Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Adam Dabrowski, Investor Relations. You may begin your conference.

Thank you, Rob. Good morning, everyone, and welcome to US Foods Third Quarter Earnings Call. Speaking on the call today, we have Andrew Iacobucci, Interim Chief Executive Officer; and Dirk Locascio, our Chief Financial Officer. Additionally, Bob Dutkowsky, our Executive Chair, will join for our Q&A session. We will take your questions after our prepared remarks concluded. [Operator Instructions] Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. During today's call and unless otherwise stated, we're comparing our third quarter results to the same period in fiscal year 2021. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2021 Form 10-K for a detailed discussion of these potential factors, that could cause our actual results to differ materially from those anticipated in those statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website, except that we are not providing reconciliations to forward-looking non-GAAP financial measures as indicated therein. Thank you for your interest in US Foods, and I will now turn over the call to Andrew.

Thanks, Adam. Good morning, everyone, and thanks for joining us today. First and foremost, I'm delighted to report that we delivered strong third quarter results, reflecting continued execution of our long-range plan. US Foods performance to date underscores our confidence in achieving our 2022 outlook. We remain committed to continuing the momentum from the first three quarters and driving our long-range plan. Let's turn to Page 3 for key takeaways from the quarter. First, our results this quarter demonstrate continued solid execution across the three pillars of our long-range plan. Our associates are a critical part of this progress, and I am grateful to them for their focus on execution and on serving our customers. In addition to strong day-to-day execution, US Foods associates have continued their tradition of stepping up when our customers and communities need us most. Most recently, during Hurricane Ian, which severely impacted many of our customers on the East Coast, our teams worked tirelessly to ensure our customers and the relief agencies we support could operate effectively and properly serve their customers. Based on feedback we received, our storm preparation and response are best-in-class in our industry. This intense focus on delivering for our customers is a large part of why we've been able to capture market share with key customer types in all three quarters of 2022. Second, with strong momentum in our plan, US Foods is increasingly well positioned to win in an evolving macro environment, particularly in light of our effective management of inflation and deflation, our scale and customer diversity and continued recovery tailwinds. Our results reinforce our confidence to deliver a strong finish to the year. Finally, we expect to drive meaningful value creation for shareholders through a new share repurchase program announced this morning. We are committed to utilizing…

Thanks, Andrew, and good morning. I will start on Page 8. We're very pleased with what we accomplished this quarter. We continue to build on our momentum from the last two quarters and demonstrated progress against our long-range plan. Adjusted EBITDA grew 21% from the prior year to $351 million for the quarter, which is an acceleration from our Q2 growth rate. In addition to strong EBITDA dollars, our adjusted EBITDA per case remained strong and was in line with Q3 2019. The Q3 adjusted EBITDA was the best quarter relative to 2019 since prior to the start of the pandemic. Adjusted diluted EPS increased 25% over the prior year third quarter to $0.60. These highlights demonstrate the actions we are taking to grow and further strengthen our business are delivering meaningful results. Net sales were $8.9 billion in Q3, an increase of 13% over the prior year. Total case volume increased 1% from the prior year and food cost inflation was 12%. Similar to last quarter, our Q3 year-over-year case growth was negatively impacted approximately 200 basis points by the planned mid-2021 exit of the grocery retail business we temporarily added during the pandemic and a small number of strategic exits. Independent case growth increased 3% over the prior year. We continued our trend of strong gross profit dollar growth again this quarter. Our adjusted gross profit dollars increased 15% from the prior year. And as a result, we generated strong adjusted gross profit per case. This is important because we experienced little sequential inflation compared to large amounts in the first half of the year, yet we're able to maintain similar gross profit per case. OpEx remains elevated, however, as the quarter progressed, we saw positive signs with improved operations turnover and productivity rates. Let's look at volume…

Thanks, Dirk. In closing, we continue to be laser-focused on driving profitable share gains, expanding gross margins and building on our strong operational and financial momentum. I'm confident in the growing strength of our business, thanks to the initiatives we have underway and the hard work of our talented team as they continue to focus on serving our customers and executing our long-range plan with excellence. To put it succinctly, we are winning, and I am proud of our progress. With that, operator, please open up the line for questions.

[Operator Instructions] Your first question comes from the line of Jake Bartlett from Truist Securities. Your line is open.

Great, thanks for taking the question. My first is on independent case growth. And it's nice to see an acceleration there. I'm wondering if you could provide detail on what's driving the acceleration? How traffic is going for the customers, whether that's been a drag or a plus and whether the acceleration is driven by -- more by wallet share gains or new account generation? Then I have a follow-up, please.

Hi, Jake, it's Andrew. Thanks for the question. Yes, we're actually quite pleased with the balance that we're seeing in that growth. It is actually a combination of both share of wallet gains as well as new business. And I will also say, we've also seen a reasonable strengthening of our own customer demand, suggesting that they too are growing as well. So it's sort of a combination across all three of expanding share of wallet, driving new customers -- growth through new customers as well as our customers themselves seeing growth in their business.

Great. And then I had a question on versus '19, the case growth versus '19. It looks like in most segments, other than the hospitality and health care, there was a slight deceleration in the third quarter versus the second. So I just was hoping if you could comment on kind of what drove that? Whether your share gains were similar in the third quarter versus the second? And just any commentary on what -- why those decelerate just slightly?

Sure. Good morning, Jake, this is Dirk. Good question. So overall, I think we're pleased. What we saw was the beginning of the third quarter had a little bit of -- just like you saw sort of broadly across there, had a slower start just with some -- a little bit slower demand broadly. We've seen that continue to improve as the quarter has gone on. Hence, what Andrew and I have talked about, just the confidence in which we exited the quarter and entered the fourth quarter, I feel good about the trajectory of the case growth. I think the important thing is we do continue to see share gains across our key customer types. And we think just with health care and hospitality also, those are continuing to improve relative to 2019 and expect that to continue as well and is really a built-in tailwind. So I feel the position is well -- we are well positioned to grow with the right key customer types, as we've talked a lot about -- for us, it's about profitably growing with the right customer types as opposed to growth just for the sake of growth. So feel good about the quarter and where we ended the fourth quarter.

Yes. And Jake, just to add to your question, we saw share gains that were quite consistent in trajectory to what we saw in Q2.

Great, I appreciate it. Thank you.

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

Thank you so much. A couple of quick ones. Can you talk a little bit about your fill rates, both inbound and outbound and then any backhaul opportunity, I do believe that's quite -- it's a fairly material opportunity for you.

Yes. Thanks, Nicole. It's Andrew. Appreciate the question. So we would say our outbound fill rates, our fill rates to our customers continue to improve. The inbound though has been fairly flat versus where it was in Q2, a little bit of improvement in some key categories. But generally speaking, still fairly flat, and we continue to basically manage that through two main means. One is to diversify our supplier base to make sure we've got alternatives when our primaries aren't in stock and secondly, to build up a little bit of extra safety stock to ensure that we have products in key categories. As far as the backhaul opportunity, that is something that we have been actively pursuing for quite some time. And you'll see -- you've seen from our freight results or logistics income results that those efforts are really paying off. I think we still got some opportunity to continue to go after that, and that's something that, that team is very focused on.

And remind us the inbound, like I've asked this question, I guess, of late, had the opportunity to. It's trying to understand the domino effect there. Is that something on the manufacturer side with their or their own inventory, their own capacity, like what's the problem today?

I think it's all of the above continued challenges. The only thing I'd add to that list is continued challenges as raw material supply in some of our categories. The system has still got some challenges that it's working through. We're definitely starting to see some improvements. And even though our fill rates in absolute terms haven't improved as much as we would like, our de facto fill rates have improved because of the diversification of supplier base. So we are still getting the product, which is not getting it from the usual sources in all cases.

And then thinking back to prior recessions or really any period of macro consumer weakness that you could speak to. Did US Foods, I guess, sales, right, I guess it would be organic go up or down. And more importantly, in terms of your share when you think back to those types of prior periods. Did you take care from bigger and smaller peers? Or did you see share to smaller or bigger peers?

Good morning, Nicole. This is Dirk. That's a good question. So overall, our industry and our business has shown itself to be quite resilient. If you look at what was a very tough recession in 2008, 2009, cases were down mid-single digits, earnings were relatively flat. If you look at other though, outside of 2008, 2009, the last three or four inflation-induced recessions, you saw much less volume decline. So it's a very, very small impact. I think that's a demonstration of the resiliency of our business. One of the things that I think if you look back even in '08, '09 and prior, we were a very different company. A lot of the work around differentiation that we've done has been since then. And so we would expect that all the same things that are resonating today for us to take share across these key customer types to continue to resonate. And in fact, I think that positions us even better to weather any kind of a challenge that comes than we were in the past. So I think we're well positioned and even though we can't control the macro, we can't control the execution of our long-range plan and the initiatives to drive that, and that's what we're going to focus on.

And last question, please. How does less inflation disinflation impact the top and bottom line? And what is the lag until you see that impact versus the market movement in the underlying commodity items? Thank you.

Sure. So overall, what we see is -- the lag is relatively short. So again, most of our contracts or noncontract price that tends to be, call it, within a month, it can be from a week to a month or so. I think -- so pretty quick. The positive thing is in the third quarter, so we saw the least amount of sequential inflation that we've seen since, I think, at the beginning of 2021 and very small amounts relative to the first half of the year, yet our gross profit per case remained quite strong. And I think that demonstrates the resiliency of the business. And within that sequential inflation in Q3, we actually saw many center of the plates or protein categories that saw some deflation. And our processes that Andrew made reference to earlier and the playbooks that we have, we manage through that quite effectively. And those are the categories actually that we think are more likely to show the deflation. And almost all those categories tend to be a fixed markup over whatever our cost is. So therefore, over time, not really impacting our overall profitability. So quite pleased with the progress, quite pleased with our management through it and where we're positioned from an inflationary and deflationary environment.

Thank you very much.

And your next question comes from the line of John Heinbockel from Guggenheim. Your line is open.

On to start independent cases, right? So I think you've said you've seen improvement thus far in the fourth quarter. Any quantification of that, right? I'd imagine it's fairly modest, but maybe that's wrong. And is that coming from a number of accounts were drop size. And then lastly, just on that topic, right? If the market grew slower, do you think you can flex up the 1.5 to maintain the current level of growth or the market would impact your ability to grow?

So John, thanks for the question. Yes, we would say a meaningfully better exit rate than we saw overall in the quarter. And that would be driven by a combination of the factors you mentioned, as I said in the earlier question from Jake, we're pretty happy with the balance that we're seeing in the way we're driving IND growth.

Yes. I was just going to say on the second part of the ability to outgrow what we think is in the environment, it's hard to know exactly where we shake out if you see a slowdown, but I think what we would expect is we would expect to outgrow period. And I think the thing that would be a factor that would potentially enable us to even outgrow further would be our differentiation and the offerings that we have to customers to help them succeed is something that helps them through difficult environments. And we've seen that in the way we help customers manage their way through with the PPP loans, how to get them, how to use them effectively as well as how we're helping them manage through inflation in their businesses. So I think if anything, we're probably better positioned, but the work that we're doing, we think is -- will allow us to continue to take share.

And John, just to add to that, I think one of the things we've learned most through COVID really is the ability to be nimble and agile and redeploy resources where the growth is. And I think that's been a pretty significant contributor to what has really been very steady sequential market share gains period-over-period over the course of the entire first three quarters of the year.

And then maybe the second one, Dirk, usually give a little bit of an update right on staffing selectors and drivers, right? So where do we stand on that? And then I'm curious, on a go-forward normalized basis, right? Do you think labor hours -- how much below case growth can labor hours be with the benefit of productivity, right? And I assume would you expect hourly wage rate, right? Will that grow mid-single digit or there's an opportunity to bring that in lower than that?

Yes. John, why don't I start and then maybe Dirk can talk a little bit about what we're seeing on the rate side. As far as our staffing situation, we feel very good. We're in a very solid position in the vast majority of our markets. As I mentioned in my remarks, we saw turnover take a pretty meaningful reduction over the course of the third quarter. And that was a combination, primarily, I think driven by some of the initiatives we've taken to better engage our workforce and create a culture that they want to be part of. Those are really starting to show some real impacts. But we've also undoubtedly had a little bit of help from the macro environment as well. So I would say, right now, I feel pretty good about the staffing situation. I'll maybe start on the second part of the question. What we've seen primarily as we get to a better place is, obviously, that has an almost immediate impact on our productivity, and that is starting to show up in our business. The other thing we've also seen is there's a lot more straight time in our facilities much less need for over time, which is probably the first impact that we're likely going to see more than necessarily overall hours reduction in the short term.

John, I think to get back to the point on what we look at costs going forward. So I do think we can get back to an environment where costs grow in line to less than cases. I think that the part that's a little harder to know exactly is at what pace that happens, just knowing that so much of it is driven by the turnover and the retention factor. And as Andrew said, we're pleased with the early signs we're seeing there, and we know we're not where we want to be, but we're going to continue to be focused on improving that. I think from overall wage inflation perspective, as we see and as we look ahead, that does appear to be coming back, call it, closer to historical levels of inflation. It's hard to know depending on what happens with the macro exactly where it settles. But I think the important takeaway there is it doesn't appear as though last year's level of outsized increases appear to be the new norm. But as you would expect, we're watching and managing that quite closely.

Okay, thank you.

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

Hi, good morning guys. I just wanted to zero in on a couple of things that have been sort of asked already. But in terms of gross profit per case, I think, Dirk, you pretty intentionally highlight the fact that inflation is decelerating yet cost or gross profit per case has been very strong and even this quarter, it looks like it's accelerated. I guess I'm trying to figure out, are you implying that the current level is sustainable. And then as we think about going forward into next year with the continued benefit of mix, is that a line item that you could even grow from here? Just kind of curious as to how you're thinking about gross profit per case off of this level.

Sure. Thanks, Ed. Good question. You're right, that was very intentional in highlighting that. And I think really what we're just trying to make sure is clear to people is the durability that we think is there in our gross profit per case. And in the environment where you see it in center of the plate deflation, which is where we think more of the potential of deflation is more likely than in grocery. And we're managing through it. So to your point, we do think as we look ahead, we think we can continue to have strong growing gross profit. And that really is underscored by the points that both Andrew and I made of the majority -- vast majority of our gross profit gains are coming from the things we're doing in our four walls as part of our plan as opposed to deflation or inflation and the pieces of inflation that are helped, especially on the parts of the business that are a percentage markup, we think are sticky. So overall, feel like we're very well positioned, very happy with the progress we made this quarter and look forward to continuing that into 2023. In fact, it's a good example. As we think of 2022 and even when we look ahead to 2023. So much of the work that we've done on our initiatives this year across the spectrum of the pillars, we think position us very well and will drive a lot of the earnings growth as we get into 2023.

Great. And then just a quick follow-up on where you stand in terms of customer exits. I know you know it sort of retail and then some other miscellaneous exits. But are you now at the point where you're really focused on more of sort of like the net case growth going forward, meaning a lot of the exits are behind you?

Sure. So I think that out of the 200 basis points that we talked about this quarter, a little under half of it was the grocery piece, retail that is fully lapped by the end of the first -- by the end of the third quarter. The other piece that's changed will continue through Q1. What I would say is our focus has been and continues to be around growing with the right customers. So it's about growing profitably as opposed to just case growth. I think when you look at any business, looking across and having sort of some level of, I'll call it, hygiene and what's the right mix and replacing customers the better customers is part of what we and you would expect, I would think others to do as we go through there. So overall, it is about growing the business, but it really is about growing the business with those more profitable customers. And hopefully, what you see this quarter is with 21% EBITDA growth that we are well positioned as we think to exit 2023 -- sorry, 2022 and end of 2023.

Awesome, thank you.

Thanks, Ed.

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

Thank you very much. As I want to start with the announcement of the share repurchase program, which I think is the first -- can you talk about how your capital allocation priorities change and just those priorities and where buybacks fit in relative to reducing debt? Thank you.

Sure. Good morning, Lauren. Good question. So this is exciting for us to be in a position to talk about this. And I think it's really been Andrew used the word intentional. We've been very intentional in the way we manage our capital structure. And so really, what this does is it fits right into one of the four priorities that we've talked a lot about. And what we've said regularly is we don't need to get all the way to the 3x high end of the range in order to begin this. But what I will be clear about though is that we remain committed to reducing leverage to getting in that range. And we think that going forward, this sort of the repurchase is an opportunistic way to, again, create shareholder value, especially with our shares at the levels they're at. But secondly, that we would expect in parallel to further reduce debt and we'll grow earnings as well as repurchase shares. And think that we will be -- expect to be in that range of 2.5x to 3x by the end of next year, inclusive of any capital that we return. So this really is about just because of the strengthening of the capital structure, the maturity as part of our whole priority and plan that we've been managing to, it is just the next step in that journey and very pleased with our ability to announce that today.

Great. Thanks. And just on the gross profit side, can you talk about what you're seeing with private label? And in more challenging environment, would you expect to see an increase in the level of penetration? And I guess just going forward, the most meaningful initiatives or opportunities you see to get that level even higher.

Yes, hi Lauren, it's Andrew. Thanks for the question. Yes, we absolutely have seen throughout a great opportunity to improve our penetration. One of the challenges, of course, has been supply. Most of our arrangements are with a limited number of suppliers from pre-COVID times, and we've had to significantly change our thinking around that to have alternatives in place. And we've done a really good job of doing that. We're in a very, very good spot now from a fairly stable supply foundation to really aggressively go after those increases. We've seen a natural improvement as customers tend to seek out the value that the control brand represents. And we expect that to accelerate as we get into a much better supply situation. So yes, I definitely expect to see that penetration level go up over the next several quarters.

And just the last one. On the gross profit per case, how much of your business is on a percentage markup versus a dollar markup to the extent you're willing to provide that?

Sure. As a straight percentage, it's about half of the business, and then the other half is a combination of either a fixed markup and/or kind of more spot pricing on noncontract type of business.

Perfect, thank you.

Thanks.

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

Great. Thank you very much. A couple of questions. The first one just on the food service chain business. You mentioned the decline in that business relative to independent growth. Just trying to get a sense, you mentioned a big portion of that is intentional exits of certain business. What we've heard from others that maybe there's an actual slowdown in the actual chain business. So just trying to get a sense for the balance between what you consciously exited versus what perhaps is the business slowing down and maybe the outlook you see for that going into '23?

Sure. If we compare the decline that we're seeing are still the amount below 2019 levels. Almost all of that is the combination of these exits that we've talked about as well as the two concepts that we've talked about that have more meaningful reductions in same-store sales. Absent those two things, our chain business is relatively in line with where it was 2019. I think to your point, Jeff. So we're watching it closely. You do see across the different chains. You see some that continue to perform very well. You see others that don't perform as well. We'll continue to watch to see if you see any kind of a sort of more discernible slowdown. But again, those are typically on the lower end of the margin spectrum. And we think that even chains that we have on board and growing are well positioned in the environment that we're in. So our key is going to continue to be with growing with those key customer types and then being very opportunistic in the all other.

Understood. And then you mentioned on the commodity inflation side, I think you were implying you'd expect continued easing, whether or not that means as a basket, you're comfortable that it would fall into the single digits as we close out '22. And is there actual -- you mentioned deflation a couple of times. I know you mentioning it's specific to [indiscernible] plate, but is there a concern that the overall basket would turn to deflation or perhaps that wouldn't be a concern at all? Any kind of sense for where you see that basket of inflation going in the short term and whether or not it would be concerning if it went to deflation?

Yes. So obviously, it's a little hard to predict as we've all discovered over the last several quarters, what inflation is going to do. Where I think what Dirk is sort of signaling is -- we have seen a little bit of easing off in a couple of the commodity categories, and we feel very good about our ability to manage through that. Our expectation, as we look forward, though, and I think we've said this in the past, is there could very well be and likely will be some easing off in commodity categories, but we don't expect to see the same level of easing in noncommodity categories. Typically, prices go one direction in that area, and that we expect, therefore, there to be a fair amount of stickiness in the non-commodity categories from an inflation standpoint.

Got it. And lastly, just because we're now a month or so away from 2023. Is it still reasonable to assume that the prior guidance is achievable? I mean, it seems like you're coming in, in '22 at the upper end of ranges. I know you've talked about growing that 1.5x the market, but I think you had also thrown out there at least $1.5 billion in EBITDA and margins getting back into that mid-4% range. Is that realistic for 2023? Or has the more recent dynamic made that those goals change either for better or for worse?

Sure. So I think, Jeff, we will update that when we release our Q4. But what I will tell you is just kind of reinforcing what Andrew and I both said is we're very pleased with where we're sort of the progress we're at to date and that we expect to exit '22 with. So I think with that, we feel very good about where the business is. We feel very good about the progress against the plan. And we'll let you take with that which you may, and again, look forward to talking about it more in February.

It sounds pretty clear. Thank you very much.

Your next question comes from the line of Mark Carden from UBS. Your line is open.

Good morning. Thanks so much for taking the questions. So to start on MOXē, it sounds like you're hearing good feedback so far. Would you expect for this to be a reasonable tailwind where it's been deployed so far in 4Q. Or is it still too early from a ramp perspective? And then more broadly, how should we think about the pacing of the broader rollout over the next few quarters?

Yes. Thanks, Mark. So we definitely are very pleased with the early returns from MOXē. MOXē has really primary benefit in the short term of being a further inducement to all of our customers to get on the e-commerce platform, which we've talked about in the past creates all sorts of benefits. We've been told and we would agree that this really is comparable to any of the sort of leading retail platforms out there in terms of ease of use and functionality. As far as the sort of the tailwind and impact on independent case growth, we haven't specifically tried to isolate on that, but it's clear that the momentum we're seeing is likely driven at least in part by MOXē. In terms of this rollout, it is basically now rolled out across our business for our local customers. We still have some work to do to make the platform available to the entirety of our national customer base as we've got some -- we need to make it -- make some adjustments to the platform in order for it to fit their order guide set up typically. But that is something that will be actively worked on and likely come and start to see in the first half of next year. So very, very pleased with what we've seen from a local standpoint -- haven't sort of isolated the specific impact of MOXē but have very little doubt that we are seeing many of the benefits that we've seen historically of getting folks on that e-commerce platform being driven by increases from -- as a result of using MOXē.

Okay. Great. And then my second one is a follow-up to Lauren's question. After your recent debt paydowns, how does your exposure to fixed and floating rates shake out? And how are you thinking about the mix there going forward?

Sure. So we ended the quarter. So as of end of Q3, we were about 55% fixed, so the additional $100 million from variable would increase the percentage of variable -- sorry, fixed a little bit. I would expect that the additional debt that we will pay down going forward will be against variable rate debt. So that will continue to increase the fix over time.

Great, thanks so much and good luck.

All right, thanks Mark.

Thanks, Mark.

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

Hi, good morning. Thanks for taking our questions. Just a couple of follow-ups here on inflation and the impact. I guess, one, do you anticipate that moderating inflationary environment may or may not impact the competitive environment. So that's part one. And then also, do you think there could be some stronger volume growth hard to tell with all the volatility, how inflation has really impacted volume. I guess I'm just trying to ask the elasticity question if we start to see inflation really start to moderate here, could you have some stronger volume growth as the offset to that.

Yes, thanks, Kelly. It's Andrew. Appreciate the question. I think we would say as far as what we're seeing in the competitive environment today and have done through much of the last couple of years, is there's still continues to be, I would say, a fair degree of rationality from a pricing standpoint. We're obviously all looking for opportunities to reduce our cost of goods and allow us to price to a more competitive level. And that's something that will, I think continue to be a priority for everyone. But I don't anticipate necessarily a meaningful change in the dynamics that we're seeing in the competitive environment as a result of that. And as far as volume growth is concerned, we've been obviously paying very close attention, not only to our relative price position to the extent we're able to determine it, but also share gains by category and paying very close attention to category softening and where we have seen that softening. We've taken some steps to address our prices if we believe that's the issue. So -- but I would say, overall, we've not seen a great deal of impact even though prices have continued to go up at quite a considerable rate. Not saying it couldn't someday happen, and certainly something we're going to continue to pay close attention to. But we have been feeling very good about the way in which we've been managing the balance between margin and volume growth in the environment based on the fact that we've been able to grow our margin at a pretty good rate while at the same time growing market share at an equally good rate.

And your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

Hi, thank you. I would just take a step back, and this might be an obvious question. When you look at your most profitable market segments, I mean, obviously, independent restaurants, but perhaps we could put health care and hospitality as well, but the focus on independent restaurants. What are the key reasons in 2022 of why you might be losing some customers? What are the reasons why you haven't been able to gain new customers. I wonder if that's kind of changing in if you're kind of identifying the factors like what you could do, what you could improve to make your customer base stickier and to grow your customer base, maybe that -- how that's evolving and gosh, we've talked about so many things, but what you think the most important thing that US Foods can do outside of just straight price, obviously, to really drive retention, if that's maybe changed relative to a couple of years ago in this obviously dynamic environment?

Yes, John, thanks for the question. I think we would say we've been very pleased really with the way in which we've grown our business across all our key segments as reflected in our market share gains sequentially from really the beginning of the year through until today. And we expect to see that continue. And I'd say there's a couple of reasons for that. I think our -- as the supply environment gets to a better place, it allows what we believe to be some of the important differentiators we have as a company to really sort of come to the fore, namely our team-based selling, the great innovative product platform as well as the technology that we bring to our customers. And so I think a combination of those things as well as just some of the great work the team has done around just focusing on ongoing after business in the areas where it's growing have been really made the business sort of the year of the success it's been in terms of our ability to continue to grow, grow share across those key profitable segments you mentioned.

And then let me ask you this. I mean, I remember some years ago, I mean in terms of overall route efficiencies, there were changes of the day or time a day that maybe customers were getting their orders that the customer wasn't necessarily happy about, that could have influenced the deliveries, I mean things like the minimum number of cases that a customer would have to order? I mean, were those types of changes that were made a few years ago, maybe obstacles or is that not really a factor? Or I mean, just trying to think about what -- how maybe the customers' demand for flexibility may have changed in your ability to serve that flexibility?

Yes. It's -- look, that's the balance. And getting back to your earlier question as well, one of the things customers are quite prepared to pay for is strong service. But they -- you'll find many customers typically want to have their product delivered within a pretty tight window, and that's something we obviously strive to do, but our -- we can't be everywhere sort of at once. We have to build our roots in a way that is most logical to sort of minimize miles. What we have found that I think has really been a very effective approach has been to prioritize or really our most profitable customers in building those routes, and that has allowed us not only to create some efficiencies, but also to ensure that those high-value customers get the service that they deserve. And that's something that I think we will continue to build upon as we move forward. But there's a lot of things we've also been exploring, as we mentioned earlier, a seven-day work week, which has, we think, some really important benefits from a select or turnover standpoint, but we also think there's an opportunity by spreading some of the volume across the week of creating a much better service experience for our customers as well, which is why we're very optimistic about what that could bring.

And John, just real quick is, I think specifically on the drop size, in fact, we've not seen an issue -- in fact, that can almost be in some cases, a worse customer experience because you have more small drops on trucks that cause competitors, trucks to be late. But one of the things that I think underscores sort of our focus on the customer here is so the things that Andrew talked about on the core sort of broad line delivery customers, we also have our Pronto that Andrew talked about, which is our small truck service that's live in almost 30 markets. And that is in largely dense, more urban areas that allows for smaller customers and has very attractive economics on there, and it allows more flexibility, later cutoffs for those customers that have less storage space, et cetera, and we think there's still a runway there. Our direct that we've talked about, which is a much broader assortment online, it's more of a direct ship. And then finally, of course, the Cash & Carry, which we continue to add to and that allows our existing customers to do fill-ins as well as other smaller customers to shop their way. So it really is about, we think, serving the right customers with the right options as opposed to having a broad line, try to be all things to all people.

Excellent, thank you.

Thanks, John.

Your next question comes from the line of Alex Slagle from Jefferies. Your line is open.

Hey, thanks. Good morning and congrats on the progress. And yes, I was actually going to ask about that seven-day work week pilot and what you're doing with the program and maybe what you are looking at in timing, but I covered a little bit of that. But if there's anything more there. Otherwise, I did -- I just wanted to follow up on -- the working capital, I guess, that positive shift we have here, is it fair to say we've kind of transitioned to this becoming more of a tailwind now. And I think you said at the end of '23, Dirk getting to within the range of 2.5x to 3x or maybe 2.5x, if that was the target. I just wanted to clarify those.

Sure. So overall, I think there's really not much more to add on the first part that Andrew mentioned. On the seven-day work week, it is a pilot, as he talked about, early positive returns but early on. So -- we look forward to updating as that progresses, but really a good win for sort of the associate, the customer and the company if we were able to move ahead successfully. I think overall, when we look to next year, you're right, so working capital, a good positive, good shift. I think that as the recovery continues in certain customer types, I think it will be -- I don't know that it's a tailwind, but it gets closer to being a more normalized working capital environment as we look ahead. And then I think finally, can you remind me of the last part of your question?

Debt leverage target.

So I wasn't specific. 2.5x to 3x is the range, and we expect to be within that -- if we have anything more specific to add, we will do that when we do our 2023 guidance early in next year. But just reiterating pleased and on track for our 3.5x that we talked about by the end of 2022. So really making sure that we're delivering against the commitments that we have put forth.

Great. Are there any like calendar shift impacts or anything in fourth quarter to think about? I think there might have been last year.

There is a little bit -- I'm trying to remember, I think it's at the New Year's holiday shift. So if I remember right, potentially a modest negative to Q4, but again, fairly modest or quite modest.

Got it, all right. Thanks very much.

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

Thanks very much. Dirk, just back on the balance sheet, and I appreciate all the conversation about buybacks and sort of balancing that now. You still have a large amount of variable rate debt. One, what do you intend to do about that? Is that something that you can action? And I guess maybe as an adjunct to that, if you were either to hedge or to go back to the market and fix the rate, what do you think the prevailing rates are to do so if you -- is that the prohibiting factor right now? Thanks.

Sure. So overall, we do expect to continue to reduce that variable rate. To your point, we are -- we do look at our capital structure in that mix. And when we have an update, we would definitely provide that. We don't think that the current market is an inhibitor to potentially being able to take some action more likely a form of a financial instrument than a new issuance. But to the extent that we have an update, we'll provide that. I think the important thing is even at the rates that they're at right now, our overall borrowing rates are so quite solid, and we will manage that and think we're relatively well positioned in the environment.

Thank you. And just on market share growth, your peers down in Houston talk about this holistically, right? They grew at 1.4% or whatever times the market, including all segments. Can you talk about maybe that in your business in that context, what you think you're growing at relative to the market? And I know you said you're going to exceed your 1.5x target for restaurants. What is that right now? Where are you growing at?

So overall, we would expect to be largely in line with the market with our goals for the overall business, which would be about 1x or a little over 1x. We do have the retail piece that we would pull out this year again. But other than that, we expect to be in line. I think the important thing to take away and the reason that we separate it and don't talk about it maybe in the same way that they do is because not all growth is the same. So if you had outsized growth in chain or K-12 education, that is not our focus. And we really are targeted at really outgrowing in those key more attractive customer types. And I think what you're seeing is you're seeing this show up in our larger increases in profitability overall. And so we'll continue to grow and grow smartly, and you should expect that of us.

Okay, thank you.

Thanks.

And your final question comes from the line of Peter Saleh from BTIG. Your line is open.

Great. Thanks for taking the question. I just wanted to ask about seasonality, and we've heard from many restaurant operators, the seasonality kind of return this summer -- slower in the summer and kind of accelerated into the Fall. Can you guys comment on the seasonality in your business, particularly in hospitality and if there's any in health care as well, are you seeing that seasonality return? Also just any comments on Omicron which I think was -- which was maybe a little bit in the fourth quarter last year and a little bit in 1Q. Just any comments on that would be helpful.

Sure, Peter. Thank you, good question. So maybe I'll start with to answer to your point, Omicron, limited impact in Q4, more so in Q1. As we think about the seasonality, I think the -- in the summer, some of the slowing, it's also harder to tell exactly if it's seasonality because that slowing also happened about the same time as you had fuel prices really spike. And we see that oftentimes that is -- like they were very closely correlated as far as timing on that. The important part for our business is the increased exit rates that we talked about and the strength into the early part of Q4. I think beyond that, the seasonality that I would reference not as much on health care is on hospitality, you do have some of the holiday events, and that will be something we're watching closely as that and other larger group events come back. I think the other final thing in hospitality as you have events around football and things in the fall, again, watching that closely there. Those would be the main things that I would think about there and that we'll continue to watch as the year goes on.

I think, Peter, the other thing I'd add is just we continue to have, we think, some real untapped recovery in those two pretty important segments, health care and hospitality. And so there will, we think continue to be some sort of baseline acceleration in those segments that will sort of defy the seasonality that typically is associated with them. And that we expect to see probably over the next -- the course of the next year or so.

Thanks and just my last question would be, I think you mentioned several times some deflation in center of the plate. Any way to quantify what you're seeing? And is there any evidence to suggest that that won't continue into 4Q and into '23?

We don't typically quantify at that level, but I would say we saw in some categories, a pretty meaningful pullback. But those categories are, I think returning to sort of more normal volatility, I would describe it, than necessarily systematically reverting back to a deflationary world. In fact, we've already started to see a number of the poultry category start to creep back up again. There just continues to be such volatility in the market from a supply standpoint that, that's, I think, driving as much of sort of the unpredictability of it. I don't foresee, I don't think the team is foreseeing a continued downward trend, but instead, more volatility than perhaps we've seen where the trajectory was typically mostly upwards.

Great, thank you very much.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.