US Foods Holding Corp. (NYSE:USFD) Q4 2021 Earnings Conference Call February 17, 2022 10:00 AM ET
Melissa Napier - Treasurer and SVP-IR
Pietro Satriano - CEO
Dirk Locascio - CFO
Andrew Iacobucci - Chief Commercial Officer
Bill Hancock - Chief Supply Chain Officer
Conference Call Participants
John Glass - Morgan Stanley
John Heinbockel - Guggenheim
Peter Saleh - BTIG
Brian Mullan - Deutsche Bank
Kelly Bania - BMO Capital
Jeffrey Bernstein - Barclays
Joshua Long - Piper Sandler
Lauren Silberman - Credit Suisse
Edward Kelly - Wells Fargo
Mark Carden - UBS
Alex Slagle - Jefferies
John Ivankoe - JPMorgan
Jake Bartlett - Truist Securities
Good day, and thank you for standing by. And welcome to the US Foods Fourth Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Melissa Napier. Please go ahead.
Thank you and thank you everyone for your patience. We sincerely apologize for the delay. It took a bit longer than we had initially anticipated, but we are excited to get into today's commentary and talk about the overview of our results for the fourth quarter in fiscal year 2021 and also provide commentary on our outlook for fiscal 2022 and 2024, and talk a bit about our 2024 long-range plan.
As usual, we'll take your questions after our prepared remarks conclude, and given the delay in the time of the start of the call, Pietro and Dirk will be happy to spend a bit of extra time on the call to be sure that all questions are answered.
Our earnings release issued early this morning and today's presentation slides can be accessed on the Investor Relations page of our website, that information should be updated. During today's call and unless otherwise stated, we're comparing fourth quarter and fiscal 2021 results to the same time period in fiscal year 2020.
In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our most recent Form 10-K for a detailed discussion of those potential factors that could cause actual results to differ materially from those anticipated in these statements.
And 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 release as well as in the appendices to the presentation slides that are posted on the website. As noted, we're not providing reconciliations to forward-looking non-GAAP financial measures.
Now I'd like to turn the call over to Pietro.
Thanks Melissa. Good morning, everyone, and apologies as well for the delay.
Especially on a day where we've got so much to cover, so let's get into it. As you heard us say on the last call, our plans to drive continued value creation are centered on delivering against three financial outcomes, profitably grow share, expand gross margin and drive operational efficiency. In 2021, we made solid progress against those outcomes in the face of continued headwinds impacting the industry and our results in the fourth quarter clearly demonstrates the impact of these efforts.
Today, we will present our long-range plan against those same financial outcomes. The plan covers the period from 2022 to 2024 and is anchored on the following strategy, setting ourselves apart on reliable service and fresh quality, continuing to offer differentiated solutions that help our customers make it, be it innovative products, digital commerce, expert resources and the only true omnichannel offering in our industry. And lastly, bringing an intense focus on cost reduction and operational efficiencies.
Joining me for that discussion will be Andrew Iacobucci, Chief Commercial Officer and Bill Hancock Chief Supply Chain Officer. The Board and I have a high degree of confidence that our plan will deliver against the targets we are sharing today.
So let me go to the takeaways for today's call, which are summarized on Slide 2. First, fourth quarter results were in line with the expectations that we outlined on our third quarter call. Strong execution resulted in a 58% increase and adjusted EBITDA compared to fourth quarter 2020.
Second, throughout 2021, we continue to take actions that solidify the foundation of the business and put in place a new operating model that underpins our recent performance and gives us great confidence in our ability to grow EBITDA from here. And third, we are presenting a long-range plan that generates $1.7 billion in adjusted EBITDA in 2024. This plan reflects a combination of initiatives that are underway and the continued recovery of our industry.
Let's move to Slide 3 with a brief review of our 2021 highlights. Starting with the first pillar of profitable market share gains, which increased across all target customer types. The biggest increase came in nationally managed business, which includes healthcare, hospitality and national and regional chains. The team has won approximately $1 billion in new business over the last two years, net of optimizing lower margin business. On the independent restaurant side, we also saw year-on-year market share gains.
Contributing to our share gains was a solid service foundation. Based on monthly research with 4,000 customers, our net promoter score on service indicate that we are faring same or better than our major competitors. Our differentiated offerings and continued enhancements to our digital strategy also contributed to our market share gains. A good example of which is our online marketplace or US Foods Direct, which saw sales increase of four-fold year-on-year.
Moving to the second pillar of optimizing gross margins. This is where we had the greatest success, with gross profit per case, the highest it has been since 2016. Contributing to this were our continued efforts to optimize our portfolio of customers. We drove a 110 basis point increase in private brand penetration compared to the same quarter a year ago and we continued to successfully pass on inflation to both contract and non-contract customers.
The third pillar, operational efficiency, is where we are intensely focused. On selling and administrative expenses, we fully realize the cost saves we put in place in August 2020 aside from reinvestments in our sales force. Distribution cost per case has been significantly impacted by industry-wide staffing and turnover challenges and higher than historical wage increases that every company has faced.
Our goal over time is to completely offset the headwinds on distribution cost per case through a combination of gross margin optimization and productivity initiatives. Over the last three months, as a result of our efforts, we've seen turnover improve and we've reduced the time to full productivity for new selectors, which ultimately will result in lower costs.
And lastly, we made changes to strengthen our leadership in almost one-third of our distribution centers. The biggest foundational change we made was to our operating model, reducing the number of regions to four and creating operations and commercial excellence teams dedicated to driving standardization more effectively and more quickly than before. We are already seeing the results, as illustrated by our 15% reduction in assortment last year.
I will now turn to our 2024 long-range plan, a plan that has been developed over the course of last year. The plan is expected to increase EBITDA to $1.7 billion in 2024, a $650 million increase over 2021 and $250 million over 2019 pro forma. This increase comes from a combination of volume growth and EBITDA margin expansion.
The initiatives you see here represent the most significant ones and our combination of programs that are successfully created shareholder value in the past with some new initiatives, which we've been piloting this year. I will introduce each of the pillars and ask my colleagues to elaborate on some of the newer ones.
Starting with profitable market share, which we expect to account for roughly 40% of the EBITDA growth. Profitable growth starts by offering reliable, consistent service and consistent quality on fresh. Our customer research indicates that no broad liner does this consistently well, which is why we see this as a big opportunity. Reliable service and quality then enables us to engage customers on those differentiated solutions that truly set us apart and have fueled our consistent market share gains heading into the pandemic.
And last but not least, our omnichannel offering consisting of CHEF STORE and US Foods Direct both of which have enormous growth potential that we are investing in. After opening two stores in 2021, we are set to accelerate our store opening program having secured the real estate to open four to six stores in 2022.
Turning next to the pillar of gross margin, which we expect to generate around 40% of the EBITDA growth. Optimizing gross margin is an area in which we have excelled over the years, generating 83 basis point increase, excluding acquisitions and the full years leading to COVID through some of the programs that you see here.
I'm now going to call on Andrew Iacobucci to highlight - to give you a highlight or two from each of the market share and gross margin pillars. Andrew was appointed Chief Commercial Officer in April 2021. He joined as Chief Merchant in 2017 and is responsible for a significant portion of the gross margin expansion over that period.
Andrew, over to you.
Thanks Pietro and good morning all.
As Pietro mentioned, the commercial roadmap is focused on driving profitable market share growth and margin expansion and I'll highlight a few of the medium-term areas of focus under these pillars. The first under profitable market share is fresh leadership, which means taking advantage of an opportunity we see to stake out a clear leadership position in COP and produce among our broadline peers.
By leveraging the sourcing scale and expertise in a Amerifresh and Ameristar, we are driving high-single digit improvements to cost of goods along with consistently high quality product and innovative assortment. In mid-2021, we launched FRESH CHECK, which is a 27 point produce inspection program that has yielded a double-digit improvement in product - produce performance in our pilot markets.
Both COP and produce drive significant incrementality and customer loyalty. Customer research review of the inconsistent produce quality is the number one reason that customers choose to source from multiple suppliers and delivering high quality fresh is equally important to distributor selection in the first place.
The second area of focus is strategic vendor management which entails strengthening our key vendor partnerships to ensure we're delivering best-in-class service and cost of goods. In a world of inflation, more and more opportunities have emerged for us to improve our cost position and we plan to pursue those by leveraging our scale, all the while balancing the lead to take advantage of newly formed regional or smaller player relationships that have flourished in today's supply constrained environment.
Scale is a key lever for US Foods, which when combined with the right supplier value proposition creates sizable cost of goods opportunities. Strategic vendor management is a proven process for us with consistent meaningful year-over-year improvement over the past several years and our recent learnings have only increased this momentum as evidenced by mid-single digit COGS improvement in recent negotiations.
The last focus area I'd like to mention is margin enhancement through next-generation pricing. We've recently announced a partnership with Zilliant, a market leading pricing platform that allows us to be more responsive to market changes by dynamically optimizing prices based on over a dozen different inputs to drive margin or volume as appropriate.
This will significantly enhance our agility and will pave the way for continued margin and share of wallet opportunities. Development and integration with our existing systems could go underway with a multi-market pilot plan for the second half of 2022.
Pietro back to you.
I will now move to the third pillar of operational efficiency. Over the years, we have done a lot of good work on reducing selling and administrative expenses, which represent about a third of our operating expenses. But we also recognize that operations remains a big opportunity, and one on which we are intensely focused. Our opportunity is to reduce operating costs by bringing a greater standardization and process discipline in the short-term while exploring opportunities for automation over the longer-term.
That is why we hired Bill Hancock, our Chief Supply Chain Officer. Bill joined in November of 2020 and brings deep experience in all aspects of operations from warehousing, to last mile delivery, to automation. Since joining, Bill has assembled a terrific team bringing talent from a number of best-in-class companies, logistics and warehouse automation. Bill?
Building off a strong exit from 2021, our supply chain team has narrowed our focus to a set of critical initiatives that will deliver continued growth and higher profitability in 2022 and beyond. I'll highlight two of those areas.
First, is our work on the foundation of our operations, which focuses on providing our teams the best training and technology available to provide a reliable service platform and reduce cost. We've reduced our trainee to trainer ratio for new associates and we've launched a network-wide driver training program to create their own pipeline of CDL drivers. We're also providing all supply chain leaders more advanced leadership training to accelerate the productivity ramp up with the high number of new associates.
In 2021, we've resumed the rollout of new scanning technology for our warehouse teams. This new technology drives faster onboarding for new associates and has helped us capture up to a 5% productivity gain and reduce mispicks by 80%. The full network deployment of this technology is on pace to be completed by the close of the second quarter of this year. We've also fully deployed new proof of delivery devices for our drivers that has shortened driver training time and improved delivery scan rates by 130 basis points in support of more accurate invoicing. And while still early in our planning, this foundational work directly supports the build out of our warehouse automation in supply chain technology roadmap.
The second highlight is the work behind our routing transformation. The initial phase of this work has focused on optimizing our current routing with pilot markets realizing a 6% improvement in cases per mile, while driving on-time delivery performance close to 90%. The next phase of this work will upgrade our routing technology enabling US Foods to offer dynamic delivery windows and real-time visibility to a customer order, both of which improved service and further reduced miles and cost. We're excited about the early results, these initiatives have delivered and we expect results to improve further over time.
Lastly, I want to take an opportunity to thank our frontline associates for their tireless work and dedication for taking care of each other and our customers. We truly have the best team in the industry, and we are fully committed to helping all of our associates be successful.
With that, I'll turn it back to Pietro.
Thanks Bill. As you can see Bill brings tremendous focus, experience and leadership to our operations. I will now turn the call over to Dirk to discuss our results for the fourth quarter and the year as well as to provide more color on the long-range plan, I just covered.
Dirk, over to you.
Thank you, Pietro and good morning.
I'll give a brief recap on 2021 and then discuss our financial outlook for 2022 and 2024 and I'll start on Page 6. Fourth quarter financial results were in line with our expectations. Our Q4 and fiscal year 2021 results were significant improvement over prior year and we ended the year with a solid foundation for further growth.
Q4 net sales were $7.6 billion, which was an increase of 32% over the prior year and you'll likely recall that Q4 2020 had an extra week, which increased that period sales approximately 700 basis points. The 32% growth excludes the extra week. Total case growth increased 13% and 21% for independent restaurants.
We produced very strong gross profit dollar growth again this quarter, with our highest gross profit per case of the year as our team very effectively managed inflation and optimized pricing more broadly. This caps a strong year as fiscal 2021 GP per case was the highest we've had since becoming a public company. Supply chain challenges continue through Q4 similar to others in our industry. Despite these challenges, we remain fully staffed in almost all markets and are continuing to build staffing for expected volume growth acceleration this year. We remain focused on increasing productivity of those hired in recent months.
As Bill noted, we've seen improvement in productivity during Q4 and expect further improvements in 2022, reaching 2019 productivity levels around midyear. Our supply chain cost was higher in Q4 than Q3, mainly due to more associates earning sign on a retention bonuses, inflation, hiring and preparation for continued volume increases and retaining additional staff as a bit of an insurance policy.
We successfully refinanced $2.7 billion of debt in 2021, taking advantage of attractive market conditions to further strengthen our balance sheet by extending tenure and replacing more of our secured floating-rate debt with unsecured fixed rate debt. And finally, we significantly improved our debt leverage this year with a three turn reduction and leveraged to 4.6 times at year-end.
On Slide 7, as I mentioned, Q4 net sales increased 32% over 2020, and within sales, volume grew 13% excluding the extra week in 2020; food inflation was 14.4% and the remainder was related to sales mix. Our independent restaurant volume increased 20% excluding the extra week and we saw acceleration earlier in the quarter before Omicron impacts which bodes well for 2022.
Q4 ends a year of significant sales and volume improvement over 2020. Full year total volume was up 19% and independent volume of 30%, each excluding the extra week in 2020. Adjusted EBITDA was $262 million for the quarter, a 51% increase over the prior year, we estimate the extra week in Q4 of 2020 increased EBITDA by $8 million, so excluding the extra week, adjusted EBITDA for Q4 increased 58% over prior year.
Q4 adjusted EBITDA as a percent of sales increased to 3.4%. For the full year, our adjusted EBITDA increased 65% and EBITDA margin increased 70 basis points compared to 2020. We did experienced limited impact from Omicron in December and the more significant impact is in Q1 2022 which we think will be temporary.
The Q4 P&L outcome was largely in line with our expectations, no real surprises in the way the quarter played out. Adjusted diluted EPS for Q4 was $0.38 and full year $1.55 per share, each up significantly over the prior year.
And lastly, specific to Food Group, most of the integration was completed by the end of 2021. We have the last system conversion plan for this coming weekend and we are on track and confident to achieve the $65 million in synergies. Future discussions of Food Group will be incorporated into our discussions of the overall business.
Operating cash flow for the fiscal year was $419 million, similar to prior year. In 2021 working capital was $300 million plus use of cash, as a result of receivables growth due to the significant growth in sales. While 2020 had the benefit of approximately $200 million working capital reduction due to lower sales. Our business has historically generated a significant amount of operating cash flow and we expect to grow that cash flow with EBITDA over time.
And as I've already highlighted, we further strengthened our balance sheet as we decreased our leverage in fiscal 2021 to 4.6 times and we are well on our way toward our target net leverage ratio of 2.5 to 3 times.
Turning to 2022, we expect continued increases in volume and earnings through the execution of our strategic initiatives to grow market share, increased gross margins and improved operational efficiencies. One point to call out is you will hear me talk about a higher 2022 adjusted diluted EPS range than we initially included in our press release earlier this morning. The numbers I'm talking about are correct and the press release has been updated to reflect these numbers.
We expect to grow volume at 1.5 times the market for restaurants and grow at market for the remaining customer types. We expect to deliver to $1.2 billion to $1.3 billion of adjusted EBITDA and $1.95 to $2.25 adjusted diluted earnings per share in fiscal 2022.
Omicron appears to be largely in the rearview mirror, however, it has had a meaningful impact on volume and supply chain costs in Q1 and likely to a more limited extent in Q2. We also plan to continue to temporarily carry additional supply chain headcount to ensure adequate staffing and service levels in the event of another impact from COVID.
Our outlook range reflects these Omicron related costs and impacts, which we estimate at $80 million to $90 million. Going forward, we are optimistic about the continued rapid recovery of our business post on Omicron. If the U.S. does not have another significant COVID wave, we expect to be at the higher end of the earnings range, the lower end of the range takes into account the possibility of another similar wave.
Specific to Q1 2022 and the Omicron impact, we are experiencing reduced volume and incremental supply chain costs. We've seen volume improve the last couple of weeks and are very encouraged it will continue to improve through Q1. Client appears to mostly be driven by customer staffing challenges and believe that the end customer demand will be robust as Omicron subsides.
Historically, our Q1 EBITDA is lower than other quarters of the year at approximately 20% of our annual EBITDA dollars. With most of the Omicron impact expected in Q1, we expect Q1 EBITDA to be a lower percent of our full year EBITDA than normal this year.
Assuming there's not another significant wave and macro volume improvement occurs, especially in healthcare and hospitality, we expect volume to return to 2019 levels sometime in half two. In 2022, we expect adjusted EBITDA margins to improve over fiscal 2021, along with continued strong gross profit per case and increased operational efficiencies.
We continue to expect supply chain productivity to return to 2019 levels midyear and surpass by year-end. We're focused on returning our adjusted EBITDA margin to pre-COVID levels and increasing it further in the coming years. Prior to the pandemic, we grew EBITDA margins 90 basis points or 25% improvement from 2015 to 2019 and expect to build upon that track record.
We're also providing additional guidance on interest expense and CapEx, cash CapEx. As we significantly increased earnings in 2022, we expect to further reduce debt and as a result, be near 3.5 times leverage by year-end.
As Pietro said, we're executing a multiyear plan to deliver significant earnings growth from the combination of profitable volume growth and margin expansion. As we look further ahead to 2024, we expect to continue growing at 1.5 times the market for restaurants and at market for other customer types. We expect adjusted EBITDA to grow at roughly - grow to roughly $1.5 billion in 2023 and then reach approximately $1.7 billion in 2024 as a result of executing our balanced plan. We will likely be near or at 2019 EBITDA margins in 2023 and then exceed in 2024 as we return to an expectation of EBITDA margin improvement each year.
Adjusted diluted EPS is estimated to be approximately $3.40 in 2024. CapEx is estimated at 1.3% to 1.4% of sales. With respect to leverage, we plan to reach our target leverage range of 2.5 times to 3 times in 2023 and remain in that range.
As we approach the range, we will further evaluate return of capital options, such as share repurchases. Our focus is on executing the plan to achieve these 2024 targets. However, beyond 2024, we would likely expect a 6% to 7% adjusted EBITDA growth algorithm.
I like to reiterate the relative contributions of the various pillars of our strategy as they contribute to our expected EBITDA growth. While we won't be breaking down the quantified impact of each initiative, we have provided impacts for each bucket of the plan which reflect the combined contribution of initiatives that Pietro, Andrew and Bill discussed. We expect to generate nearly $650 million of adjusted EBITDA in fiscal 2024 compared to 2021.
We expect the contributions of our increased earnings to be significant, for each of these pillars. Volume is expected to contribute an estimated $290 million, gross margin expansion approximately $325 million and OpEx efficiency approximately $235 million, which is incremental to the $130 million of fixed cost reductions completed in 2020. Then we have annual OpEx cost inflation that we must mitigate through productivity and gross margin increases. OpEx inflation is estimated to total about $210 million over the three years.
Pietro, Andrew and Bill covered the key drivers in each pillar, so I won't repeat them. We successfully grew independent restaurants at approximately 2x the market rate and increased gross margin per case more than OpEx per case driving operating leverage gains over multiple years pre-pandemic, so we know how to do this well. Our new operating model gives us line of sight through initiatives already underway to improve execution on cost reduction. And as you've heard, we are especially focused on supply chain where we have new leadership with strong capabilities.
We are confident in our ability to deliver strong adjusted EBITDA growth via continued share gains, further gross margin improvement and a more intense focus on operational efficiency. These increased earnings will produce strong and growing cash flows, which we can then prudently allocate to reinvest in the business, reduce leverage, return capital to shareholders and opportunistically pursue tuck-in M&A. We estimate this will lead to adjusted diluted EPS of approximately $3.40 per share, which is more than a 40% increase over FY 2019.
Pietro back to you.
I hope you all share in our excitement in our long-range plan and what the future holds for US Foods. Our plan is bold, achievable and it builds on a very strong foundation. The progress we have made, the initiatives currently underway and our talented and dedicated team of leaders and frontline associates give me great confidence that we will deliver on the plan we outlined and create significant value for our shareholders.
We will now open the call for Q&A.
[Operator Instructions] Your first question comes from the line of John Glass from Morgan Stanley. Your line is open.
Thanks, good morning. Thanks for all the details. One way to look at your business I think some have framed is looking - comparing your business to your largest competitor Cisco and thinking about the gap in margins that you have and your desire to think to close a part of that maybe not all but maybe 75% of it. Can you talk about how you put that in the context of your plan for '24, it doesn't seem like you can close that entire gap but do you see that as a feasible opportunity over time? And I've got a follow-up, please. Thanks.
Sure. Thank you, John. Good morning and good question. So our job, first of all and what we're focused on is executing our plan which generates as you heard us talk about meaningful value based on a combination of margin expansion of volume growth.
We're not going to speculate specifically and how much for the progress of things that are outside of our control i.e., others, peers, but this plan does include additional margin expansion on top of what we've done in recent years. And I can say, we expected the plan to generate over $600 million and 40% higher adjusted diluted EPS in 2019 and we're confident we'll deliver value through the combination of this volume growth and margin expansion.
And if I could follow-up and forgive me if this is wrong, but I think your CapEx, as a percentage of sales, in your target is higher than it has been historically, is that right and does this plan I guess more broadly require more capital spending to improve operational efficiencies and warehouse and fleet et cetera?
So the range - so when you get to 2024, it's a little bit higher than it was, say in 2019. And so very similar I think to the point of maybe a tenth and that contemplates some modest increase potentially for some - beginning up some warehouse automation et cetera, but it is not an extremely heavy capital-intensive plan out there other than again some limited areas. So we expect to continue to generate strong cash flows.
Your next question comes from the line of John Heinbockel from Guggenheim. Your line is open.
So two things. Let me start with - you didn't give - you obviously talked about 1.5 times the market, you didn't give a specific revenue targets, but do you think 4% to 5% is that a fair growth rate beyond the recovery by '23-'24? And when I think about the 290, right, and incremental margin, what's the fair incremental margin on whether it's 4%, 5%, 6%, is it a high-single digit or is that too high on revenue growth?
Morning John, this is Dirk. Good question, I think that - so the reason we stayed away from specific numbers is that's more feasible and don't want to be accurate during a more stable period, in a period of recovery like this. Really what our focus is relative to what the market does and it's really growing with especially our key target customers of the restaurants, and within there, especially the independents, meaningfully faster as we have done. And then at least that market with the target customer type.
So although we haven't given a specific number, that really is - it's kind of indexed to how Technomic is calling for the outlook and would expect again meaningful growth on that. So no it's not a specific number, but that's how we thought about why we're focused on relative to the market and others.
Yes. And maybe a follow-up on that and then turning to my last question. Again when you think about it look at that 290, right. And I know it depends, right, if it's drop size, the margin is higher, if it's new account wins, it's lower. But just as a thought process, how do you guys think about incremental margin on new business that obviously has to be greater than the 3.5% that you set out today? And then lastly the 325 of gross profit, right, if you broke that down, I think procurement and mix is probably the two biggest components, is that heavily skewed to procurement, is it maybe two-thirds procurement and one-third mix or what's the biggest bucket in the gross profit dollar improvement?
Sure. So on the volume growth, we look at your point - we do look at new volume higher than our overall EBITDA margins, it really is dependent on the specific customer types, as you remember, our independents were the most profitable on healthcare and hospitality. But the chain business that we brought on has been meaningfully more profitable than that we've had in the past which has allowed us to be more opportunistic with our growth there. So we do expect it to be higher than our overall EBITDA number.
With respect to your gross margin, you're right, procurement is a meaningful part that is within there. I think the other two things that I would call out and talk about that at least one of them Andrew talked about is pricing and customer profitability optimization. So some of it is from the tool that he talked about, some of it comes from the success that we are have and expect to continue to have with lower margin, large customer improvements.
And then the third piece is around logistics. So our inbound logistics, optimizing that's another form of cost of goods, but it's about optimizing our inbound cost of goods and that is a key focus areas for us as well. So those are the key largest pieces of it.
Your next question is from Peter Saleh from BTIG. Your line is open.
Great, thank you. In 2021, you guys had about a 15% reduction in your assortment or the SKU rationalization. Just curious if you elaborate a little bit on, is that part of the plan going forward in '22, '23 and '24 to get to your EBITDA targets, do you anticipate reducing the SKU counts even further or that the most we're going to see at 15%?
So we do anticipate further reduction in the assortment over the course of time and that helps in a number of ways, that helps provide better service to the customers by reducing the volatility that you see typically in the slower moving part of the tail and it also helps streamline operations, which helps contribute to improved distribution cost per case.
Are there any targets on that in terms of should we expect you guys to be 30% lower or 25% or anything that we can hang our head on?
Yes. We - obviously, we have our internal targets, but we're not prepared to discuss them on this call.
Understood, okay. And just lastly for me, is the private label expansion also part of this strategy, I mean, what do you expect to be in 2024 in terms of the private label mix versus where we are today?
Maybe I'll pass that to Andrew. He is really driven the EB growth of the last few years. So Andrew, how would you answer that.
Yes. Thanks for the question, Peter. I think we have a tremendous focus on growing our EB penetration, it's something we made great progress on pre-COVID and supply interruptions sort of stalled our progress, but it's great to see in Q4 resumption of pretty strong year-over-year growth and we anticipate that continuing to be an important part of our strategy over the next three years and beyond.
Your next question is from the line of Brian Mullan from Deutsche Bank. Your line is open.
Okay, thank you. Just want to confirm, did you say adjusted EBITDA of about $1.5 billion in '23, I think I heard that so. Just if yes, using the high end of the 2022 guide it would imply you expect adjusted EBITDA growth of about 15% in '23 followed by another 13% or 14% again in '24.
So I think expecting outsized EBITDA growth next year when you're lapping over what is still a COVID impact environment right now. I think people can get their arms around that. But as far as '24, could you just speak to what will be the biggest driver of that outsized growth that you expect to take place that following year between volumes, gross profit, OpEx efficiency is one item the most important or do you have outsized confidence in as you look out to '24?
Thank you. A good question and yes you're correct, the $1.5 billion is what I noted for 2023. And I think that, to your point, the '23 have a lot of recovery, it still occurs whether it be the rebound from the - as you heard me talk about the meaningful amount of Omicron impact this year as well as healthcare and hospitality recovery, which is likely not fully back to normal this year. I think as we get further through that, we see more of the initiatives take hold across gross margin around the fresh accelerators of volume that Andrew talked about in the supply chain improvements there. So there's not a single thing that I would call out as opposed to continued execution and feeling good about our ability to deliver the $1.7 billion.
Okay, thank you. And then just a follow-up question on just balance sheet, capital allocation as it relates to the guide, you expect net leverage to get back in the 2.5 to 3 turns range in '23. It appears like you expect it to stay in that range for '24 as well. So if that's right, I'm wondering if there are any share repurchases contemplated and then adjusted EPS guide of $3.40 in 2024 if net leverage is flat from '23 to '24, I'm just curious what the plan is for the free cash flow?
Sure. Good question. You're right, so we're happy to be - expect to be in that range next year and then stay there. As I said, we'll explore other returns similar to we've talked about in the past, more likely, starting with share repurchases as we get closer to the range, we'll do that work. For assumptions here, we've assumed some levels of repurchases beginning and look forward to hearing more from us as we get closer to that range.
Your next question is from the line of Kelly Bania from BMO Capital. Your line is open.
Thanks for taking our questions and for all the color. Wanted to just ask about the fiscal '24 plan, the $1.7 billion EBITDA target. I guess what would you consider the biggest risk from an internal execution standpoint to achieving that, obviously aside from external factors, COVID and variants and so forth?
Yes. I think you've - good morning, Kelly. The main risks that we anticipate are more external and macro focused, whether it's new variance or economic conditions from an internal execution perspective, we feel very confident in our ability to execute. In part because of some of the things we've mentioned, we're in some ways a bit of a different company from three or four years ago, thanks to having prototypes some of these initiatives and the results we see, the impact of the operating model that I talked about and some of the talent that we've brought into the company.
Okay. And just another follow-up, I think I heard the algorithm beyond fiscal '24, 6% to 7% adjusted EBITDA growth. And just was curious, I believe the 2018 Analyst Day outlined 9% to 11% path. So just what are the big factors that lead to that being lower to the kind of prior algorithm?
Sure. Good morning, Kelly. Appreciate the question. So I think in the prior Investor Day that was more focused on the near-term and some of the opportunities there. Really the intent, since our focus right now is on executing this plan through 2024, which you've heard us say multiple times, we're excited and expect a significant value creation from it. The 2024, you're right, the 6% to 7% was really to give people a sense and post that we will obviously refine it as we get closer to there, but really to indicate more that we do expect meaningful growth to continue as we get beyond 2024.
Your next question is from the line of Jeffrey Bernstein from Barclays. Your line is open.
Great, thank you. Two questions, one just from a top line perspective, the market share gains you talked about 1.5 times the industry for the pure play restaurant industry. I was wondering obviously after moving target, how do you arrive at a target like that maybe what's the outperformance been in past years that assuming in the M&A maybe what do you assume the industry is growing anything to at least on a more normalized period what is the assumption that this 1.5 times against?
Sure. Good morning, Jeffrey. We - it's a blend of what we expect on the independent restaurant and the national chain side. If you go back to the four years leading to COVID, we pretty consistently performed at twice the market from an independent restaurant perspective and so the 1.5 is in part based on that experience.
And on the restaurant side, as we've talked about, we've had really good success. So on the chain side of the restaurant business, we've had really good success over the last couple of years. And when we look at our pipeline, we expect that to continue probably on the lower side of the 1.5, which is how we get to that blend.
Got you. And then the fiscal '24 EBITDA, you gave those three big pillars to drive that incremental gain over the next three years. I was wondering, if maybe you could provide some color on the sequencing of that, maybe what you see is the biggest near-term opportunity versus what you think is going to take be more of a back-end story kind of how you see those buckets of $200 million to $300 million each playing out over the next few years? Thank you.
Thank you. Good morning. I think when we think of it, really all three of the buckets we think of as a pretty steady stream. And I say that because a number of things that you heard, Andrew and Bill each talk about an example, maybe I'll build on those. So the example on whether it's routing for example, there is a shorter-term impact and then there's a longer-term impact that's enabled by additional technology and process.
Pricing has it similar with some of the things we're doing around pricing and customer optimization now, and then that's enabled further by the enhanced pricing tool that is an upgrade over the one that we've had in place for a number of years. So as we look ahead, really each of those, there isn't a hockey stick or extremely different phasing as opposed to we expect incremental value to come out of all of them over the three years.
Your next question is from the line of Joshua Long from Piper Sandler. Your line is open.
Great, thank you. Encouraged to hear about the private brand growth. Curious if you might be able to give us an actual base of our mix or however you're thinking about it and in terms of where you're are down with private brand, I think earlier, I heard you say something along the lines of 110 basis points of growth, but just curious with the actual mix of that segment of the business was?
So we were at about 34% of sales from private brand for this year, which we do include that in our 10-K. And I think that what I'll just build on what Pietro talked about earlier is that is an area that is both with smaller, with the independents as well as the national customers, an area of focus for us and a value driver in our plan for the next three years. If you remember, we grew, call it, 70 to 100 basis points in the multiple years leading up to it. We've talked about that we don't see a ceiling of a lot of opportunities so that remains an area of focus for us. And especially in this timeframe with the inflation because it tends to be a double win from a customer perspective, it's a better value, and for us, it is higher margin.
Great, thank you for that. And maybe on that inflation point, curious if you've seen any sort of abatement here of late or just kind of what your latest take is on the inflationary environment. And then as you've gone through your pricing work with consumers and laid out your tool. Any sort of push back or commentary in terms of just how your end consumers are being able to manage the inflationary environments as well?
So I'll start with the consumer side and then turn it over to Dirk in terms of what we expect. So as I mentioned in my prepared remarks, we've been very successful in terms of passing on inflation both to non-contract and contract customers. I think the general environment has made it possible to have conversations in off cycle that we normally wouldn't have. And you've seen that those increases reflected in menu prices as dine-out or take-out.
One of the things that perhaps a little bit different than historically is when we look at inflation in our channel relative to inflation in the grocery channel, it's been roughly the same. In fact, over the last few months, inflation in the grocery channel has been even higher than inflation in our channel. So we're not disadvantaged from that position, consumers FTE they may change a little bit the mix of what the based on inflation, but the two channels have kind of stayed consistent with each other.
Dirk, do you want to talk about the expectations going forward.
Sure. Thanks, good morning. I think when - so my crystal ball is probably going to be just as accurate as anybody else's since we're not quite sure exactly how it plays out. A couple of things I will tell you from the data points as we look at it is, the year-over-year inflation as we go back over the past few quarters, sequential inflation quarter-to-quarter has slowed each of the quarters, which is we think as a positive toward hopefully price stabilization.
We would expect inflation to remain higher here in 2022 with likely some incremental inflation here in the earlier part of the year and additional stabilization as we get further into the year. I think the thing that's hard to predict for anybody is it then just stagnated and stay at that higher level or do you see any kind of reduction in that going forward.
Great, that's helpful. Thank you. And then when we think about the labor front as well, excited to hear about some of the initiatives you have outlined on the labor front to support these longer-term targets. But curious if you could provide a little bit more color there and just in terms of what you're seeing how the pipeline maybe on the driver or the warehouse side is shaping up and any sort of other initiatives that are embedded to make sure you have the human capital side to support these targets that you've outlined today?
Yes, I think that, sorry, go ahead, Dirk.
As you said, maybe I'll start and then hand it over to Bill for any insights on the driver pipeline. But ultimately, as you heard Bill talk about, we will continue to be staffed in the fourth quarter and we didn't use a lot of temporary resources but even further reduce that in the fourth quarter. So very optimistic on the progress that we've been seeing there. But Bill can comment more specifically on drivers.
I think when we talk about inflation and sort of the wage inflation, we talked a lot about this last year and transitory has been a word that has been used in a lot of different ways. I think the way we talk from Q3 was the higher level of inflation, some of the temporary, some of it permanents, we'd likely transitory in the sense that we didn't think and don't think that becomes the new norm as opposed to some higher inflation and then we return to more normal levels.
So what we had estimated on top of the normal $50 million or so of inflation that we see for supply chain and given here is an additional $40 million to $60 million annual impact with a combination of wage increases and signing and retention bonuses. We had indicated that we expect most of that to be permanent, our outlook on the range and on the ratio doesn't really - hasn't changed since then. What I'll tell you though is, when we talked about an expectation for covering most if not all of that through margin improvements with lower profitability customers. Our confidence is stronger than ever that we're able to do that as we've continued to see good progress.
Bill, anything you want to add on or would you add on driver on warehouse staffing.
Yes, couple of key points, I would add. I would say like most supply chains, we've found ourselves behind in the first quarter of '21 on driver and warehouse staffing. We put a lot of very intentional work into how we recruit, how we hire, how we train intentional investments and sign on bonuses, wage adjustments to make sure that we're competitive and we saw the kind of the return on that work, which like Dirk said, we've come into 2022 fully staffed.
Specific to drivers, we don't expect the shortage of drivers to go away anytime soon which is why we stood up our driver training program, but we can take an existing warehouse worker or somebody off the street and put them through a fully funded driver training program and create our own CDL pipeline. We're going to stay really close to that. Like I said, we expect continued volatility on the labor front and we're going to make sure we're prepared to staff our business.
Your next question is from the line of Lauren Silberman from Credit Suisse. Your line is open.
Hi, thank you guys. So just the first, I believe you implied pro forma 2019 EBITDA was $1.45 billion. Can I confirm that's what you're saying?
Good morning, Laura. Yes that's correct. When we talk about pro forma, it's been in the context of how we've talked about it with you other analyst/investors that contemplates the synergies, inflation, new business wins et cetera and that's what we've then estimate it at.
Okay. So looking at 2023 EBITDA of $1.5 billion, which is slow recovery of volume plus the $180 million in cost savings and then understanding some of the incremental investments that you guys have talked about. Can you walk us through the difference between the 2019 pro forma $1.5 billion and the 2023 $1.5 billion? Just trying to wrap my head around what some of those dynamics are?
Thank you. It's many of the same elements we've talked about it. The combination of realizing a number of the synergies from the transactions, it is incremental with volume recovery, it is some of the wins with national sales, it is multiple years of cost inflation, it is the cost savings that you've mentioned. So really is all those things there and that's the way I think the way you maybe started is the way I would think about it as it's maybe not getting all the way back in the exact same way, but it's basically back to where the business was and sort of the platform for growth there beyond.
Okay, got it. On the gross margin piece, I understand there's some noise with the actual gross margin percentage given the inflation and how that the numbers work. But can you talk about what's embedded in your gross margin percentage expectation for - if you expect to get back to 2019, I think 17.8%?
Sure happy to do that. I think that when we look ahead, we know what's harder to predict is in the period of inflation that we're in what happens exactly on that and that really drives as you just alluded to what, how gross margins versus OpEx as a percent of sales play out, it doesn't change EBITDA impact. So I'd rather stay away from that, specifically what I will say though is, specific to our - when we look at our plan for 2024, what we expect to do is to get EBITDA margins sort of at or near 2019 levels in 2023 and then exceed those EBITDA margin levels in 2024 through the number of initiatives around operating efficiency as well as gross margin expansion.
Okay, thanks. And then just my last question, can you give us an update on the business mix for 2021 across the different channels?
Sure happy too, and I'm going to actually...
Lauren, it's Melissa Napier. Is that - do you mind if that's something that we can follow-up on with you afterwards. We still have a lot of people in our queue that we want to get through.
Thank you, guys.
Your next question is from the line of Edward Kelly from Wells Fargo. Your line is open.
Yes. Hi everybody, good morning. Firstly, I just wanted to ask about the 2022 outlook, the $1.25 billion of EBITDA which obviously has been already talked about where it's below 2019 pro forma levels, but there is a lot of optimism around sort of like spring-summer period, you've obviously talked about share gains. I'm just kind of curious as to why volumes wouldn't get back to 2018 levels earlier than maybe the back half? And then from a cost perspective, how much of like unusual costs are still sitting in this 2022 guidance number just really trying to bridge to like the '22 number being below the '19 number, value amount that it is still?
Sure Ed. Good morning, good question. I think that couple of things I would highlight, one is really that when we, to your point, with that 1.2 to 1.3 as I commented that, absent another COVID wave like Omicron, we would expect to be at the higher end of that range. And so I think that and within that we've embedded roughly $80 million to $90 million of impact from Omicron, so that gives you a jumping point from where sort of that range is plus the additional amount.
So we aren't going to talk today about specific amounts that we've embedded in there, but I think it is not an insignificant amount in the first half of the year especially as we're still working to get productivity back to 2019 similar to a number of our peers.
I think that the thing that we are expecting is we expect steady improvements in our EBITDA versus 2019 as the year goes on and expect to make meaningful progress. And I think what you see from there is if we expect which we are roughly $1.5 billion of EBITDA next year, that means a healthy exit rate for this year.
Dirk can I add a little bit in terms of some of the points I had made in terms of volume and supply chain and why the ramp that perhaps is not what you would have expected. So talk about volume first, so we're in very good place from a restaurant perspective, hospitality and healthcare as we said in the past, we do expect volume to recover, but the timing is a bit uncertain, right, I mean healthcare has flat-lined a little bit driven by senior living.
We expect demographic trends are extremely favorable, but it will take time for healthcare to recover. And with hospitality, similarly, we've seen a recovery on the leisure side of things, there's other parts of hospitality that have not yet recovered and will take some time. So that's a little bit of the volume story.
On the operational expense side primarily in distribution. As Bill mentioned, the percent of workers in our buildings, and you've heard this from others in the industry is abnormally high and it just takes time to get those new associates to the level of productivity that then drives meaningfully lower cost per case. And those two factors in addition to the Q1 Omicron impact that Dirk referred too, what is driving perhaps a ramp that is not one you might have - one might have modeled or expected.
Okay. And then just a follow-up Pietro for you, can you maybe just take a step back for us and talk about some of the strategic adjustments that we're making to the business. So there's been talk maybe about the CLO in the press, obviously there has been a pressure, could use some more supply chain management muscle. Strategically right, are you making any adjustments to things that you plan to do [technical difficulty] pressure can create to rethink, right. So I'm just kind of curious what's changing on that front?
Sure. And maybe what I'll do add is add a little bit of color to the three things I talked about earlier that are really increase our level of confidence in the plan, and I said to Kelly earlier, reduce the execution risk.
So the first is this operating model, historically, when we drove an initiative, things might get regionalized or customized in a way that kind of slow things down and what these operations and commercial excellence teams have set inside Bill and Andrew's area is they drive best practices, and for example, we have, I call them, the assortments are Brett Wilson and that's all he does and he works with the field to put that in place. And so we've seen progress on those initiatives and standardization unlike what we've seen before. So that operating model is really critical, that's been extremely well received by the field. So that's number one.
Talent, so you've heard from Bill today, Bill has on his team new logistics person, new continuous improvement person, new technology person comes from Amazon. So the people, the new folks on my team have brought with them some really good talent and that's going to change the trajectory.
And then the third is having more of an agile approach when we launched these initiatives, making sure we prototype and iterate, get customer feedback, that's embedded in the operating model and that's something else that is we're going to adopt. And all three of those changes the talent, the op model and the agile approach is, we really put in place early in 2021 and based on reflection of our results leading to COVID what we could do to improve our results from there.
Your next question is from the line of Mark Carden from UBS. Your line is open.
Thanks a lot for taking my questions. Building on some of the prior questions from the 1.5x growth on the restaurants. We're seeing really all the major players anticipating pretty considerable levels of growth on that front. Are you expecting your share gains to come primarily from smaller distributors with fewer resources? Are you seeing these players facing more pressure given the latest COVID wave or would you expect some of the gains that's come from some larger players as well? Thanks.
So thanks for the question. Maybe I'll pass it on to Andrew who is again responsible for driving our commercial initiatives on the local side of the business and the emphasis on kind of new versus existing customers. Andrew?
Yes, thanks. Thanks Pietro and thanks Mark for the question. Yes, as Pietro says, we really have a balanced approach to growing our case growth across not only obviously significant new customers but also improving our penetration of existing. And both are equally important as is preventing churn within our existing customer base.
So all three of those things in balance are going to be the ways in which we go after the business, and our focus is really on delivering customer value more than specifically targeting one competitor or another as we look to drive that business forward.
And then can you remind us of where online penetration stands today. As we hopefully emerge from the pandemic, do you think there is still much room to grow penetration in the near- to intermediate-term or are you just getting closer to maturity on the proportion of your business that can - you can do digitally just given your head start on that front? Thanks.
Yes. So we're at 80% today and we still see opportunity to grow that. In fact, we are working on our next release for our digital platform, which is being piloted right now and been very well received. And as I talked about further supplementing that is our marketplace, which helps creates an added reason to go to our digital platform.
Your next question is from Alex Slagle from Jefferies. Your line is open.
Want to follow up on some of the previous comments around the growth expectations relative to the market. I think we kind of know the reasons, but I mean those other non-restaurant segment kind of what makes it so hard to outpace the market there and what are some of the opportunities to maybe see some better share gains in those categories?
Good question. I think that when we - maybe I'll focus primarily on when you talk about the non-restaurants and healthcare and hospitality which are our target customer types, because there are a number of things that show up in the marketplace that are not our focus.
So with healthcare and hospitality, we have a strong presence there, we have a differentiated offering with people. So our expectation there is to grow a little bit above the market in those spaces where it's our focus area and other areas like local school, so K through 12 is an area where it has added complexity, they tend to not be as profitable et cetera and we would expect to grow below the market there.
So the way to think about it is even though it's at market, it's an expectation of above market and are more attractive target customer types and below market and those that are less attractive in order to optimize the value that we generate.
Makes sense. And on the new national business, how much of this $1 billion that you gain or won in '20 and '21, how much of that comes online in '22 in terms of the magnitude, I know you hadn't really had the staffing all in place so maybe that held it back some in '21?
Not a lot of it. Most of it has been in some through '20 or '21. The other thing on the national I guess that I would just add in is that the thing that we're excited about is our pipeline on these attractive national customers is just as strong for this time of year as it's been the last two years. And so when we talk about just attractively adding in especially healthcare hospitality chains. We're bullish about our ability to continue to attract net new customers.
And just a quick clarification on the '24 guide that assumes accretive tuck-in M&A, is there a magnitude of accretion baked into about $3.40 EPS target?
It does not assume tuck-in M&A. So this is an all-organic plan and just because we've talked about being more opportunistic, what we decided to focus on was the organic and the way we would deploy our cash. And in those cases, if we have the right tuck-ins that come in, they would be incremental.
We have time for two more questions. Your next question is from John Ivankoe from JPMorgan. Your line is open.
I was wondering if some of the conversations with restaurants may have shifted to more value-added products that would allow them to reduce the use of labor further in their own operations or whether using exclusive brands or whether using manufacturer brands, if that is an opportunity that you have, I guess specifically now and whether an opportunity like that would fit into some of the SKU or assortment reductions that you've discussed?
Good morning, John. Yes, so one of the major thrust of our school program has been on labor saving products, we believe that with the resources that support those the salespeople and the restaurant operations consultants is some that truly distinguishes us versus our competitors in the industry and one that has been really welcomed by our customers.
And in terms of exiting - in terms of reduction in the overall assortment that you plan to offer. I know you've quoted some percent there?
Yes so, as I said earlier, John, really good success this year probably better than a number of years combined leading into this year and a lot of that credit goes to the operating model we put in place. We have goals to further optimize the assortment focusing on the duplication that exists within a DC or some of the harder to manage tail items with the lower value customers where we don't necessarily get the return from them and that we can build strong on the supply chain side harder. Again not ready to disclose any specific goals but definitely meaningful reduction as part of our playbook going forward.
Your next question is from Jake Bartlett from Truist Securities. Your line is open.
Thanks for taking the questions and sneaking me in here. My first was on really the trends what we might think of transitory costs in 2021. We've heard from others as well and there's over time, there's maybe temporary staffing costs, there's bonuses that I think probably [technical difficulty]
Jake you cut out. [Operator Instructions] Your line is open, Mr. Bartlett.
Great. Sorry I'm not sure what happened there. The question is on the transitory costs that I would have thought would be in 2021 and others have talked about significant costs around over time, the bonuses you talked about, but do you see any kind of something that wouldn't recur or maybe temporary staffing agencies using those, but where is that reflected in the spreads and looking at the bridge from 2021 to '24 EBITDA. Would that be captured in OpEx efficiencies as I just don't see kind of a bar there what I might expect as you kind of lap some of those kind of one-time costs?
Sure. Good question, Jake. I think that - so yes, it is in the OpEx efficiency line there. I think when you think about our transitory temporary type of costs as our peers have talked about it. The level that we incurred in the fourth quarter is not dissimilar to theirs, call them in the neighborhood of $40 million, maybe $50 million. So very similar and that comes from whether it's temporary staffing, the additional training hours, the signing and retention bonuses, all those kinds of things as you would think about in there and that we would expect as you called out to go away, as we continue to get our individuals that have been on more productive and staffed up to a more normal level as we go ahead.
Great, thanks. My next question is about the gross profit per case. Obviously very strong I think you saw this in 2016, it seems like that's been driven in part by just supply chain disruption driving really strong pricing power for you and your peers, but how sustainable is that? I'm thinking about, I mean that could be a risk given especially if we see some deflation from product cost, but how confident are you that what looks to become an outsized gross profit per case you really can continue long-term?
We do think that gross profits do stay stronger over the longer-term than they were historically in part because of meaningful portion of this inflation is likely to stay, but also labor costs are different than they were a few years back. So as you pointed out, it's hard to say exactly the amount as we see what plays out with inflation, deflation. But I think over time we do expect through the processes, the margin improvements we've had from individual customers et cetera that we expect gross profit to remain stronger and TBD on exactly where it lands and the same I think would be the case for the broader industry.
Great. And then my last question is just on the customer segments, and looking at a chart on the Page 16, looking at those lines and as I eyeball it, looks like kind of all other which I believe in Foods chain restaurants a big chunk of it really is negative - reversing of wrapping a negative and it really accelerated sharply on a two-year basis.
One, it seems like maybe those numbers are kind of not adjusted for the operating week in the fourth quarter '21 and are in '20, but just if you could talk about the trajectory of that big slice of the customer base, really what's happening there. I would have thought that some of the gains that the $1 billion in new business would have come in that customer type as well kind of help each other to grow cases there?
That would be - so you're right, that would include some of the chain and that would help that. The other thing that, again as that I would call out is, school volumes have continued to remain lower than they were before. I think the other thing is it does cloud that as you go through 2020 into really the middle of 2021 is some of the retail support business that we and others picked up. And in our case, we picked up, and most of that had temporary in the sense was gone by the end of 2020, we did have some portion that remained kind of in through the earlier part of Q3 and that is fully gone now. Those are the main reasons for it.
I would like to turn the call back to Pietro Satriano.
So thanks everyone for tuning in. Appreciate all the questions. Hopefully, you have the same level of excitement and energy and a better level of understanding about our plans. Again apologies for the delay earlier today, and we look forward to continuing our conversations.
This concludes today's conference call. Thank you for participating. You may now disconnect.