statements. Relevant factors that could cause our results to differ materially are contained in this presentation and in our reports filed with the SEC, including our 10-K for the year ended December 31, 2016. Our slides and our earnings release contain certain non-GAAP financial information, along with reconciliations to the most comparable GAAP financial measures. And now, I'll turn the call over to Pietro.

Pietro Satriano: Thanks, Melissa.

Good morning, everyone, and thanks for joining our call. So let me start with the highlights on page 3. So we're very pleased with our performance, chalking up 10% adjusted EBITDA growth for the second quarter, which brings adjusted EBITDA growth for the first half of the year to 8%. Highlights include volume growth across all our target customers, gross margin dollar growth fueled in part by inflation in certain categories, continued progress against our portfolio of cost reduction initiatives and continued success of our M&A strategy. We are updating our guidance first by increasing our expected net sales range to 3% to 5% for the year and second, by raising the bottom end of the expected range for adjusted diluted EPS.

I will cover these highlights, after which, I will turn over to Dirk to walk down the P&L. Let's go to page 4. Total volume grew 3.6%. More importantly, growth with our target customers ticked up in the second quarter. Organic growth with independent restaurants was 3.7%, almost 100 basis points up from the previous quarter, and our food growth was 4.7%, the 9th consecutive quarter where growth of independent restaurants was over 4%.

For healthcare and hospitality, our other target customer types, growth also ticked up from the 4.2% we saw in the first quarter to 5.6% in the second quarter. This was fueled by good organic growth on a part of these customers as well as the continued impact of some larger customer wins that we have discussed in previous calls. We did experience a dip in our nonstrategic customer types, what we're calling all other on this chart, and this is fueled by both some negative comps on the part of some large customers and by the exit of a few smaller chain-side customers. Given their low contribution margin, the impact from the bottom line is not significant. We do expect growth from this all other group of customers to continue to trend down in the back half of the year.

Let's go to page 5. Given our focus on independent restaurants, we thought we would spend a minute or two on Technomic's most recent outlook, which is shown here. So if you compare this most recent view released late last week to the view we showed on our first quarter call, you'll notice two things. First, the historical growth numbers for independent restaurants going back to 2015 has been restated down. The reason for this is what I would call definitional, meaning Technomic has switched its data source for restaurant units.

The resulting gap between both the old - between the old and new sources on historical growth rates imply that the definitional impact was significant. It also, by the way, implies our level of outperformance versus the market is even greater than we believe up to now. In fact, it tells us that we've been growing closer to 3x the market versus the 2x the market, we believe, until now based on this industry data. Second, if you compare Technomic's most recent view to last quarter's view, you would also notice that Technomic is calling down its outlook for 2017 and beyond. The first reason is the definitional change I just referred to, but it also reflects that Technomic now has a slightly more negative outlook on independent restaurants.

We will admit that we are a little bit surprised by this change in outlook as we are not seeing it in our own reported numbers. For example, the uptick in our organic growth that I just talked about is coming from raising the performance of our underperforming markets, which would confirm our view that the market is fairly constant in its outlook. In addition, our own forecasting models, which are based on the macroeconomic drivers of primary demand for the industry, have also been fairly consistent and constant in their outlook. So in sum, our view remains. The outlook for independent restaurants has not changed and we are gaining market share.

So let's take a couple of minutes to update you on what's new in our differentiated platform that we believe is fueling these market share gains. Let's go to page 6 and an update on our 18th edition of the Scoop, which, you will recall, is a program by which we introduce new, exclusive and innovative products to the industry. The latest issue launched in June was focused on providing products that provide choice to today's discerning diners. As our Head of Product Development, Stacie Sopinka said in this edition of the Scoop. From socially conscious consumers to the specialized diets of food tribes, it's becoming harder for groups of diners to visit a restaurant and try something on the menu that appeals to everyone in that party.

According to Datassential, 49% of consumers desire alternatives to protein and 44% of consumers say allergy, food restrictions or avoidance of certain ingredients dictate what they eat. In this issue, we featured some meat substitutes which are exclusive to US Foods, products such as Molly's Kitchen meatless breaded boneless wings and Molly's Kitchen meatless crumbles, both of which have a taste and texture that's very similar to their meat equivalents, thanks to the technology we are using. So far, sales are promising. On our key metric of customer trials, we are tracking 6% higher than we were at this same juncture for our spring Scoop. In addition, and we do - we don't mention this a lot.

But our innovative Scoop products also resonate with our other target customers, healthcare and hospitality. Just over - just under one-third of Scoop sales, a pretty significant number, typically make their way to healthcare and hospitality customers. Let's move to page 7 and what we last talked about on our last call as our evolving digital ecosystem. So by way of a recall, [indiscernible] Foundation is e-commerce and mobile ordering platform, which is used by all our customers and in particular, independent restaurants, who have an industry-leading 53% of our purchases that go through this e-commerce platform. Now if you're wondering why 53% is the same as last quarter, seasonalities typically cause our e-commerce penetration number to drop in the second quarter.

And so we would expect this number to grow again through the back half of the year. As I talked about last time, sitting above this order entry system is a set of applications and solutions that help restaurant owners in three areas, drive traffic, manage their menu and food costs and optimize labor. So let's talk briefly about how our apps and our solutions are helping these operators in the three areas. First, driving traffic. Last call, I talked about our exclusive relationship with the takeout app called ChowNow.

ChowNow gives restaurants the immediate ability to generate incremental traffic from takeout, which everyone knows is growing double digit. We began to actively market ChowNow about a year ago, and placements are up around 3.5x since the end of 2016. Second, in terms of managing the menu and food costs, our menu design service helps restaurants engineer and design menus that both optimize profitability and are compelling to consumers. Placements of this service are up almost 2x since the end of 2016. And third, in terms of labor, a real point was our customers especially in some geographies, placements of our third-party labor scheduling app are up 3x since the end of 2016.

Many of these apps and solutions have been in market less than 12 to 18 months, so the growth numbers are naturally off a very small base. Nonetheless, these growth numbers are indicative of the appetite independent restaurants operators have for this kind of value-added solution, and they are also indicative that we are absolutely on the money in terms of meeting their needs. Further, our Restaurant Operations Consultants or ROCs, who are part of the team-based selling model play a critical role in working with our customers to diagnose their biggest pain points and identify which solution works best for a particular customer. Let's go to page 8. On the last call, I gave a status update on our portfolio of cost reduction initiatives.

On this slide, we have taken the same approach for our gross profit initiatives, most of which we've discussed in the past. Let's start at the top. As you can see, our CookBook predictive analytics, which provides sellers with pricing recommendations based on an item's price elasticity, is now fully rolled out. This means that all our sellers on the street are now presented with guidance on opportunities to margin up as well as opportunities to increase share of wallet by selectively lowering prices. Adoption of these pricing recommendations has already reached our goal of 70%, and we expect that number to rise over time in part because the models themselves will become smarter over time.

So we're now turning our attention to applying CookBook to other target customers, such as healthcare. So we've done an exercise where we've grouped together and analyzed hospitals located in different parts of the country but would share similar characteristics and purchase patterns. And so we're able to identify any missed opportunities, which are then sent to our account executives on the street through our CRM platform. We've had good results so far, and so this capability will soon be extended to our e-commerce platform that is specific to healthcare customers. Just moving down the list here.

Strategic vendor management is the name by which we call our category management efforts, which began in early 2012. And so while we have reached a certain level of maturity, we do believe that opportunity still exists to optimize our cost of goods. And one of these opportunities comes from the centralization of replenishment, which is about half deployed. And last but certainly not least, we continue to grow private brands at a clip of around 50 basis points per year, with the growth among independent restaurants being closer to 100 basis points. This growth has come from a combination of factors, including stocking and core assortment in every DC as well as using analytics to guide our sellers to conversion opportunities that have a higher probability of success.

We look to continue to grow our penetration of private brands at approximately this rate for the foreseeable future. So last, let me turn to page 9 and M&A. In July, we announced our acquisition of TOBA, a $130 million broadliner serving the Midwest. And earlier in the quarter, we announced the acquisition of F. Christiana, a $100 million broadliner in Louisiana, a thriving and growing food market.

These two acquisitions are fourth and fifth of the year, have a high penetration of sales to independent restaurants and fit the bull's eye of our M&A strategy of acquiring small tuck-in broadliners that increase our local market share, thereby providing significant synergies. Initial response from the sellers who have joined our team has been good, and progress on the other three acquisitions from earlier this year are performing on track. So let me now turn the call over to Dirk.

Dirk Locascio: Thanks, Pietro, and good morning, everyone. As Pietro commented, we had a strong second quarter.

Our net income increased to $65 million from a net loss of $13 million a year ago and adjusted EBITDA increased 10%. We also experienced strong overall case growth and continued delevering on the balance sheet. Let's walk through our results now in more detail. On slide 10, our second quarter net sales were $6.2 billion, an increase of 6.1% over the prior year. This increase was a result of our 3.6% case growth combined with approximately 2.4% from year-over-year inflation and mix.

Our case growth for the quarter was solid with our customer type - key customers types, as Pietro noted, with independent restaurants over 4% and healthcare and hospitality growing over 5%. In the second quarter, we saw a return to year-over-year inflation in a number of commodity categories such as seafood, produce, poultry and dairy, as well as modest inflation in several grocery categories. Sales mix, primarily from our center-of-the-plate acquisitions, was a benefit for the quarter as well compared to negative mix impacts in recent quarters as we lapped our produce acquisition from the second quarter of 2016. As a reminder, center-of-the-plate cases have higher sales prices and as a result, positively impact sales mix, while produce cases are lower sales prices and negatively impact sales mix. We did experience month over month or sequential inflation as well during the quarter in several commodity categories, namely several of the aforementioned categories as well as beef.

We do, however, expect sequential deflation in several commodity categories to return in the second half, with beef being a primary category where the outlook indicates the deflationary second half. Year-over-year inflation, however, will likely remain for the balance of the year. Although we are encouraged by the year-over-year inflation we've seen in some categories, we don't expect any significant inflationary tailwinds to impact our full year results, primarily as a result of the commodity categories in which the inflation is showing up. Now to gross profit performance for the quarter and year-to-date which you see on slide 11. We continue to deliver good gross profit results.

For the second quarter, gross profit was $1.1 billion, which is $20 million or a 1.9% increase over the prior year on a GAAP basis and up $57 million or 5.6% on an adjusted basis, which removes the noncash impact of LIFO. This is on a case volume increase of 3.6%. As a percentage of sales, gross profit was 17.1% versus 17.8% in the prior year period on a GAAP basis and down 10 basis points from 17.7% to 17.6% on an adjusted basis. Gross profit margin as a percent of sales was also negatively impacted by the sales inflation we saw in the quarter, and I'll discuss this point more in a few minutes. Adjusted gross profit dollars grew as a result of the volume increases we discussed as well as on a rate per case from expansion.

As Pietro mentioned earlier, the elements of our strategy focused on gross profit continue to make good progress, including the initiatives, such as sourcing and CookBook that Pietro commented on, as well as continuing our focus on private label growth. We saw our private label penetration increase to 33.8% in the second quarter, and we continue to see increased private label penetration, especially in our independent business. Additionally, our acquisitions of special distributors such as SRA and FirstClass Foods, helped during the year with gross profit along with our continued focus on growing center-of-the-plate as a category. Year-to-date, gross profit increased 2.6% in dollars over the prior year from volume growth and initiative benefits, partially offset by an increase in our LIFO charge. On an adjusted basis, excluding LIFO, gross profit increased $109 million or 5.5% compared to a 4% case growth.

Adjusted gross profit as a percent of sales also improved 10 basis points from the prior year to 17.5%. As a reminder, it's important to call out that as we move from a lengthy period of deflation to year-over-year inflation, there's an impact on basis point comparisons for the prior year and gross profit and OpEx percent of sales measures. On Slide 12, we show our estimated cost of goods inflation and deflation since 2015 on the top left for illustrative purposes. And you can see we've been in deflationary period for an extended period of time. On the bottom left of the chart that illustrates the estimated impact of sales inflation on gross profit basis points.

Within that chart, adjusted gross profit as a percent of sales as reported, the right-hand bar, compared to, in the left-hand bar, adjusted gross profits as reported over a calculated net sales number using actual cases sold and the sales rate per case fixed at the second quarter of 2016 rate, effectively neutralizing sales inflation. Using this illustration, you can see gross profit as a percent of sales in Q2 2017 is lower year-over-year as reported even though our rate per case improvement is significant. The basis point change on an adjusted basis, however, is 40 basis points higher, removing the estimated impact of inflation, which is more indicative of the core improvement. OpEx is the opposite. Our return to inflation results in improved results as a percent of sales.

Moving now on to operating expenses on slide 13. Operating expenses decreased 0.9% or $8 million for the quarter from the prior year to $928 million, primarily due to higher case volume more than offset by lower restructuring charges, sponsor fees and productivity gains. As a percent of sales, operating expenses were 15.1% in the current quarter, which is a decrease of 100 basis points from 16.1% in the prior year. Adjusted for depreciation, amortization, restructuring and certain other items, as noted in our non-GAAP reconciliations, second quarter operating expenses increased $30 million or 3.9%. Adjusted operating expense as a percent of sales was 13%, a decrease of 20 basis points from the prior year.

The increase in adjusted OpEx dollars was mostly due to higher case volume. Overall, our OpEx initiatives and continuous improvement projects continue to make progress. Year-to-date, operating expenses increased 1.8% or $32 million to $1.8 billion. As a percent of sales, operating expenses decreased 50 basis points to 15.4%. Adjusted operating expenses increased 4.8% year-to-date and were flat to prior year in terms of basis points.

I'm now on slide 14. We've made solid improvement in all profitability metrics. Operating income in the quarter increased $28 million to $126 million and year-to-date increased $19 million to $202 million. The increases were primarily as a result of the aforementioned stronger business results discussed, partially offset by the $37 million negative year-over-year LIFO reserve impact for the quarter. Adjusted EBITDA was $286 million in the second quarter, up 10% over the prior year period and as a percent of sales, increased 10 basis points over the prior year period to 4.6%.

As a reminder, reconciliations of these non-GAAP measures are included in the appendix of the presentation and outlined in the earnings release we issued earlier today. Year-to-date, our adjusted EBITDA of $501 million increased $38 million or 8% versus the prior year period. And finally on the far right, second quarter net income improved to $65 million compared to a net loss of $13 million in the prior year, largely as a result of improved business results and lower interest expense, partially offset by the $37 million increased year-over-year in the LIFO reserve and increased income tax expense. Our adjusted net income was flat in the prior year and on a year-to-date basis, our net income improved to $92 million from breakeven in the prior year period. Adjusted net income also increased to $125 million from $114 million in the prior year period.

Turning now to cash flow and debt. Operating cash flow year-to-date was $368 million compared to $301 million in the prior year. This increase from the prior year is due to a combination of stronger results, the nonrecurrence of certain items as previously discussed related to charges and lower interest expense. Net debt at the end of the second quarter was $3.6 billion, a decrease of approximately $170 million from the same period a year ago. Our net debt leverage ratio stood at 3.5x at the end of the second quarter, down from 4x in the prior year period.

We remain focused on continuing to delever the business toward our midterm target of approximately 3x leverage and are pleased with the progress to date. Moving to slide 16, we do have a few updates to our fiscal 2017 guidance provided on the February 15 earnings call. We're increasing our sales range to 3.5% - 3% to 5% as we now expect year-over-year sales inflation to remain for the balance of the year. We have no changes to our expected case growth or adjusted EBITDA ranges for the year. We expect total case growth, not independent restaurants, rather total case growth to slow in the second half of the year as we lap several large customer wins from the prior year and are anticipating some customer exits late in the year.

We are lowering our interest expense outlook to $175 million to $180 million as well as decreasing our cash tax estimate to $20 million to $25 million for 2017. Finally, we're increasing the lower end of our adjusted diluted EPS range for a revised outlook of $1.30 to $1.40 per share. We also recently completed an interest rate hedge, which increases our ratio of fixed and variable debt from 25% fixed and 75% variable to now more of an approximately 50-50 split, which also significantly mitigates our exposure to future rate increases. The estimated impact of the hedge is reflected in the revised interest expense guidance and in our subsequent event disclosure of our 10-Q that will be filed later today. Our business continues to perform as we have expected, and we're pleased overall with our performance so far in 2017.

With that, thank you for joining us today, and we now go to Q&A.

Operator: [Operator Instructions] Your first question is from Marisa Sullivan from Bank of America Merrill Lynch.

Marisa Sullivan: I wanted to touch on inflation, which just came back in a number of categories. Can you comment on the pricing environment, how quickly you've been able to pass that through, how you're feeling about the inflationary environment right now and your outlook going into the second half and kind of how that would - the cadence of the gross margin impact as we look into the back half?

Dirk Locascio: Sure. This is Dirk.

I'll take that one. So I think overall, we feel good about our ability to pass this through. For the contract business, it's more procedural as the contracts reset. It passes through - it can be weekly, every couple weeks. On the noncontract business, in periods of inflation and deflation, we're very focused from a process perspective and ensuring that gets a pass-through.

And so we have processes in order to monitor, in order to execute on that. I think the - from an environment, it's - as I commented before, it's - because it's somewhat in the center-of-the-plate commodity category, it has much more of an impact on the sales growth and sales dollars than it necessarily does on gross profit because these categories tend to be more fixed mark-ups per case or per pound. But what we have seen is in the second quarter, so beef being one of the more volatile categories that had been very deflationary, saw sequential inflation in the second quarter, and the outlook appears to be fairly deflationary for the balance of the year. I think the - overall in some of these same commodity categories, it appears as to be leaning more towards sequential deflation versus a lot of inflation out there. We'll continue to monitor it and make sure we pass through.

But I think overall, from a competitive nature of the environment, et cetera, on these categories, we haven't seen much difference.

Marisa Sullivan: So just to clarify, would you expect inflation to kind of be at - total inflation to be similar to what you saw in Q2 or actually to be maybe sequentially a little bit lower?

Dirk Locascio: So as I talked - when I think of year-over-year, we would expect inflation to remain for the balance of the year, so not too dissimilar to what we've seen, probably a little bit less as we see some deflation sequential. So as we go month to month with the markets changing, that's where we would expect to see some modest deflation in the balance of the year in a number of these commodity categories.

Operator: Your next question is from John Heinbockel from Guggenheim.

Ryan Kilbane: This is Ryan on for John.

Quick question here. So this is second straight year in which you've added almost $500 million in revenue from four to five acquisitions. What does the pipeline look like now and how much organizational capacity is there to step this up going forward?

Pietro Satriano: So the pipeline is pretty constant, Ryan, because given the fragmented nature of the industry, there's - it's a target-rich environment. And in terms of our capacity, so we're at 5 this year. Last year, by this stage, I believe we had done 3.

And I think we've also said historically that last year's run rate for the year is a good proxy for capacity. So we're a little further ahead this year than last year. They know if the right one comes along in our pipeline, we probably have - staying on geography, in size and business mix, we probably have capacity to do one more.

Ryan Kilbane: Okay, great. And then as a quick follow-up, how has the nonrestaurant portion of the customer base performed recently versus restaurants given some of the challenges faced by the latter?

Pietro Satriano: Can you say the question again? You're interested to understand the level of performance of nonrestaurants versus restaurants?

Ryan Kilbane: Correct.

Yeah.

Pietro Satriano: Okay. So nonrestaurants, healthcare and hospitality, as you saw, we had - we, as a company, had a good growth for the quarter and that was a function of both comps, positive comps in the part of those particular customer types and notably healthcare and hospitality. And then restaurants, as we've said before, we tend to emphasize and focus on independent restaurants. That's kind of at the heart of our strategy.

And our own historical performance, including the second quarter and our own models, we have certain models that look at macroeconomic factors, they really haven't changed our outlook. It's pretty constant.

Operator: Your next question is from Ajay Jain from Pivotal Research Group.

Ajay Jain: It looks like you had a nice sequential improvement in organic case growth through independents. Pietro, you mentioned in your prepared remarks that I think Technomic is expecting a slowdown with independents.

But based on what you've been seeing, how much of the second quarter growth would you say is a function of industry trends? And then to what extent was that sequential improvement from independent company specific?

Pietro Satriano: Yes. So let me take our - maybe just state a little bit differently what we believe is going on. So we think our - so we had talked about, in Q1, some - three headwinds. Remember, we have talked about timing of the calendar, we talked about strong weather in Q1 of 2016 and we had talked about the drag from acquisitions that have entered the baseline. So calendar and weather were not a factor.

As you can see from the callout blocks, the acquisition drag of 40 basis points actually is a little bit higher than it was in Q1 because we have now fully incorporated into our baseline the two larger acquisitions from early 2016 versus the last year of 2015, so call that 2016. And so where the balance of the improvements coming from - as I said, we've really been focused on the fundamentals. We really see one of our biggest opportunities to deliver even better returns to the company. It was less on the strategy and more on the fundamentals. So we're very focused on having the right talent, the right routines and we're starting to see that pay off.

We're seeing - we look at our sales by market every week, and we're seeing the bottom quartile markets starting to tick up based on those efforts. And that has brought - that has been the large factor that has brought up the overall organic growth ticked up in addition to the other factors I talked about.

Ajay Jain: Okay. And as a quick follow-up, would you say that the recent organic case growth to independents, is that coming more from new customers or selling more cases to existing customers?

Pietro Satriano: Yes. So we look similarly every week, we look at the sources of growth in terms of churn, acquisition of new customers and penetration of existing customers.

And again, given - the growth is coming more from those underperforming markets. And typically, once markets start to perform better, there's a little more of that shift to kind of new customers. But again, from a system perspective, trying to hold everything constant, very balanced across those three levers.

Operator: Your next question is from Kelly Bania from BMO Capital. Please go ahead, your line is open.

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Pietro Satriano: And maybe just to build on Dirk. We established our recognizing function about a couple of years ago, building on some capabilities and pricing perspective that we already had in-house. And what that team has done is build what we think has been fairly sophisticated profit models that actually allocate costs based on usage, not on averages. And so as Dirk was saying, as we review the portfolio of customers, sometimes a different picture emerges than we thought we had two, three years ago. And so that then informs our strategy.

And it doesn't always lead to an exit. Sometimes it leads to just a different discussion about the level of resources and how we can make it more of a win-win for us and our customers. But sometimes it does lead to our choosing to exit those particular customers. And that is an ongoing process every quarter since those customers just got reviewed based on this new profitability model.

Operator: Your next question is from the line of Shane Higgins from Deutsche Bank.

Please go ahead, your line is open.

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Shane Higgins: Got it. And then just a follow-up I have on just about how your independent restaurant customers are doing. Any concerns that you're hearing out there from your independents, whether it's around labor, inflation, the strength of the consumer, kind of what you're seeing out there today? Anything that you guys can call out and maybe discuss some of the capabilities that you guys bring to them to help them address these issues?

Pietro Satriano:
-: But I think in the end, part of the reason our ROCs, our Restaurant Operations Consultants, are in such demand by both our customers and our sales reps and why we're seeing the kind of growth, again, small base, but the kind of growth on these solutions, whether it's solutions to drive traffic, solutions to drive better profitability from the menus, solutions that assist with scheduling, is because it helps those customers mitigate the impact of those pressure points that, in some form or another or in one part of the country of another, has been a fairly consistent theme for at least a year, if not two. -: But I think in the end, part of the reason our ROCs, our Restaurant Operations Consultants, are in such demand by both our customers and our sales reps and why we're seeing the kind of growth, again, small base, but the kind of growth on these solutions, whether it's solutions to drive traffic, solutions to drive better profitability from the menus, solutions that assist with scheduling, is because it helps those customers mitigate the impact of those pressure points that, in some form or another or in one part of the country of another, has been a fairly consistent theme for at least a year, if not two.

Operator: Your next question is from Alexander Mergard from JPMorgan. Please go ahead, your line is open.

John Ivankoe: It's John Ivankoe actually. Just a couple of questions, if I may. Firstly, we're seeing a pretty unusual environment where PPI food is beginning to go up but CPI food is not.

So we have grocery just in general, I guess, continues to maintain their pricing even when some of their backdoor inflation might be going up. And some restaurants, at least on the chain side, say that, that's bad for restaurant pricing. And if grocery isn't taking pricing, then that means that restaurants can't take the pricing that they normally would be able to base on commodity inflation. And of course, I ask that question just coming back to you, if you do feel confident in this current environment, especially when labor costs are going higher, whether you could pass through the inflation to your restaurant consumer that you would on a "normal economy".

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Operator: Your next question is from Vincent Sinisi from Morgan Stanley.

Please go ahead, your line is open.

Vincent Sinisi: So appreciate the color on the second half top line outlook. Obviously, the inflation being the main reason for the change there, but just wanted to maybe get more qualitative. In terms of some of the recent acquisitions, have they been going accordingly kind of in line with your expectations to date? And also just to circle back on the commentary earlier, the anticipated exits in the second half or potential anticipated exits, you didn't change, of course, your case growth guidance. So is it safe to say that it should be relatively immaterial? And is there any kind of maybe more qualitative around large versus small?

Dirk Locascio: So I think, Vinny, from an M&A performance, recent acquisitions have performed as we expect.

I think the one thing that we really tried to do is as we complete more of these and maybe we've talked before that we have a small M&A integration team that works with the business to ensure that as we buy them, we can integrate them effectively in the business. And as we continue to do more of these, we continue to make sure we build the learnings we have into the playbooks of the processes as they implement them. So each one of these that we do, the execution continues to get better and better. So as a result, recently performing as expected. I think from an exit perspective, it's not that significant in the balance of the year.

But it's really the combination of lapping a few of these large customer wins compared with some smaller exits that really result in this little bit lesser volume growth in the second half of the year compared to what we saw in the second quarter.

Vincent Sinisi: Okay, okay. All right. And then maybe just a fast follow-up. Appreciate the color around the gross margin initiatives.

Can you guys just give us a little bit of an update and reminder more on the expense leverage opportunities, how some of those things are going and kind of how should we expect that going forward?

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Operator: Your next question is from Zach Fadem from Wells Fargo. Please go ahead, your line is open.

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Zach Fadem: Got it. And then if I could sneak in one more, just with your EBITDA guidance unchanged, could you comment on where you're trending on the range as of now?

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Operator: Your next question is from Andrew Wolf from Loop Capital. Please go ahead, your line is open.

Andrew Wolf: Dirk, I just wanted to ask you to clarify. On the rate per case, do you mean gross profit dollars per case? Or are you talking actually about the margins?

Dirk Locascio: Yes, it's gross profit dollars per case.

Andrew Wolf: Okay. So in those categories and customers where the pricing is market based, could you tell us how things are going with preserving gross profit margin? Given your results, it looks like you're getting some progress with gross margin preservation but not volumes. And if I'm right, is that sort of typical of an early kind of reinflation period?

Dirk Locascio: So I assuming when you're talking margin, you're talking about basis points, correct?

Andrew Wolf: Yes, year-over-year.

Dirk Locascio:
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Andrew Wolf: Okay, so it sounds like more you're preserving gross profit dollars, which is all, I guess, sort of typical of the early stage change.

Dirk Locascio: Yes, dollars and for every case we sell, we're bringing home more gross profit than we did a year ago. So that's where internally we will manage a lot more about the dollars and the per case because that's really what the controllable component and making sure that we are more profitable than we were.

Andrew Wolf: Okay, all right. Then I wanted to switch to the ramp you had in e-commerce and digital ordering like independents.

Not all, but the majority of that ramp, I think, was in the deflationary period, so I'm just wondering if this past quarter, there are any takeaways you had noticed about how that process might be different in an inflationary period.

Pietro Satriano: Yes, I don't think it has anything to do with inflation or deflation. The seasonality I was referring to is imagine in some parts of the country, there are some restaurants are open only for the summer. And so they tend to not be as high a penetration on e-commerce because they're seasonal, and so there's some things they just won't do. And that's really what's driving the fact that it's flat quarter-on-quarter, but year-on-year, there continues to be good progress.

Operator: Your next question is from Karru Martinson from Jefferies. Please go ahead, your line is open.

Karru Martinson: You guys talked about independents continuing to gain share and being nimble in terms of how they respond to shifts in consumer tastes and inflation. But I guess, what are your national chains customers doing in response to these shifts? Are you seeing changes in behavior from them? And what should we kind of expect going forward there?

Pietro Satriano:
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Karru Martinson: Okay. We certainly got the question a lot just in terms of Amazon moving into grocery and just the ability of new entrants to come into the food service market.

When you look out at your customer base, I mean, what are the challenges and the defensive barriers for a new entrant coming into the space?

Pietro Satriano: So with respect to Amazon and Amazon entering our space, which I think is just the root of our question, we see Amazon being focused primarily on the consumer in the smaller end of B2B, and we're focused on restaurants of a certain size. And I think the Whole Foods acquisition confirms that. I think too if you look at our assets, they're more different than they appear on the surface, right? So you walk through one of our warehouses and the pack sizes are very different than the pack sizes in a retailer's warehouse. I mean, there's a reason why there's no company in America that kind of serves food service and retail equally. Our trucks are different.

They tend to have smaller trucks. -:
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Operator: This concludes today's call. You may now disconnect.