US Foods is one of America’s great food companies and a leading foodservice distributor, partnering with approximately 250,000 chefs, restaurants and foodservice operators to help their businesses succeed. With nearly 25,000 employees and more than 60 locations, US Foods provides its customers with a broad and innovative food offering and a comprehensive suite of e-commerce, technology and business solutions. US Foods is headquartered in Rosemont, Ill., and generates approximately $23 billion in annual revenue.
Third Quarter Highlights
- Total case volume growth of 4%, Independent Restaurant volume rose 5.5%
- Net sales increased 0.8% to $5.8 billion
- Gross profit of $1.0 billion, up 2%
- Operating income increased $42 million to $115 million
- Net income increased $128 million to $133 million
- Adjusted EBITDA increased 8.4% to $244 million
- Diluted EPS of $0.59; Adjusted Diluted EPS of $0.39
Nine Months Highlights
- Total case volume 2.5% higher, Independent Restaurant case volume increased 6.5%
- Net sales increased 0.3% to $17.2 billion
- Gross profit of $3.0 billion, up 3.1%
- Operating income increased $161 million to $298 million
- Net income decreased $44 million to $133 million
- Adjusted EBITDA increased 14% to $707 million
- Diluted EPS of $0.68; Adjusted Diluted EPS of $1.02
“Our third quarter results reflected strong performance in many areas, including volume growth and improved profitability,” said President and CEO Pietro Satriano. “Top line momentum and margin expansion, despite deflationary pressures, continue to demonstrate that our Great Food. Made Easy. strategy is resonating with independent restaurants and other customers. Our M&A pipeline remains strong, with two new acquisitions closed since the beginning of the fourth quarter. With the successful rollout of our new field operating model now substantially complete, we have launched two new initiatives that will contribute to EBITDA margin expansion. As a result of our strong year-to-date performance, we have increased our outlook for full year Adjusted EBITDA growth to 9-10%.”
Third Quarter Results
Independent restaurant case volume grew 5.5% from the prior year, with acquisitions contributing 200 basis points (bps) to this growth. Total case volume increased 4% over last year’s third quarter, of which 1.7% was organic. Strong growth with independent restaurants and other broad-based customer wins, the wrap of planned national chain exits, and the onboarding of new customers positively impacted total case volume. Net sales of $5.8 billion increased 0.8% versus prior year as sales from acquisitions completed in the last 12 months boosted Net sales by 1.5%. Total Net sales growth was negatively impacted by deflation, particularly in beef and dairy, and product mix changes in the quarter.
Gross profit of $1.0 billion increased by $20 million, or 2% from the prior year, as the company benefitted from higher volumes, favorable customer mix, and positive impacts from merchandising initiatives. As a percentage of Net sales, Gross profit increased by 21 bps. Adjusted Gross profit of $1.0 billion increased by $33 million, or 3.3% from the prior year.
Operating expenses were $917 million, a decline of 2.5% from the prior year. This improvement reflects progress on initiatives to reduce distribution, selling and administrative expenses and improve the efficiency and effectiveness of the company’s operating structure. Restructuring charges taken in the third quarter include a new initiative to further centralize field procurement and replenishment activities, and completion of the field reorganization. Adjusted Operating expenses for the quarter were $781 million, 1.8% higher than the prior year. As a percentage of sales, Adjusted Operating expenses were 13.4%, up 14 bps from the prior year, as higher variable costs associated with the increased volumes were partially offset by lower fuel costs.
Operating income was $115 million, or 2.0% of Net sales, a $42 million increase from the prior year. Adjusted EBITDA of $244 million increased $19 million, or 8.4% compared to the prior year, driven by the Adjusted Gross profit and Adjusted Operating expense factors discussed above. Net income for the quarter was $133 million, up from $5 million in the prior year. Contributing to the 2016 result was the one-time tax benefit of $80 million, driven primarily by the release of the company’s tax valuation allowance. Diluted EPS was $0.59 and Adjusted Diluted EPS was $0.39 for the quarter.
Nine Month Results
For the year-to-date, independent restaurant case growth was 6.5%, including 4.5% organic growth. Total case volume increased 2.5% over the prior year, including organic case volume growth of 1.1%. Net sales of $17.2 billion were up 0.3% over the prior year, with sales from acquisitions in the last 12 months increasing Net sales by approximately 1.1%. Net sales and case volumes continue to be affected by strong independent restaurant volume growth, planned shifts away from current national chain business, and deflation in certain categories, particularly in beef.
Gross profit of $3.0 billion increased $91 million, or 3.1% from the prior year. This was driven by higher volumes, favorable customer mix, private brand growth, and positive impacts from merchandising initiatives. As a percentage of Net sales, Gross profit increased by 48 bps. The same factors affected Adjusted Gross profit of $3.0 billion, which increased $109 million from the prior year.
Operating expenses year-to-date were $2.7 billion, down 2.5% from the prior year, as favorable fuel and lower benefits and administrative costs were partially offset by the payment of a consulting and management agreement termination fee and higher depreciation and amortization. Adjusted Operating expenses for the first nine months were $2.3 billion, an increase of 1.0% from the prior year, as favorable fuel costs and lower administrative expenses did not fully offset increased distribution and selling expenses.
Operating income was $298 million, or 1.7% of Net sales, up $161 million from the prior year. Adjusted EBITDA for the first nine months of 2016 was $707 million. This represented an increase of $87 million, or 14% over the prior year, driven by the Adjusted Gross profit and Adjusted Operating expense factors previously discussed. On a year-to-date basis, Net income was $133 million, down $44 million from the prior year, which included a $288 million net acquisition termination fee. The one-time tax benefit of $80 million, driven primarily by the release of the company’s tax valuation allowance as discussed above, contributed to the 2016 result. Diluted EPS was $0.68and Adjusted Diluted EPS was $1.02.
Cash Flow and Capital Transactions
Cash capital expenditures for the first nine months of fiscal 2016 totaled $105 million, a decrease of $37 million from the prior year. On a year-to-date basis, cash flow from operations and Free cash flow were both impacted by the $288 million net cash inflow related to the Sysco acquisition termination payment discussed above. Excluding this payment, cash flow from operations improved by $142 million over the prior year period, driven by margin improvements and decreased operating expenses, and Free cash flow improved by $179 million over the prior year period, driven by stronger results from operations and lower cash capital expenditures.
Net Debt at the end of the third quarter was $3.7 billion, a decline of $320 million versus the comparable prior year period. Towards the end of the quarter, the company completed the defeasance of the outstanding principal of its CMBS Fixed Facility of $472 million, scheduled to mature in August 2017. As a result of the defeasance, the mortgages on the properties were extinguished and all properties previously held as collateral were released. The defeasance resulted in a $12 million debt extinguishment loss in the third quarter. Net Debt to Adjusted EBITDA leverage was 3.8x at the end of the third quarter, down from 4.6x over the prior year’s third quarter.
Outlook for Fiscal 2016
The company is updating its outlook for fiscal 2016, raising expected Adjusted EBITDA growth to a range of 9-10% as compared to prior guidance of 8-9%. Full year Net sales are expected to be flat to slightly down compared to last year. Expected independent restaurant case volume growth remains at 6-7%. Fourth quarter results will reflect the impact of a 53rd week, which occurred in 2015 and will not take place in 2016. The 53rd week added approximately 150 bps to Net sales and 125 bps to Adjusted EBITDA in 2015.
Full year interest expense is expected to be in the range of $225-$235 million. Fiscal 2016 cash capital expenditures are expected to be in the range of $190-$200 million, and fleet capital leases are expected to be approximately $80 million. Depreciation and Amortization expense for fiscal 2016 is expected to be approximately $415-$425 million. The amount of diluted shares at the end of the fiscal year is anticipated to be approximately 225 million shares.