US Foods Reports Second Quarter Fiscal 2020 Earnings

US Foods Holding Corp. (NYSE: USFD), one of the largest foodservice distributors in the United States, today announced results for the second quarter of fiscal 2020. In this press release we refer to certain organic financial results. Organic financial results exclude contributions during the respective period from Smart Stores Holding Corp. (“Smart Foodservice”), which was acquired on April 24, 2020 and the Food Group of Companies (the "Food Group"), which was acquired on Sept. 13, 2019.

Second Quarter Fiscal 2020 Highlights

• Total case volume decreased 28.0%; total organic case volume decreased 40.2%
• Net sales decreased 29.2% to $4.6 billion
• Gross profit decreased 41.2% to $671 million
• Net loss available to common shareholders was $97 million
• Adjusted EBITDA decreased 72.5% to $88 million
• Diluted EPS loss was $0.44; Adjusted Diluted EPS loss was $0.25

Six Month Fiscal 2020 Highlights

• Total case volume decreased 12.6%; total organic case volume decreased 24.1%
• Net sales decreased 12.6% to $10.9 billion
• Gross profit decreased 20.8% to $1.7 billion
• Net loss available to common shareholders was $229 million
• Adjusted EBITDA decreased 52.0% to $265 million
• Diluted EPS loss was $1.05; Adjusted Diluted EPS loss was $0.10

CEO Perspective

"While COVID-19 continues to impact the foodservice industry and our business, we remain confident in the long-term outlook for both the industry and our company,” said Pietro Satriano, Chairman and CEO. “Our team is focused on providing tools, technology and expertise to help operators succeed in this rapidly changing environment. As the quarter progressed, we saw trends in volumes, margins and bottom line profitability improve, and we believe our scale, our differentiated platform and our strong balance sheet leave us well positioned to gain market share as the industry continues to recover.”

Second Quarter Fiscal 2020 Results

Total case volume decreased 28.0% from the prior year, while total organic case volume decreased 40.2%. Independent restaurant case volume decreased 32.1%, while organic independent restaurant case volume decreased 42.1%. Net sales of $4.6 billion decreased 29.2% from the prior year. Both case volume and Net sales were negatively impacted by social distancing measures and required closures of non-essential businesses that occurred during the quarter as a result of COVID-19. The Food Group and Smart Foodservice acquisitions contributed Net sales of $732 million, or 16.1%, for the quarter.

Gross profit of $671 million decreased $471 million, or 41.2%, from the prior year, primarily as a result of the negative impact of COVID-19 on case volume, which also resulted in higher inventory write-offs and product donations, lower logistics income and changes to our customer mix. These were partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Gross profit as a percentage of Net sales was 14.7%. Adjusted Gross profit was $730 million, a decrease of $426 million or 36.9% from the prior year, driven by the negative impact of COVID-19 on case volume, which also resulted in lower logistics income and changes to our customer mix. These were partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Adjusted Gross profit as a percentage of Net sales was 16.0%.

Operating expenses were $730 million, a decrease of $218 million or 23.0% from the prior year. The decrease was primarily due to actions put in place to reduced operating costs as a result of lower case volume and a $75 million reduction in the reserve for uncollectible accounts, which were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions. Adjusted Operating expenses were $646 million, a decrease of $192 million or 22.9% from the prior year, primarily due to actions put in place to reduced operating costs as a result of lower case volume, which were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions.

Net loss available to common shareholders was $97 million, a decrease of $213 million compared to prior year. Adjusted EBITDA was $88 million, a decrease of $232 million or 72.5%, compared to the prior year. Diluted EPS loss was $0.44; Adjusted Diluted EPS loss was $0.25.

Six Month Fiscal 2020 Results

Total case volume decreased 12.6% from the prior year, while total organic case volume decreased 24.1%. Independent restaurant case volume decreased 16.6%, while organic independent restaurant case volume decreased 25.4%. Net sales of $10.9 billion decreased 12.6% from the prior year. Both case volume and Net sales were negatively impacted by social distancing measures and required closures of non-essential businesses that were put in place the second week of March as a result of COVID-19. The Food Group and Smart Foodservice acquisitions contributed Net sales of $1.4 billion, or 12.7%, for the first six months of fiscal 2020.

Gross profit of $1.7 billion decreased $457 million, or 20.8%, from the prior year, primarily as a result of the negative impact of COVID-19 on case volume, which also resulted in higher inventory write-offs and product donations, lower logistics income and changes to our customer mix. These were partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Gross profit as a percentage of Net sales was 15.9%. Adjusted Gross profit was $1.8 billion, a decrease of $423 million or 19.2% from the prior year, driven by the negative impact of COVID-19 on case volume, which also resulted in lower logistics income and changes to our customer mix. These were partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Adjusted Gross profit as a percentage of Net sales was 16.4%.

Operating expenses were $1.9 billion, an increase of $53 million or 2.8% from the prior year. The increase was primarily due to a $95 million net increase in the reserve for uncollectible accounts and operating expenses for the Food Group and Smart Foodservice acquisitions, which were partially offset by actions put in place to reduced operating costs as a result of lower case volume. Adjusted Operating expenses were $1.5 billion, a decrease of $130 million or 7.8% from the prior year, primarily due to actions put in place to reduced operating costs as a result of lower case volume, which were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions.

Net loss available to common shareholders was $229 million, a decrease of $416 million compared to prior year. Adjusted EBITDA was $265 million, a decrease of $287 million or 52.0%, compared to the prior year. Diluted EPS loss was $1.05; Adjusted Diluted EPS loss was $0.10.

Cash Flow and Capital Transactions

Net cash provided by operating activities in the first six months of fiscal 2020 was $770 million, an increase of $376 million from the prior year, primarily driven by working capital benefits. Cash capital expenditures for the first six months of fiscal 2020 totaled $131 million, compared to $110 million for the same period prior year.

Early in the second quarter, the company undertook various financing activities to increase cash on hand and strengthen its liquidity. At the end of the second quarter, the company had $1.7 billion in cash on hand and approximately $1.3 billion in borrowing capacity available under the company’s ABL facility for total liquidity of approximately $3.0 billion.

Net Debt at the end of the second quarter of fiscal 2020 was $4.5 billion, a decrease of $100 million versus the end of fiscal 2019. The ratio of Net Debt to Adjusted EBITDA was 5.0x at the end of the second quarter of fiscal 2020, compared to 3.9x at the end of fiscal 2019.

Outlook for Fiscal Year 2020

Due to the continued uncertainty associated with COVID-19, the company withdrew its fiscal 2020 financial guidance on March 23, 2020 and is not providing financial guidance at this time.

Conference Call and Webcast Information

US Foods' second quarter fiscal 2020 earnings call will be broadcast live via the internet on Tuesday, August 4, 2020 at 10:00 a.m. CDT. The call can also be accessed live over the phone by dialing (844) 292-0976; the conference ID number is 3295176. The presentation slides reviewed during the webcast will be available shortly before that time. The webcast, slides, and a copy of this press release can be found in the Investor Relations section of our website at https://ir.usfoods.com.

About US Foods

US Foods is one of America’s great food companies and a leading foodservice distributor, partnering with approximately 300,000 restaurants and foodservice operators to help their businesses succeed. With more than 70 broadline locations and 76 cash and carry stores, US Foods provides its customers with a broad and innovative food offering and a comprehensive suite of e-commerce, technology and business solutions. US Foods is headquartered in Rosemont, Ill. Visit www.usfoods.com to learn more.

Forward-Looking Statements

Statements in this press release which are not historical in nature are “forward-looking statements” within the meaning of the federal securities laws. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “plan,” “outlook,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecast,” “mission,” “strive,” “more,” “goal,” or similar expressions and are based upon various assumptions and our experience in the industry, as well as historical trends, current conditions, and expected future developments. However, you should understand that these statements are not guarantees of performance or results and there are a number of risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements, including, among others: any declines in the consumption of food prepared away from home; the extent and duration of the negative impact of the COVID-19 pandemic on us; cost inflation/deflation and commodity volatility; competition; reliance on third party suppliers; interruption of product supply or increases in product costs; changes in our relationships with customers and group purchasing organizations; our ability to increase or maintain the highest margin portions of our business; effective integration of acquisitions; achievement of expected benefits from cost savings initiatives; fluctuations in fuel costs; economic factors affecting consumer confidence and discretionary spending; changes in consumer eating habits; our reputation in the industry; labor relations and costs; access to qualified and diverse labor; cost and pricing structures; changes in tax laws and regulations and resolution of tax disputes; environmental, health and safety and other governmental regulation, including actions taken by national, state and local governments to contain the COVID-19 pandemic, such as travel restrictions or bans, social distancing requirements, and required closures of non-essential businesses; product recalls and product liability claims; adverse judgments or settlements resulting from litigation; disruptions of existing technologies and implementation of new technologies; cybersecurity incidents and other technology disruptions; management of retirement benefits and pension obligations; extreme weather conditions, natural disasters and other catastrophic events, including pandemics and the rapid spread of contagious illnesses; risks associated with intellectual property, including potential infringement; indebtedness and restrictions under agreements governing indebtedness; and potential interest rate increases.

For a detailed discussion of these risks, uncertainties and other factors, see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on February 13, 2020, and in our Quarterly Report on Form 10-Q, which was filed with the SEC on May 5, 2020. The forward-looking statements contained in this press release speak only as of the date of this press release. We undertake no obligation to update or revise any forward-looking statements.

Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). However, Adjusted Gross profit, Adjusted Operating expenses, EBITDA, Adjusted EBITDA, Net Debt, Adjusted Net (loss) income available to common shareholders and Adjusted Diluted EPS are non-GAAP financial measures regarding our operational performance and liquidity. These non-GAAP financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.

We use Adjusted Gross profit and Adjusted Operating expenses as supplemental measures to GAAP measures to focus on period-over-period changes in our business and believe this information is helpful to investors. Adjusted Gross profit is Gross profit adjusted to remove the impact of the LIFO inventory reserve changes. Adjusted Operating expenses are Operating expenses adjusted to exclude amounts that we do not consider part of our core operating results when assessing our performance, as well other items specified in the agreements governing our indebtedness.

We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because they exclude amounts that we do not consider part of our core operating results when assessing our performance. EBITDA is Net (loss) income, plus Interest expense-net, Income tax (benefit)/provision, and Depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for (1) Restructuring costs and Tangible asset impairments; (2) Share-based compensation expense; (3) the non-cash impact of LIFO reserve adjustments; (4) Business transformation costs; and (5) other gains, losses or charges as specified in the agreements governing our indebtedness.

We use Net Debt as a supplemental measure to GAAP measures to review the liquidity of our operations. Net Debt is defined as total debt net of total Cash, cash equivalents and restricted cash remaining on the balance sheet as of the end of the most recent fiscal quarter. We believe that Net Debt is a useful financial metric to assess our ability to pursue business opportunities and investments. Net Debt is not a measure of our liquidity under GAAP and should not be considered as an alternative to Cash Flows Provided by Operations or Cash Flows Used in Financing Activities.

We believe that Adjusted Net (loss) income available to common shareholders is a useful measure of operating performance for both management and investors because it excludes items that are not reflective of our core operating performance and provides an additional view of our operating performance including depreciation, interest expense, and Income taxes on a consistent basis from period to period. Adjusted Net (loss) income available to common shareholders is Net income excluding such items as Restructuring benefits and costs, tangible asset impairments, Share-based compensation expense, the non-cash impacts of LIFO reserve adjustments, Business transformation costs (costs associated with the redesign of systems and processes), and other items, and adjusted for the tax effect of the exclusions and discrete tax items. Effective as of the third quarter fiscal 2019, we revised the definition of Adjusted Net (loss) income available to common shareholders to also exclude the effect of intangible asset amortization expense. Prior period amounts have been revised to conform with the current year presentation. We believe that Adjusted Net (loss) income available to common shareholders may be used by investors, analysts, and other interested parties to facilitate period-over-period comparisons and provides additional clarity as to how factors and trends impact our operating performance.

We use Adjusted Diluted Earnings per Share, which is calculated by adjusting the most directly comparable GAAP financial measure, Diluted Earnings per Share, by excluding the same items excluded in our calculation of Adjusted EBITDA to the extent that each such item was included in the applicable GAAP financial measure. We believe the presentation of Adjusted Diluted Earnings per Share is useful to investors because the measurement excludes amounts that we do not consider part of our core operating results when assessing our performance. We also believe that the presentation of Adjusted EBITDA and Adjusted Diluted Earnings per Share is useful to investors because these metrics may be used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in our industry.

Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors as they assist in highlighting trends, (b) to set internal sales targets and spending budgets, (c) to measure operational profitability and the accuracy of forecasting, (d) to assess financial discipline over operational expenditures, and (e) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used in connection with certain covenants and restricted activities under the agreements governing our indebtedness. We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry.

We caution readers that our definitions of Adjusted Gross profit, Adjusted Operating expenses, EBITDA, Adjusted EBITDA, Net Debt, Adjusted Net (loss) income available to common shareholders and Adjusted Diluted EPS may not be calculated in the same manner as similar measures used by other companies. Definitions and reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures are included in the schedules attached to this press release. We have not, however, provided a reconciliation of our full fiscal 2019 Adjusted EBITDA or Adjusted Diluted EPS outlook because we are not able to accurately estimate all the adjustments on a forward-looking basis and such items could have a significant impact on our GAAP financial results as a result of their variability.

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