Prepared remarks
Thank you for joining us. My name is Abbie, and I will be your conference operator today. I would like to welcome everyone to the US Foods Holding Corporation Third Quarter 2025 Earnings Call. Now, I will hand it over to Mike Neese, Senior Vice President of Investor Relations. You may begin.
Thank you, Abbie. Good morning, everyone. And welcome to US Foods Third Quarter Fiscal 2025 Earnings Call. On today's call, we have Dave Flitman, our CEO; and Dirk Locascio, our CFO. We will take your questions after our prepared remarks conclude. Please limit yourself to 1 question and 1 follow-up. Our earnings release issued earlier this morning, in today's presentation can be found on the IR page of our website at ir.usfoods.com. During today's call, unless otherwise stated, we're comparing our third quarter of fiscal year 2025 to the same period in fiscal year 2024. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our Form 10-K for a detailed discussion of the potential factors that could cause our actual results to differ materially from those anticipated in forward-looking statements. 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 press release as well as in the presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures. Thank you. I'd like to turn the call over to Dave.
Thanks, Mike. Good morning, everyone, and thank you for joining us. Let's turn to today's agenda. I'll start with our third quarter and first 9 months results. I'll then hand it over to Dirk to review our third quarter financial results and our updated fiscal 2025 guidance. Turning to Slide 3. We delivered strong financial results for both the third quarter and year-to-date. Our performance aligns with our long-range plan algorithms, underscoring the strength of our execution. For the first 9 months, we delivered 4.4% net sales growth, 10.9% adjusted EBITDA growth, 29 basis points of adjusted EBITDA margin expansion and 26.7% adjusted EPS growth. These results reflect our team's focus on and ability to consistently deliver sustainable growth, which is a testament to our operational rigor and long-term value creation. I thank our associates for their commitment to our customers' success and to serving them with excellence. Moving to Slide 4. We delivered a double-digit adjusted EBITDA increase this quarter alongside a notable acceleration in independent case growth. These results demonstrate our continued ability to deliver earnings growth through consistent share gain and margin expansion. Now that we're 1/4 of the way into our 3-year long-range plan, I'm even more confident in achieving our algorithm. We're focused on delivering long-term shareholder value and disciplined capital allocation, investing for growth while executing share repurchases and targeted tuck-in M&A. Today, we announced an agreement to acquire Shetakis, an independent food distributor based in Las Vegas, with strong market share in casinos and independent restaurants. This is our fifth acquisition in 2.5 years and aligns perfectly with our tech in M&A strategy. Now let's turn to our case growth and the industry backdrop. We gained share with independent restaurants again this quarter as case volume grew 3.9%, in line with our full year guidance range of 2% to 5%. Notably, we gained share each month of the third quarter. Independent case growth accelerated by 120 basis points from Q2 to Q3, reflecting strong momentum and outperforming the broader market. We exited the quarter on a high note as we grew approximately 4% on an organic basis in September, and that momentum carried through October. During the third quarter, we achieved our strongest performance of the year in net new independent account wins, which grew approximately 4.4% over the prior year. This was our highest net new account growth rate since the second quarter of 2023, and we expect this momentum will continue. Additionally, health care and hospitality are helping to drive our overall volume growth with 3.9% and 2.4% case growth, respectively. We have new business wins in both customer types coming on board throughout the fourth quarter, supporting further growth. We continue to gain market share with our target customer types of independent restaurants, health care and hospitality. This is our 18th consecutive quarter of market share gains with independent restaurants and the 20th consecutive quarter with health care. Turning to our Chain business. Volume declined by 2.4%, a 160 basis point sequential improvement over the second quarter. That acceleration was ahead of restaurant industry foot traffic as reported by Black Box, which improved roughly 60 basis points, but was still down 0.5% in the third quarter. Turning to our strategy. We are guided by our 4 strategic pillars, and I will discuss progress on each over the next several slides. Moving to Slide 5. Our first pillar is culture. We remain committed to achieving zero injuries and accidents for our associates. In the third quarter, our injury and accident rates improved by 16% compared to the same period last year. And over the past 2 years, we have improved our safety performance by 35%. There is still work to be done, and we will keep pushing forward to ensure every associate goes home safely every day. We're proud to announce a new partnership between U.S. Foods and Hiring our Heroes, a nationwide initiative of the U.S. Chamber of Commerce Foundation dedicated to connecting transitioning service members, veterans and military spouses with meaningful career opportunities. This partnership will accelerate military hiring and reflects our deep commitment to honoring military service and strengthening our workforce with the talent, leadership and dedication that veterans and military families bring to companies like US Foods. Turning to Slide 6, our second pillar, service. We remain focused on providing reliable on-time deliveries that customers can count on. Our commitment to service excellence is reinforced by our flagship MOXe, e-commerce platform, which enables us to deliver a transparent, best-in-class experience tailored to the evolving needs of our customers. Broadly, we are deploying AI across our business to enhance the experience of both our customers and our associates. This includes within MOXe, where this quarter, we launched AI-powered search, a significant upgrade that's already delivering measurable results. Customers are finding products faster and more intuitively, leading to a 3% higher conversion rate of products added to their cart and purchased, resulting in approximately 1.3 million incremental cases on an annualized basis. Importantly, this upgrade is also improving seller productivity by surfacing more relevant and higher quality search results. Turning to supply chain. We are improving routing productivity for the Descartes route across our distribution network. We are now live or actively deploying in all markets. In Q3, we achieved a 2.3% improvement in cases per mile compared to last year. Our UMOS deployment is delivering value across our safety, service and profitability, key results. We continue to make meaningful progress on our operations quality composite, which measures our ability to deliver products to our customers without errors with performance improving by 24% compared to the prior year. These results reflect our commitment to improving our customer service experience. Turning to Slide 7, growth. We are accelerating profitable growth and expanding market share across our target customer types. A key driver of this growth is our Pronto small truck delivery service. The Pronto program is now expected to deliver approximately $950 million in sales this year, and more than a $1 billion run rate by year-end. Pronto Legacy is now live in 46 markets with plans to expand into 3 more markets next year. Significant growth opportunity remains as we add more trucks to many of these markets. In parallel, we expanded Pronto penetration to more than 20 markets, deepening our share of wallet with current customers. This initiative delivered a double-digit percent uplift in overall case growth among participating customers during the third quarter. Given the success of Pronto, we plan to make our largest annual investment in the program in 2026 to fuel future growth. In addition to Pronto, we continue to invest in the business to support growth and drive operational efficiencies. As we discussed last quarter, we began limited shipping from our first new semi-automated facility in Aurora, Illinois, and we continue to ramp up volume served out of this facility. To date, we have transitioned approximately 50% of the volume out of our Pharma facility into Aurora and expect to be fully operational over the next several months. We will leverage our early learnings and use these insights to help guide our approach as we plan and execute future semi-automation rollouts in select distribution centers. In August, we held our Food Fanatic Live show, which was our largest customer event ever. We hosted more than 3,500 customers and prospects over 2 days, showcasing each area of our customer value proposition. We expect more than $150 million in potential new customer wins coming out of this event with nearly half of that realized to date. Additionally, we're in the process of onboarding more than $100 million of annualized new business wins in health care and hospitality by leveraging our expertise, differentiated model and unique digital capabilities. Our tools and technology, like our VITALS program, which is our proprietary technology suite that helps health care operators solve some of their biggest challenges are easy to use and generate real results. For example, this year, we're on track to complete approximately 4,500 individual customer interactions, leveraging tools within VITALS, which helps our customers save 5% of their total costs on average. Looking ahead, we believe that we will further accelerate our profitable growth and share gain momentum through 2 important changes: one, to our sellers' compensation structure, and one to our team-based selling approach. Starting with sales compensation. In January of 2024, we returned to a 50-50 split between base salary and variable compensation for our local sellers, reinstating the structure we had in place prior to COVID. Otherwise, the core sales compensation framework has remained largely unchanged for the past 8 years. Over the past year, we've conducted a thoughtful review of our sales compensation model through the lens of further accelerating growth while fueling seller success. We are excited to announce that we will be transitioning to a 100% variable compensation structure for our local sellers. The new incentive structure will continue to be based on gross profit dollar growth with their total compensation uncapped. Additionally, the new compensation model will reward sellers for accelerating independent case growth, private label penetration and Pronto volume growth. We're conducting pilots in several markets during the fourth quarter, and we will use those learnings to inform our full deployment in early 2026. We believe these changes will accelerate profitable volume growth while creating greater earnings potential for our sales force. In parallel, we've streamlined our team-based selling model to better reflect what customers value most from US Foods and where we truly differentiate quality products, excellent service and industry-leading technology. As part of this change, we've transitioned individuals in some sales support roles into customer-facing seller positions, bringing our expertise closer to the customer. Initial feedback from our sales team has been positive on both the compensation change and the role realignment. Moving to Slide 8, our profit growth. Our consistently strong execution resulted in adjusted gross profit growth in the third quarter and across the first 9 months of the year. Third quarter adjusted gross profit reached $1.8 billion, a 6.4% increase over the prior year. This growth was fueled by increased volume, improved cost of goods and inventory management. Our strategic vendor management initiative is now on track to deliver more than $120 million in cost of goods savings for 2025. These results reflect our disciplined approach to sourcing and supplier partnerships. As we realize these benefits, we're reinvesting a portion of the savings to fuel growth by supporting innovation, expanding customer relationships and strengthening our competitive position in the market. Private label penetration among our core independent restaurant customers grew again this quarter and was over 53%. By helping customers offset inflationary pressures with lower costs, our private label offerings continue to strengthen loyalty and differentiate US Foods in a highly competitive market. We are also improving operating expense productivity through UMOS and our enterprise routing initiatives including market-led routing and our cart deployment. These initiatives help support our ongoing commitment to driving 3% to 5% annual productivity well into the future. In summary, I am pleased with the progress we made in the first 9 months against the 4 pillars of our strategy and remain confident in our ability to deliver on our long-range growth algorithm. Before I pass it to Dirk, I want to recognize one of our outstanding associates, a veteran of the U.S. Marine Corps, Kevin Connelly. As warehouse manager at our Albany, New York distribution center, Kevin has been instrumental in driving operational excellence. Since stepping into the role nearly a year ago, he has led improvements in cross-functional communication and execution across sales, inventory replenishment and operations. By elevating key frontline deliverables of operational quality composite and inventory accuracy, Kevin and his team have successfully reduced errors and delivered year-over-year improvement in shrink, a testament to disciplined leadership and a commitment to continuous improvement. As a result, the team successfully reduced errors per 1,000 and delivered a significant improvement in inventory management within the Albany facility. As Veterans Day approaches next week, we pause to honor and recognize the members of our team who have served in the U.S. armed forces. We are incredibly grateful for your selfless service and your personal sacrifice for our country. Thank you, Kevin, and thank you to every veteran past and present. Your courage and dedication inspire us all. Let me now turn the call over to Dirk to discuss our third quarter results and our updated 2025 guidance.
Thanks, Dave, and good morning, everyone. This quarter, we delivered a combination of top line growth and margin expansion, once again, demonstrating the power of our strategy and execution. Our unwavering commitment to continuous improvement and operational excellence continues to advance the service experience we provide to our customers while improving our overall financial performance. These results reflect our focus on creating long-term value for our shareholders and building a more resilient customer-centric business. Moving to our third quarter performance on Slide 10. Net sales increased 4.8% to $10.2 billion, driven by case volume growth of 1.1% and food cost inflation and mix impact of 3.7%. If you exclude the Freshway divestiture impact, total case growth was approximately 1.6%. Independent restaurant volume growth accelerated 120 basis points from the second quarter, increasing 3.9% year-over-year, which includes 40 basis points of M&A. Health care performed well, growing 3.9% and hospitality was up 2.4%. We lapped some larger wins in hospitality from the prior year and continue to see growth supported by a strong pipeline. Our chain restaurant volume improved 160 basis points sequentially, but remained down 2.4% compared to prior year, primarily due to the strategic exit that we discussed last quarter, partially offset by the recent onboarding of new business wins. Shifting to our financial performance. We delivered earnings growth and drove margin expansion again this quarter. Adjusted EBITDA of $505 million increased 11% through a combination of volume growth, gross profit improvement and operating expense productivity. As a result, adjusted EBITDA margin expanded by 28 basis points. Finally, adjusted diluted EPS increased 26% to $1.07 per share. We expect to continue growing adjusted EPS at a meaningfully faster rate than adjusted EBITDA through a combination of earnings growth and share repurchases. Turning to Slide 11. Our focus on driving continuous improvement resulted in another strong quarter of operating leverage gains. Adjusted gross profit per case improved $0.41 or 5.2% compared to the prior year. This is driven by our progress on various gross profit initiatives, including strategic vendor management and inventory loss reductions that Dave addressed earlier. Our inventory management initiative is on track to generate $35 million in savings for the full year. This initiative focuses on reducing losses from product that can't be sold due to damage or spoilage through improvements in process and insights. We've made strong progress and expect to drive additional savings in 2026. Adjusted operating expense per case increased $0.22 or 3.8%. We are offsetting a portion of operating cost inflation by driving productivity improvement in both operations and administration through eliminating waste and supply chain and instituting greater process discipline across the business. Both gross profit and operating expense include an approximate $0.07 per case year-over-year increase related to the Food Fanatics live show versus these amounts being spread out across quarters in the prior year. Our third quarter and year-to-date performance demonstrates our ability to drive meaningful leverage through the P&L and deliver consistent financial results in a dynamic environment. As a result of the strong execution of our strategy, adjusted EBITDA per case increased $0.21 or 9.9% to $2.33. Turning to cash flow and capital allocation on Slide 12. Our robust operating cash flow, combined with our strong balance sheet enables us to deliver on our capital allocation priorities. Year-to-date, operating cash flow increased by $185 million to nearly $1.1 billion, driven by earnings growth and a reduction in tax payments. We continue to fund strong capital investment, which ensures the vitality of our business, promotes healthy growth and generates attractive returns. And we remain focused on our capital allocation priorities to maintain net leverage within our target range of 2 to 3x, return capital to shareholders via share buybacks and opportunistic that we pursue accretive tuck-in M&A. During the third quarter, we repurchased approximately $335 million of shares. And to date, in 2025, we have bought 7.6 million shares for over $600 million and have $467 million remaining on our $1 billion share repurchase authorization. We ended the quarter at 2.6x net leverage. Our debt structure is strong, and we have no long-term debt maturities until 2028. And finally, subsequent to quarter end, we signed a definitive agreement to acquire Shetakis, an independent food distributor in Las Vegas. Now turning to our guidance and modeling assumptions on Slide 13. Given our year-to-date performance and outlook for the remainder of this year, we are updating our fiscal year 2025 guidance. Given the continued lower restaurant foot traffic and dynamic macro environment, we are tightening our total case volume growth to 1% to 2% from 1% to 3%. We now expect net sales growth to be in the range of 4% to 5%. Due to our solid progress this year and our ability to deliver profitable growth, and enhance margins, we are now projecting adjusted EBITDA growth of 10% to 12%. We are increasing the low and high end of our guidance for adjusted diluted EPS, and we now expect adjusted diluted EPS growth of 24% to 26%. I am pleased with the progress we've made this year in executing across our business. We are growing our top line, gaining share, expanding margins and deploying our strong cash flow toward our capital priorities. Our disciplined approach to strategic investment, operational efficiency and shareholder returns positions us well for sustained success, and we remain fully committed to achieving the financial targets outlined in our long-range plan. With that, I'll now pass it back to Dave for his closing remarks.
Thanks, Dirk. Our third quarter and year-to-date results are strong. We're accelerating independent case growth, sharpening our focus on productivity and operational excellence to better serve our customers and consistently delivering top and bottom line growth. We have a clear ambition to become the undisputed best of our industry. We have the right strategy and the right initiatives in place, and we will continue to execute with discipline and purpose in support of our customers, our associates and our shareholders. Our most important differentiator, however, remains our strong and highly talented team. I couldn't be more pleased or proud of how our 30,000 associates embrace our ambition. In my 40-plus-year career, I've not witnessed a level of alignment, dedication and passion that our associates bring each and every day to help our customers succeed. Their commitment to our success is the heartbeat of our company and the foundation of everything we're building for the future. Before we move to Q&A, I do not have any new information to share regarding a potential combination with PFG. We will not be taking any questions on that subject today. Let me finish by underscoring how highly confident I remain in our stand-alone feature and ability to deliver our long-range plan and financial algorithm, which, as a reminder, is a 5% sales CAGR, 10% adjusted EBITDA CAGR, at least 20 basis points of annual adjusted EBITDA margin expansion and a 20% adjusted EPS CAGR through 2027. And we will remain disciplined as we execute our capital allocation strategy, which will enable us to be a consistent double-digit earnings compounder for many years to come. With that, Abbie, please open up the line for questions.
Questions and answers
And our first question comes from Edward Kelly with Wells Fargo.
Dave, your performance in this environment has been impressive, and you're showing market share growth. I would like to ask you about the overall total case growth, which still seems to be a bit slow. The full year guidance there is unclear. I'm interested in hearing about any additional challenges you might be encountering outside of the independent channel, where things are performing well. Additionally, could you share your insights on the current quarter and your expectations for Q4?
Sure. Let me start with independents and just point out, I feel really good about our momentum. We just put up the strongest number we have in the last 7 quarters on independent restaurants and a backdrop that remains, I would describe it as sluggish. We haven't been anywhere close to historical foot traffic in this industry for most of my tenure here at the company, and yet you continue to see us execute very, very well. Dirk commented about the Freshway sale and the 50 basis points roughly impact that had on our total case growth, right in the middle of our prior range had we not made that divestiture. So underlying momentum is still very strong. For the quarter, I was pleased to see that we gained share each month of the quarter and importantly, finished at the strongest growth rate in September, which, as I commented, carried over into October. I'd say, with the government shutdown, some choppiness out there and just remind everyone that we are over-indexed with government business. It shows up in our other category through our GPO relationships. We serve a lot of military bases. And it's not as much just the impact on that volume. And I think it's more about people not knowing if they're going to get paid and not going out to eat and all the things that are impacting the local markets there, up and down the East Coast. But that's going to correct itself. And what we're focused on is the same thing we've been focused on for the last 3 years is controlling our own destiny through our own initiatives. And importantly, taking share consistently, which we continue to do, and I fully expect that that's going to continue.
Great. Along the lines of controlling your own destiny, Dave, could you provide more details about the change in sales force compensation? Transitioning to 100% variable compensation is not unique, but it is a shift for your sales team. Can you discuss what a typical salesperson at US Foods can expect? Will some employees earn less while others earn more initially? Additionally, how do you plan to manage any risks related to potential turnover?
Very good questions, Ed. And let me just tell you, I have high confidence in our ability to execute this transition. As I commented, this isn't something that we just thought about last weekend. We've been working on this since the better part of this year. And importantly, just some inside thinking here, I was contemplating this change the day I showed up here because I think it's the right way to compensate our sellers. I want them to be incented to grow as fast as they possibly can. And importantly, make as much money as they possibly can. And if you have the comp plan design right, the more they make, the better it is for them and the better it is for growth and for the business and for the company. And so obviously, we'll be thoughtful about the change management process here. We've got a very robust plan in place. Most excited about, obviously, you would expect I didn't announce this to our sales force on this call today. We've been talking a lot about this internally. And as I commented, people are excited about it and eager, and I believe it's going to help us further accelerate our growth. So we'll manage it thoughtfully. We'll manage the transition thoughtfully with each individual. We're already having those conversations. And I think it means great things for the future.
And our next question comes from the line of John Heinbockel with Guggenheim.
Dave, I wanted to start with the team-based selling change. How many of those individuals are transitioning to this new role? Is this new role customer-facing in the sense that they will be actual salespeople compared to where they were before? If that's the case, what impact will that have on the growth rate of the sales force going into next year?
Yes, the majority of those individuals in those roles have been offered sales positions, which are definitely customer-facing. They are enthusiastic about it and understand the rationale behind the change. Importantly, we are keeping all of that expertise within the company. They are already getting started. While there will be a temporary increase in our sales headcount due to this change, we are not viewing it that way. This is a one-time adjustment. We expect to see about a 5% increase in sales headcount this year, finishing within the 5% to 6% range for the entire year, consistent with our strategy for low to mid-single-digit headcount growth.
You mentioned the significant increase in accounts with double-digit penetration in terms of volume. Could you clarify how this shift compares to their previous penetration levels? It seems like a strong improvement. However, what factors might limit the rollout of this growth? I understand you've expanded markets and the number of trucks, but what is the main constraint here?
Yes, you're talking about Pronto penetration, right? Just as a reminder, when we go into a new market, we go with a limited number of trucks to prove the model. And we did enough piloting that we're confident that we're going to maintain the profitability and importantly, not cannibalize our existing broadline business. But that's something we have to check in every market, John. And that's why we go in with a relatively small number of trucks. That's why I made that comment that we will continue to drive growth through additional trucks in these markets as they make sense. The double-digit uplift is exciting. But again, it's to a limited number of customers. But importantly for us, it just validates the model market by market, and it gives us the confidence to go leaner and harder. Exiting the year at $1 billion is a significant uptick in where we hope to be. And we'll see that $1.5 billion comes along.
And our next question comes from the line of Lauren Silberman with Deutsche Bank.
So I wanted to start with the sales comp model. How do these changes impact the flow-through given just the more variable contracts? And are you contemplating accelerating your pace of sales growth over the next few years with the shift?
What was the last part of your question, the accelerated...
Lauren, this is Dirk. I think overall, we still continue to like that low to mid-single digits increased rates, and that's where we expect to continue to be. The flow-through, our expectation is it's very similar to today. So this really wasn't intended to be an increase or decrease in compensation versus more linkage to the compensation with the growth. And therefore, as Dave pointed out earlier, as sellers have that 100% compensation that it brings it more with their growth and opportunity for them to earn more all while accelerating growth is our expectation.
It's encouraging to see the leverage in the profit and loss statement despite a softer top line. One of the main questions we receive is about your capability to achieve the long-term goals if the macro conditions remain difficult. If the current trends continue into 2026, how confident are you in reaching those goals?
Well, I think I reaffirm my confidence several times in my prepared remarks. I couldn't be more confident. And I would just point out to those that are concerned, we've been doing it for about 10 quarters now and a very soft macro backdrop that continues to remain sluggish. We have a tremendous amount of self-help. We've got a very clear strategy, Lauren, and our team is 100% focused on execution. Confidence is high.
And our next question comes from the line of Kelly Bania with BMO Capital Markets.
I wanted to ask about the change in the commission structure, which is quite significant. Investors tend to be cautious about how disruptive this could be in the short term. Can you discuss the change management you plan to implement to support this? What turnover do you expect, if any? Additionally, what kind of improvement can this drive based on any testing you've done regarding the productivity of your cyclical sales representatives?
Well, I'll take the last part first, Kelly. First of all, we wouldn't be doing it if we didn't have high confidence it was going to accelerate growth because you've heard me say many times, when you change sales compensation, you have to be really thoughtful about how you do it and what potential unintended consequences you could have. And that's why we've been thinking about this for a while. We've been working on it for quite some time. And the change management process is quite robust. I do not expect an increase in our turnover. We are handling this seller by seller, giving them good visibility to how they're currently compensated and what the new change will make. Any required behavior changes, we're going to give them a long runway, and we're going to be thoughtful about how we bring them into that 100% commission plan. The goal here is to ease people into this and make sure they have a chance to perform and understand those expectations. All that's being worked on has been worked on for quite some time already. And we'll be thoughtful about how we roll this out in 2026. So I've got a high degree of confidence not only in the change having the right output that we intend, but also our ability to manage this quite well with our sales team. And as I said, and I'm not making it up, we're excited.
And our next question comes from the line of Jeffrey Bernstein with Barclays.
First question is, Dave, I know you mentioned no update on the performance food discussions, and I appreciate that. I'm curious if you're observing any changes in how customers perceive your business, such as whether they are delaying new business until things settle or if salespeople are hesitant to join due to uncertainty about the future. I assume that a quick resolution would be ideal, but I'm interested in any impacts this ongoing process might have on your business. I also have one follow-up.
Thanks, Jeff, for the question. And really, there hasn't been any impact. We haven't seen that at the customer level. We certainly haven't seen it internally. As we said going into this, we would maintain our focus on day-to-day execution. Hopefully, our results support that. And importantly, we haven't had any challenges attracting new sales talent. I talked about being in that 5% to 6% range for the year. And we've been at this for a while now. So we're still having robust incoming new sales classes and people are excited to be here.
Understood. And then my follow-up is just on the restaurant industry. We've heard from many restaurants over the past week, and they will talk about a slowing trend in October, which you haven't seen, which curious about why you think that is. But they've talked specifically about the younger age cohort and the lower income and perhaps Hispanic. Just wondering whether you see any evidence on any of those specific groups based on your customer demand? And then just right, why you perhaps haven't seen any change in trajectory in October, there's a lot of the restaurants are talking about such.
Yes. And I don't want to misrepresent anything. I think I used the word sluggish more recently. I think it's related to the government shutdown and some of the uncertainty. We're operating in an environment here for several years now where consumer confidence has been a challenge. The knock-on effect from the government shutdown certainly impacts consumer confidence. And I think that's what we're saying and seeing broadly. Certain markets, as I mentioned earlier, and a response up and down the East Coast are more challenged with the more government headcount and those challenges. But again, I just keep coming back to our execution is our execution. We have significant ability to take market share, and that's where our team is focused. And when the shutdown gets resolved, when a consumer confidence gets back to where it needs to be, we're going to be extremely well-positioned because of the work our team has done over the past 2, 3 years.
And our next question comes from the line of Alex Slagle with Jefferies.
Could you provide the comparable figures? Additionally, regarding the role realignment, I'm interested in discussing the broader topic of decentralizing certain aspects.
And our next question comes from the line of Jacob Aiken-Phillips with Melius Research.
So I wanted to ask a follow-up on the sales compensation change. You said it's late 2026 rollout, but also that you're working with all the salespeople. I'm just curious should we expect it to be more phased throughout 2026? Or is there a date where a large percentage of the sales force will change over. I understand you're trying to minimize turnover, but I would expect at least some level, and I'm trying to see if that's more phased or if there's a point in time?
Yes. The phasing is more around the piloting work we're doing in the fourth quarter that I referred to. We'll do some transition, and we'll give visibility into both methods of payment for some period of time. And then we'll pick a date certain and make the move.
Got it. You mentioned strong progress in vendor management and reducing inventory loss, along with private label initiatives. Many of these efforts are transitioning from capability building to active execution now. Which initiatives have the most potential for growth in the next one to two years, and which ones are least affected by the current restaurant traffic situation?
This is Dirk. I'd say almost all of them are insulated and drive our self-help focus and story, highlighting the areas we can control. Each of them continues to have potential for growth and contributes at different levels. Strategic vendor management is one of our major initiatives, and we anticipate it will keep generating additional value. The items you mentioned will also keep driving value, which is why our portfolio approach is crucial for driving gross profit gains, market share growth, and operational productivity. It's not just a few factors at play; it's a managed portfolio. As various components reach maturity, we have others ramping up, which is what gives us confidence in our ability to continue driving earnings growth and achieving the long-range plan we've outlined.
And our next question comes from the line of Brian Harbour with Morgan Stanley.
Dirk, what is the M&A contribution as we consider the upcoming quarter and how are you approaching inflation and mix?
M&A has been around 30 to 40 basis points, and I expect it to remain at that level. As we move later into the quarter, one will roll off, but another smaller one announced today will close sometime during the quarter, so I anticipate that the impact will stay around 30 to 40 basis points. Inflation remains fairly stable, having ticked up slightly in the quarter to about 3, affecting various categories that others have discussed. However, grocery prices remain stable, and although our commodities fluctuate, I believe they will continue to stay in that healthy range of 2% to 3%.
Okay. Got it. The comment about AI being interesting is how it's driving conversion. What are some other ways you see that being used in the business?
We're really using it, as Dave mentioned, pretty widely to inform various aspects of our online recommendations to customers, suggesting products they haven't purchased yet and enhancing our digital marketing efforts. It also supports our models for routing, letting customers know where their truck is and when it’s expected to arrive. Additionally, a key focus has been the order guide for our sellers, enabling them to prepare proposals for local customers in just 15 or 20 minutes, compared to the 2 to 3 hours it used to take. We're applying these tools broadly for sales growth and productivity, but with a significant emphasis on features that have immediate impacts rather than those that may only provide value in the next 5 to 7 years. Our business team, digital team, and AI development team are all collaborating to prioritize and deliver these capabilities to the market.
And our next question comes from the line of Mark Carden with UBS.
I would like to begin with a follow-up on the Shetakis acquisition. How does it integrate with the business compared to some of your recent acquisitions like Jake's and Saladinos? Additionally, how do you view your strategy for pacing more traditional bolt-on mergers and acquisitions while you are conducting the cleanroom exercise?
Well, Shetakis, it fits exactly our model. It's got a pretty even mix of casino business in independent restaurants. And if you think about our footprint in Vegas. That's exactly where we're focused. So we love it from that standpoint. And just M&A strategy in general, Mark, as you've heard us say, is really a market-by-market play around tuck-in acquisitions really to improve our local market density, take miles out of our routing. And we lean heavily on our core target customer types, but specifically independent restaurants, and this one fits that exactly. Our pipeline is strong. As we've said, you never can control when one of these things comes out. But we continue to have robust conversations in our Broadline business and really focused on the independent space.
Okay. Great. And then it sounds like some continued good demand in health care and hospitality. You called out some nice anticipated wins there. Would you consider the pipeline of business to be deviating much from your initial expectations on that front? And then I guess within hospitality, how is growth progressing between your lodging and non-lodging segments?
Sure. We're quite pleased with the pipeline there. Our team continues to do a quite nice job of maintaining a strong pipeline. And I think that's really more of a testament to the value proposition that we can bring to customers. And so I'm confident that we'll continue to drive healthy levels of growth in both of those customer types. I think overall from a hospitality perspective, lodging has actually been pretty solid for us in the last few months. I know there's been some challenges in occupancy and whether it be Vegas or some other places. So that's still kind of intermiss across the country, whether it be fewer international travelers, et cetera. But it's holding up well. But at the same time, a big part of the growth there for us continues to be this net new account business that the team has converted and we will continue to convert going forward.
And our next question comes from the line of Jake Bartlett with Truist Securities.
Mine is about the market share gains in independents. And all 3 of the large players are accelerating case growth in independents. It seems like there's an acceleration of market share gains by the larger players in general. I guess I'm wondering why you think that's happening. Is that a trend? Or are there dynamics in the marketplace where that is particularly suited for share gains from the larger players and whether you'd expect that to continue or even accelerate from here?
I don't think I would point to anything different in terms of the market dynamics, Jake, around that. I mean, you go back even to our Investor Day, the big 3 have consolidated this industry and taken share for a long time, broadly at ebbs and flows. Importantly for us, we've got 18 consecutive quarters in independent restaurants. It's nothing new for us. We've talked in the past about how we use the data to really target by ZIP code where the opportunities are. Our sales force has really embraced that and make sure we have the right assortment in place before we target a certain type of customer within those markets. And so it's our process continuing to mature is what I'd really point to that's driving our success. Nothing really new, and I don't really see any changes in the market dynamics there.
Great. And then I'm sorry if this was answered before, if it was, I missed it. But independent case growth or actually just traffic growth. For the change that we've been following, October has been pretty pressured, I think, broadly. But you're talking about an acceleration for your business, one of your competitors you mentioned the same. And so is it independent traffic doing much better than chain? Is there kind of an outperformance there that's been accelerating in recent months, do you think?
It's Dirk. We didn't discuss the acceleration in October, but the strength we observed in September carried through into October. Dave mentioned that the last few weeks have been choppy, which is an accurate description as many things are happening simultaneously, making it difficult to get a clear read. However, our case growth remained solid throughout October, and our team will continue to focus on gaining market share and driving top line growth.
And our next question comes from the line of Peter Saleh with BTIG.
I wanted to ask on the change in the sellers' compensation. Do you anticipate that will drive the private label penetration higher? And can you just remind us, again, the profitability on private label versus branded? And how you guys plan to proceed there with change in sellers' compensation?
Yes. I think private label, in general, is roughly twice as profitable for the company and for our sellers as manufacturers' brands. And importantly, as I commented, we're incenting for growth with independents with our private label and with Pronto and our compensation plan. So we do expect an uplift in that. And as you've heard me say many times, I don't see any near-term ceiling to our private label brand penetration opportunity. Our sellers are embracing that aggressively. I think that's why you've seen our success over the last 18 to 24 months. Importantly, our customers are embracing it because it solves problems for them to help them deal with inflation in a big way, and these are at their heart. These are great quality products that our customers are embracing. So lots more to come. We're excited about it. And certainly, we're incenting our sellers in a way to lean into our private label products.
Great. And I just wanted to follow up on the comments on October. I know last October, there were some storms, so maybe a slightly easier compare, but then this year, we've got the government shutdown. Any more details you guys can provide on the October trend this year versus last?
Not really, Peter. I'd just point to my comments earlier. We roughly finished with the same growth rate we did in September, normally about 4% and a little stronger in the first half, a little choppier in the back half, really driven by the government shutdown. But again, we've got good momentum, and we're focused on gaining share.
And our next question comes from the line of Karen Holthouse with Citi.
Kind of continuing on the theme of the government shutdown, thinking about more on the hospitality side of the business, would we want to think about travel disruptions and whatnot ultimately maybe filtering down and hitting that a little bit in the fourth quarter?
I think this is the one where we'll watch like everybody else, what the implications may be. I think I don't want to diminish the impact of the shutdown, especially on the individuals impacted. But I think when you think of for the industry, our expectation would be that gets addressed pretty quickly. And so when we think about what our business looks like going beyond this period of time. Again, we continue to feel very good about our ability to gain share and drive growth and we'll manage through this period as we face some of the same macro challenges as most other businesses.
And then one other one on the chain side of the business. I know there was a pretty big exit in 2Q and then more recently spoke to some business coming on board. How should we think of the sort of net onboard offboard evolving through the next couple of quarters for that piece of the business?
Well, most of the main business came on second quarter and through the third quarter. So we expect to be improved here in the fourth quarter, but then it really is going to be dictated more by just the overall traffic within our concepts. And as you probably know, Black Box is a good proxy, but really it comes down to more of a chain-by-chain performance because it's quite differentiated across them. So that's an area where we'll continue to optimize the business. But overall, the onboardings that we've talked about previously are playing out as we had expected.
And our next question comes from John Ivankoe with JPMorgan.
The question is about independent restaurants. And specifically on the credit side, which obviously broadliners and foodservice distributors are somewhat in the business of issuing credit even if extremely short term to your customers. So the question was around the benefit that your sales force being close to customers and maybe even AI to some extent, giving you some data putting you close to customers that are maybe helping you make more informed credit decisions. In some cases, people deserve a little bit more time or more help, especially to open new restaurants; in other cases, that actually might make sense to pull back credit and not extend some terms. So it's not something I don't think we've talked about in some time, but just with obviously a lot of disruption just going on in various pockets of economies across the country, how you kind of feel about the credit side of your business and how it could potentially be an opportunity for you?
John, I feel good about where our team is from a credit perspective. We really try to balance the use of what the data and the tools to just tell us, but also, as you pointed out, those sellers and those local teams being close to the customer. That communication back and forth between them and our credit teams is a regular occurrence. And to your point, there's not one answer on everything. Sometimes the answer is that you need more time. Other times, you have to have the harder decisions and other times as much as you can do all those things, you still get caught with some of that. So our team is really, I think, doing a pretty good job of managing through it and has been back to Dave's point on that consumer confidence and some of the challenges out there, they're not new this quarter. They just spent different versions in the last couple of years. And our team has managed pretty effectively through that, and I'm pretty confident that they can going forward. But we're definitely not taking our eye off the ball on it.
And our final question comes from the line of Danilo Gargiulo with Bernstein.
I would like to know more about the progress of the semi-automated warehouse. Specifically, have you started shipping from your facility in Aurora, and how has your output changed as a result? Also, what is your long-term vision regarding automation?
It's still early in our transition, and as you can imagine, there are both successes and lessons learned along the way. Our team is actively navigating this. We are making progress, but at this time, I won't comment on the potential impacts on gross profit or productivity. However, we are encouraged by what we are learning, and we believe that automation in warehouses will play a significant role over time. It's nearly inevitable, and the focus is on how we can best leverage these insights across our network. We'll provide more updates in the future.
Yes. I think with the work that we've done over the past several years, we've got great confidence in both Pronto legacy and Pronto penetration. We've got a lot of work going on to support that business today. So I don't think the investments are more around that. It's more trucks and people to drive those trucks. And with the confidence that we've got, you'll see us leaning in pretty hard in that in 2026. The model is proven. It's working. Our salespeople love it. It's serving our customers in a way that we had a gap. And I think it's proven out by the growth rate. So we're bullish about Pronto and we're going to continue to invest in it.
The performance has been strong due to our balanced focus on earnings growth and enhancing our return on invested capital. As you've likely observed in our trends, we've made substantial improvements and progress over the past few years. Many of our decisions are made with this perspective in mind. Additionally, this model is relatively capital light and provides excellent service to our customers.
And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Dave Flitman for closing remarks.
Thanks, Abbie, and thanks, everyone, for joining us today. Our team remains focused. We're executing very well, and my confidence in our future has never been brighter. Have a great day. Appreciate you joining us. Thanks.
Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.