US Foods Holding Corp. (USFD) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentleman, thank you for standing by, and welcome to the US Foods’ Fourth Quarter and Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. After the spear presentation, there will be a question-and-answer session. [Operator Instructions] With that, I would now like to hand the conference over to your first speaker, Ms. Melissa Napier. Thank you, and please go ahead.

Thank you. Good morning, everyone. Welcome to today’s earnings call. I’m joined by Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an overview of our results for the fourth quarter and fiscal year 2020. We’ll take your questions after our prepared remarks conclude. Please provide your name, your firm and limit yourself to one question. During today’s call and unless otherwise stated, we’re comparing our fourth quarter and full fiscal year result for the same period in fiscal year 2019. Please keep in mind that the fourth quarter in fiscal 2020 included 14 weeks versus 13 weeks in 2019, and full fiscal 2020 results included 53 weeks versus 52 weeks in fiscal 2019. References to organic financial results during today’s call exclude contributions from Smart Foodservice, which we acquired in April 2020. For the Food Group, our organic financial results reflect contributions from September 14, 2020, which is the one-year anniversary of the completion of the acquisition through the end of the 2020 fiscal year. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2019 Form 10-K and last quarter's 10-Q filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied 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. I'll now turn the call over to Pietro.

Thanks, Melissa. Good morning, everyone. I hope everyone's year is off to a good start. I'd like to start by thanking our 26,000 associates, whose commitment to serving and helping our customers during what has been almost an entire year of the pandemic has truly been second to none. The results we are covering today are only possible because of their hard work. I'm going to begin today's remarks on slide 2 with a brief summary of the three main topics we are going to cover. First, even though we are very pleased with how well our Great Food. Made Easy strategy has served us over the years, we continue to develop and enhance our capabilities so that our strategy can have an even greater success over the coming years. Second, we have taken several steps to position the business for a recovery, and we are confident that these actions will allow us to continue to gain market share as the recovery takes shape. And third, the changes we have made to our cost structure and the new business we have won over the last eight months has strengthened the future earnings power of the business. I will cover the first two topics and Dirk will cover the last one. Moving -- 3. Our Great Food, Made Easy strategy has proven to be enduring, but this does not mean we are standing still. We are continuing to evolve our capabilities to further improve the customer experience and take advantage of future growth opportunities. Let's start with innovative products, which is at the heart of Great Food. During COVID, there was a shift in the products that customers rely on the most, products that travel well and packaging that builds trust with consumers. We adopted our Scoop platform to quickly jump on these trends and results from our last two Scoop launches have been in line with prior pre-COVID launches. Even with the pandemic, consumer interest for more sustainable, healthier choices continues to grow. That's why the theme of our spring Scoop, which launches in two weeks is Hungry for Better. The lineup features: new products under Serve Good, our growing lineup of sustainably sourced products; a range of plant-based meat alternatives for burgers and tacos; and a range of functional food with ingredients that introduce a healthy twist to some of those favorites. Continuing with the theme of product innovation, as we have mentioned in the past, one of the big benefits of the acquisition of Food Group is the ability to leverage some unique capabilities in Center-of-the-plate and Produce, two categories that drive a higher basket and greater stickiness. Having made good progress on the integration front, we are now beginning to introduce these Food Group capabilities into legacy U.S. Foods market. And while it will take some time to roll these capabilities out across the country, we are excited about how these capabilities will accelerate the opportunity to grow share of wallet in those two categories. Moving to technology, which is at the heart of making things easy for customers. The consumer shift to more digital and more off-premise dining has made our technology and e-commerce offerings even more important than they were before. For example, 68% of consumers say they are more likely to purchase takeout than they were pre-COVID. As a result, we are seeing a corresponding increase in demand from operators for applications that help them ride the growth in off-premise dining. Our partnership with ChowNow is a good example. We also continue to invest in our technology platform, having recently improved our product search capabilities and our analytics platform to allow us to drive more targeted pricing and product recommendation to customers and to our sellers. The last set of capabilities on the right that we are evolving is our operating model. One of the key learnings from COVID has been how we can operate more effectively as a company. We've learned to use technology to leverage individual process experts to more quickly adopt its practices across the country. As an example, we recently rolled out a new warehouse pick process in four weeks, something that might have taken us four months in the past. As a result of these learnings, we are refining our operating model by shifting some responsibilities and resources from our region teams to our centers of excellence. These centers of excellence have responsibility for identifying and deploying best practices across the country and this shift in resources will result in a more consistent execution. In conjunction with this shift, we have reduced the number of regions from six to four in the second quarter. This does not change the cost savings that we announced in August, but is simply a logical evolution of our operating model informed by the experiences over the last 12 months and they end up providing more consistent execution. Also in conjunction with this shift, we are consolidating merchandising and local sales under Andrew Iacobucci. Andrew has been overseeing these two functions on an interim basis for the last 12 months, and so now he becomes our Chief Commercial Officer. Also critical to advancing our strategy has been the capabilities we now have access to as a result of the acquisitions of Food Group and Smart Foodservice. So, let's move to Page 4 for an update on the business performance and integration, starting with Food Group. Integration and synergy capture are on track. So far, we have completed two warehouse system conversions, and we expect to have the third completed by early next quarter. The conversions to date have gone very well, and we expect to have the remainder completed in the second half of this year, in line with our original plan, despite some of the early delays from COVID. We are also on track to achieve our previously announced $65 million in annualized synergies and the business is performing in line with expectations. The Smart Foodservice business continues to outperform our delivery business, and we continue to be excited about the future growth opportunities in the cash and carry space. You will recall, part of the strategic rationale for the acquisition of Smart Foodservice, is the incremental sale, it drives to our delivery business. To help capitalize on this opportunity, we will rebrand all Smart Foodservice locations to the US Foods CHEF'STORE brand in the first quarter. This rebranding will also facilitate our entry into new geographic markets, where US Foods has an established presence. For 2021, we plan to open three to four stores, primarily in existing Smart Foodservice markets. But we do expect the pace of store openings to pick up in future years, as we expand the footprint into new geographies. I'm now on Slide 5, where I would like to close with a quick overview of how we are positioning our business to gain market share as our industry recovers. In prior calls, we talked about the $800 million of annualized new customer wins with larger customers in 2020. We feel good about the 2021 pipeline and our ability to continue to profitably gain market share with larger national customers. To prepare for the expected increase in case volume that we foresee in the coming quarters, we have started to hire warehouse, transportation and sales associates in anticipation of the recovery. We are also investing in inventory to support our customers while partnering with several of our larger customers to understand the demand curve they are seeing in their business. And lastly, the evolution of our capabilities and our operating model, that I discussed earlier position us to emerge from COVID as a stronger and more effective business. I would now like to turn the call over to Dirk, for a discussion of our fourth quarter financial results, and how we have strengthened the future earnings power of our business.

Thank you, Pietro, and good morning. I'll begin on Slide 7. I'm going to cover a few highlights for the quarter, before we discuss our thoughts on 2021. Melissa mentioned this earlier but just as a reminder, our fiscal fourth quarter and full year 2020 results do contain an extra week, so the fourth quarter 2020 results reflect 14 weeks of activity while the full year results reflect 53 weeks. As we discussed at the ICR conference in January, case volumes slowed in the last half of Q4 as COVID cases increased and additional restrictions were put in place on in-person dining. We have seen an improvement in restaurant and overall volume trends in January, which although early on, is encouraging. We've also successfully onboarded 99% of the $800 million of new large customer wins that we discussed last quarter and Pietro mentioned. Our pipeline remains robust and we expect to continue to win new business, resulting in further share gains. Typically, in our fourth quarter, we see a meaningful seasonal gross profit margin lift based on changes to our product mix, some of which from holiday parties and events. This year, we did not see that margin lift and our gross profit rate was in line with the third quarter. Lastly, our Q4 operating expenses on a 13-week constant basis increased compared to our third quarter 2020 expenses. As a reminder, the third quarter OpEx benefited from a $17 million non-recurring real estate gain. During the fourth quarter, we also experienced higher healthcare and incentive compensation costs. On the healthcare side, we typically see an increased cost in the fourth quarter, and this year's cost increase was more than the normal seasonal increase as associates who are not able or chose not to schedule procedures earlier in the year, did so in Q4. On the incentive comp side, mid-year 2020, we developed a revised incentive plan that resulted in some additional compensation costs in the fourth quarter. Distribution costs for the quarter was in line with Q3. However, as Pietro noted, we do expect distribution costs to temporarily increase in the first half of 2021, as we continue to increase hiring in warehouse and delivery ahead of the recovery. Moving to slide eight. Sales inflation for the fourth quarter was 2%, similar to the past few quarters and remains in a very manageable range. The 53rd week contributed 5.3% to our fourth quarter net sales. Net sales for the quarter, excluding the extra week, were in line with Q3 net sales. Adjusted gross profit margin for the fourth quarter decreased approximately 110 basis points from the prior year, which is similar to the Q3 change versus prior year. Adjusted gross profit margin in Q4 did not have the typical seasonal margin improvement, as I noted earlier. Adjusted operating expense in the fourth quarter increased 90 basis points from the prior year, compared to about 50 basis point increase from prior year in Q3, when you exclude the Q3 non-recurring property gain. The 40 basis point increase in our adjusted OpEx, as a percent of sales, from Q3 to Q4, ex the property gain, was primarily the result of the healthcare and incentive comp factors I discussed. As the recovery in case volume occurs, we do expect the negative mix impact on our gross profit and the negative impact of OpEx deleverage to improve and expect the current impacts to be transitory. On slide nine, adjusted EBITDA was $174 million for the quarter, including approximately $8 million for the extra week. When you exclude the real estate gain from our third quarter results and the benefit of the extra week in the fourth quarter, adjusted EBITDA declined $26 million in the fourth quarter compared to the third quarter. This is primarily due to the OpEx items I just noted. Adjusted net income was $10 million and adjusted diluted EPS was $0.05 for the fourth quarter. Pietro discussed how we're positioning the business for recovery, and this remains our primary focus at the present time, and we expect our financial results to significantly improve as case volume continues to recover. I'm now on slide 10, where I'll spend a few minutes on our outlook for 2021. We remain confident that case volume will recover as COVID cases decline, restaurant restrictions are lifted and vaccine distribution expands. Since the timing of the recovery remains uncertain, we're not providing financial guidance for 2021. Regarding synergies, we did achieve the $10 million of Food Group synergies we were targeting for 2020 and remain on track for the full $65 million of synergies by the end of 2023. We're also on track to achieve the $20 million of Smart synergies by the end of 2024. Our liquidity position remains strong with over $800 million of cash on hand and over $2.7 billion of total liquidity. Our revolving credit line remains largely undrawn. And as the recovery takes shape, we expect to use the excess cash on our balance sheet to reduce outstanding debt. The cash flow of our business remained strong, and in 2021, we'll be focused on investing in our business and reducing debt. Delevering is a priority in the coming years. In 2020, we reduced our capital spend to those items essential to the continued operation of the business. At this time, we are planning to resume a more normal level of capital spend, focusing on building and expansion projects that we slowed or paused last year in addition to continuing to invest in our technology platform. The resumption of these projects will help drive growth as the recovery takes shape. Moving to slide 11. The actions we took during 2020 have strengthened the future earnings power across our business. We are continuing to focus on profitably winning market share with new business wins across small and large customers. As our case volume with small and large customers recover, we expect our gross profit margin will improve as well. This is largely due to the expected improvements in our customer mix. When you combine this with a $180 million of fixed cost reductions, most of which we expect to be permanent, we expect the business to likely operate a higher EBITDA margin post COVID. Finally, our business continues to generate strong cash flow that will be used for future debt reduction and to further improve the earnings power of the business. We generated over $400 million of operating cash flow even in a pandemic impacted fiscal 2020, demonstrating the resiliency of our business. Operator, we can now open the call for questions.

Thank you. At this time, we would like to take any questions you may have today. [Operator Instructions] Our first question comes from the line of Lauren Silberman from Credit Suisse. Your line is open. Please go ahead.

Hi, thanks for the question. So with light now at the end of the tunnel, can you share how you're thinking about the growth strategy in a post-COVID era and the composition of that growth across new business, wallet share expansion, M&A? Where do you see the most meaningful incremental opportunities today relative to your expectations pre-COVID?

Sure.

So in many ways -- sorry, Dirk. In many ways, in terms of where we anticipate the growth, as I said, it's – our strategy has served us well, and the strategy talks to both the types of customers we target and the capabilities we've developed over time, and so independent restaurants remain an important focus point for us. As we've talked about in prior calls, there's perhaps a small shift within that, a micro shift in terms of menu types, in terms of geographies, urban to suburban. But independent restaurants, we believe, have – will continue to thrive in the post-pandemic era. We have, as we've talked about, increased our emphasis on some of the larger customers compared to the past. This was motivated by the opportunity we saw and they were looking for in terms of being served by more established customers, as well as an attractive margin profile associated with these customers. And then in terms of healthcare and hospitality, we expect those two customer types to recover, healthcare probably being closer in and hospitality probably taking a little bit longer to recover compared to the other segments. Q – Lauren Silberman: Are there any incremental growth opportunities do you see today relative to what you were forecasting or expecting kind of pre-COVID? A – Pietro Satriano: So the large customer space, as I think I've said has proven to be kind of fertile ground, probably more than we thought pre-COVID and we are taking advantage of that opportunity. That's the profitable business coming in. We've talked historically about our foray into retail, the foodservice side of retail, which we've got a couple of pilots going on across the country, which look promising. And then the third is cash and carry, we've always talked about cash and carry as an important channel for growth. It's a higher-margin profile than the core business. It's growing more quickly. It helps grow share wallet. Obviously, with the acquisition of Smart Foodservice, that presents an opportunity to accelerate that growth. And what we've seen from that channel is some exposure to the consumer side of things that has helped keep comps relatively positive relative to the core business. And I think some of that consumer business will stick, but that is kind of icing on the cake. That's not the main reason for pursuing that business. Q – Lauren Silberman: Great. Thanks so much.

We have our next question comes from the line of John Ivankoe from JPMorgan. Your line is open. Please go ahead. Q – John Ivankoe: Hi. Thank you. A couple of related questions, I think. First, can you talk about kind of the state of the addressable independent restaurant market? I mean, obviously, there's so many different numbers that are out there. There are obviously very different ways of even defining what an independent is. But if you can – I mean, I guess, as we're in the middle of February, just kind of give your -- best guess year-over-year of the percentage of addressable independent restaurants that you think are going to come back to business basically this spring or summer when the vaccine takes? And then secondly, can you shed some light in terms of how desperate your performance is across markets, comparing for example, the southeast to the northeast or the – or California, just in terms of what you're seeing is maybe green shoots or leading indicators in terms of how the consumer will come back and use restaurants and specifically U.S. Foods market share gains within those markets? Thanks. : Okay. And I'll tie the two questions together, because they're related. And the headline John is that, the outlook is very promising for independents. We – in January we saw – so Dirk talked about, December being a softer month than the run rate in the fourth quarter. What we're seeing so far in January, in terms of volume, in terms of customer count, in terms of basket size, we're seeing trends that are not only better than the exit rate in December, where we saw that softness, but better than the earlier part of the fourth quarter. So the recovery, kind of, continues to happen, and that's driven by some of the things you mentioned in your question. Some of the southern markets with fewer restrictions continue to operate very close to last year levels. Then we've had a couple of regions, the Midwest, California reduce restrictions over the intervening period. And in both those regions, we've seen a pretty dramatic and quick increase in sales as restrictions have reduced. So from a metric perspective, things continue to progress on the recovery front and as well as we see different geographies have jurisdictions, we're seeing them recover. And the last thing I would add is the sentiment amongst independent restaurant owners is positive. They see the potential impact of the vaccine. Good weather, despite the horrific snowfall we had in Chicago, yesterday is on the horizon. And the aid from the federal government at the end of December has also helped give a lot of independent restaurants a new lease on life.

And if I can ask the question, I'll just ask it very directly. I mean, is the decline in independent restaurants, is it – do you think at the end of this, is it down high-single digits? Is it down 10% or 20%, or obviously, you can use other numbers that are even higher to quote some certain industry sources. I mean, are you kind of honing in on a number? And then just kind of comment on what kind of share you think you can take on what? It certainly is going to be a smaller number of restaurants year-over-year on the independent, but how much do you think you can perhaps outperform the overall industry?

Yes. So to be honest, John, I don't know that we know for certain. So we expect, ultimately, in our sales, as a result of both the recovery and our continued share gains. We expect independent restaurants to account for same amount of business as it been pre-COVID. At some point, we just can't say – we don't have a crystal ball to say what quarter precisely it will be. The number – the restaurant count, I think is what you're referring to, may very well be lower for some period. I think a lot of what's published is forecast of the future. What we see in our data in terms of actuals is, as we've talked about, restaurant count is down slightly over prior year and not nearly anything like what's being reported as forecast. So we think the signs are there for a healthy recovery of independents, and we think ultimately it recovers fully to what was pre-COVID for our business anyhow.

Thank you so much for the time and color.

Yes.

We have our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open. Please go ahead.

Great. Thank you very much. Two questions. One, just following up on the last one, but I guess, thinking about it more from your competitors on the Foodservice distribution side rather than the customer side. Just wondering if you could share some thoughts on the – your small and mid-sized competitors, especially as you talk about share gains and presumably, the opportunity you see there, whether or not you're seeing closures or opportunities there. And with that as a backdrop, any thoughts on M&A, especially as you talk about excess cash, primarily for debt paydown? I'm just trying to get your sense for the foodservice distribution side of the landscape and then, one follow-up.

Okay. So I'll talk about the state of competitors, I'll let Dirk talk to part B of your question on, return of capital. So, there really hasn't been much of a change in the competitive landscape, since this summer. I think, if you go back, nine months, I think we all expected more shakeout from smaller and regional competitors, basically, the speed of the recovery, right? If you go back to our summer earnings call, where we showed how quickly growth was coming back. That has benefited not just us, but also some of the smaller and regional players. So, I think the shakeout that we potentially anticipated, hasn't happened, and that's just because the industry has recovered more quickly, than it has. Our share gains, we know exactly where share gains come from, when it comes to larger customers. And as I've said, they've typically come from, the regional players for a couple of reasons. One is, our standard operating model across the country, just makes it easier for those larger customers to do business. And they see an accessibility that they may not see in smaller players. When it comes to the smaller customer wins, on the street, it's hard to tell where those come from. Dirk, do you want to talk about the second part of Jeffrey's question?

Sure. So I think, Jeff, as we've talked about before, our focus is on integrating the two acquisitions that we've done. I think, because what Pietro commented, that we haven't seen the fallouts, really what our team has been focusing on is, even though, there haven't been closures or many distressed sales going out of business, et cetera, there are still areas where our teams locally continue to hear about different operators that may be having inventory challenges or staffing challenges, et cetera. And outside of buying someone, there's still an opportunity to gain share in those markets because of our strength, our product offering, et cetera, that can open the door to those customers. And we've been focused on taking advantage of that. And I would expect us to. And so, it's really that combination of organic growth and the successful integration of our two deals are the primary focus.

Got it. And just as a follow-up, Dirk, on that exact point. I mean, it seems like in your prepared remarks. And even just now, you mentioned, I guess, the challenge that some of your peers are facing. And I'm guessing, you guys are as well, with presumably, sales weakness in the short-term. And costs elevated ahead of the recovery specific to -- I think you guys talked about inventory, and a variety of labor aspects. So, I just want to make sure that's a fair assessment that we're in some kind of unusual timeframe, where the sales aren't recovering yet, but the costs are quite high. I'm just wondering, how we should think about that, in terms of sales and EBITDA, whether it's just this quarter or the first half of the year, kind of the magnitude of the mismatch potentially. Thank you.

Sure. And you're right. It's a different kind of unusual, than it was last year, where now, it's a matter of managing through the challenges that are still in existence. But, I think, as Lauren put it, the light at the end of the tunnel is closer. And so it's managing for that recovery. And so, as a result, likely, the next couple of quarters, become a little bit choppy as far as sales and staffing. And because we know that across our supply chain and sales teams, you can't staff up overnight. So it's one of those that we're managing diligently for the today, but also planning ahead. And so, I would expect, likely -- it's hard to know exactly, depending on what that recovery looks like. But at least for the first half of the year, you would see higher operating costs, as you hire ahead of the volume recovery. But we would expect that to be transitory. And as the volume comes back, I would expect our cost structure to be lower than it was prior when you contemplate the different actions we took.

Understood. Thank you.

Thanks, Jeffrey.

Our next question comes from the line of John Glass from Morgan Stanley. Your line is open. Please go ahead.

Hi. Thanks, good morning. First, just on the services that you offer the independent restaurants, you talked about ChowNow, and I think there's probably other some value-added services. Do you have stats that would suggest how independent restaurants perform relative to others, those that embrace those services versus those that don't? And I guess maybe more importantly, is this change of views, could that be a revenue stream at some point? Could you ultimately offer a services business along with the food distribution business, particularly in the independent restaurant space?

So we've talked in the past about how those services result in typically a higher basket or higher retention -- and/or higher retention, I should say. And that was definitely the case with the ChowNow customers earlier in the year; the reopening rate was much faster, the closure rate, whether it was temporary or permanently much lower. In terms of part B of your question, I think I've used this analogy before. It's like the old razors and blade analogy. We make money on the blade by selling food every day and the increased basket size, increased retention and the fact that we sell more food is how we make money. We haven't, at this point, considered. And, obviously, costs are passed on to the operators. So we haven't considered making it not a revenue stream but a profit stream.

All right. Thank you. And just maybe a follow-up, on the seasonality of the business, how different in a normal year is January and February versus March? I would think that March is a heavier sales volume month. So, I guess, the question is how dependent really for the first quarter on March just anyway? And, obviously, given there's a lot of change though, even current trends may not really matter much to the quarter, given you expect volumes -- the seasonality of the volumes in the business?

Sure. I'll take that. You're right, so January tends to be a lower volume month and it ramps up tends to as the quarter goes on. And that's why we were measured in our comments that January is positive to see it but it is still early on. So watching that as February, March play out will be important. But it is still positive to see the widespread improvements that we saw in January.

Thank you.

Thanks.

We have our next question comes from the line of Edward Kelly from Wells Fargo. Your line is open. Please go ahead.

Hi, guys. Good morning. Could you just provide a bit more color on how much better case growth trends have been in January and February versus Q4? And then Dirk, I'm also curious just around the gross margin performance, what was the impact of acquisitions this quarter, any impact of the loss of the seasonal benefit? And does that go away in Q1, so we should start to see at least some improvement, I guess, sequentially in Q1 off of that?

Good morning, Ed. You packed a lot into that question. As we are saying, so we're not -- we haven't talked about a specific number for January, but it is meaningfully better than we were seeing in December, especially in the restaurants. And I think part of it again is not a number because it is again early on with the one period, but it is a level that is very positive and also that it's fairly widespread. Pietro talked about at different levels, so meaning those places that have more restrictions have seeing more meaningful upticks as they've reopened. And so, those are all very positive as we look ahead, assuming that they continue. When you think -- so acquisitions, we haven't talked about the specific impacts there, but they were modestly positive from an overall EBITDA margin and gross margin as a business. And the seasonal piece is predominantly a fourth quarter impact, where we do see that increase. So it is less of an impact in the other quarters. And so it's hard to speculate on exactly what margins do depending on what mix, which has been the biggest impacts based on a recovery looks like in Q1, Q2. However, we do remain confident that as volume comes back, that mix impacts will reduce and therefore improve gross margin over time.

Okay. And then just a follow-up related to the cadence of EBITDA performance. So I know there's cost investments that need to be made to prepare for the reopen. But as sales get better, should we still expect the cadence of EBITDA to be better over the next few months? So for instance, was January's EBITDA better than December's? And if the top line trend continues, do we expect sequentially better improvement in sort of February or March? A – Dirk Locascio: Edward, so a few things that I'll point out on that is that, so different months have fairly different levels of EBITDA based on sort of the volume base in those periods. So January, for example, tends to be a lower volume month than most of the other months of the year. So it's not as straightforward as just a steady cadence up. I think the other thing that as we look through in the earlier parts of the year, it's harder to predict exactly what the operating cost impact is and volume impact is because so far, what we've seen in different geographies is that recovery isn't necessarily linear. And so depending on that, there's just -- because of some of the uncertainties and thoughts about trying to be vague as opposed to that uncertainty leads to just lack of clarity exactly what the cadence looks like, But we do expect that as volume improves, that we will see improvement in EBITDA.

Great. Thank you.

We have our next question comes from the line of John Heinbockel from Guggenheim. Your line is open. Please go ahead. Q – John Heinbockel: So Pietro, let me start with how are you thinking about the investments in the sales force, right? Magnitude, generally speaking, the types of people, roles you want to invest in. And when you then think about the opportunity, particularly the existing customer opportunity and drop size, where do you think drop size ends, right? Obviously, it's going to recover with the recovery. But when you think about, I guess 12, 15 months from now post-COVID, drop size versus what it was before. Do you think it will be significantly greater? Hello? A – Pietro Satriano: Sorry, I am here, apologies for that. So John, in terms of the investments you were talking about – and just as a reminder, right, it's drivers, it's selectors, it's also salespeople as we talked about. In terms of order of magnitude it's – part of the way back to where we were pre the reductions we made last April. So, not all way back, but part of the way back. And again, it's because we just have much greater clarity now as to the recovery and as well, it's just – there's more involved, right, in these days and servicing a customer than there might have been a couple of years ago, just given some of the service challenges that come with COVID and volatility of demand. And in terms of the nature of the investment that will be both sellers and new business managers are – as you remember, from when we talked about this a couple of years ago, the investment in new business managers has been one that has paid off for us. We're very pleased with it, so we'll continue on that front as well. In terms of drop size, we would expect drop size to be at least as high, if not higher, than it was pre-COVID. It could come from the fact that there maybe fewer customers to serve and demand is being redistributed. But I think more importantly, our efforts to grow share of wallet, our push on produce and center of the plate that I talked about earlier, our continued improvements in our execution ability, all those kind of set us up well to grow share of wallet and have higher drop sizes over time, which obviously improve our supply chain economics.

Okay. And then, I guess, as a longer-term follow-up, if you think about getting back right to pro forma 2019, right, sales and profitability. Is it fair to think because of the cost takeouts and the increase in drop size that the EBITDA gets back to that pro forma quicker? And could it be a year – could it be as much as a year quicker when you think about the cadence or is that still too hard to tell?

Dirk?

So John, this is Dirk. I think it's too early to tell, but I think the way you're thinking about it is definitely the right way to think about it, is we would expect it to be sooner because of the cost reduction opportunity that we took advantage of last year and improvements that that drives. I think the exact timing, depending on the recovery and what that looks like, will drive that. But we do feel, as Pietro and I both commented, that because of the actions we've taken, both from top line from growing share and the new business wins as well as on the cost side, really positions the business well to be very successful in a post-COVID world.

Okay. Thank you.

Thanks.

We have our next question comes from the line of Peter Saleh from BTIG. Your line is open. Your line is open.

Great. Thank you. I wanted to ask, you mentioned that you're rehiring or hiring some warehouse employees and other drivers in anticipation of the increase in demand. Can you give us a sense of how many of these employees, are coming back to the system or rehires versus new employees? Just trying to understand how efficient and how much training will be involved to get these employees up to speed. Is this something we're going to start to see more efficiencies in the second quarter or the second half of the year, or just trying to understand the efficiencies behind that.

So, we would expect the majority of these individuals to be new hires, as opposed to bringing them back, especially in the supply chain, as we begin to increase that hiring again, because it’s spread really across most of our roughly 70 distribution centers. On the sales side, similar, most of them -- so this is not a reduce and rehire the same individuals. It's also an opportunity for talent as we move ahead. So that's part of why it's important to really get ahead of this in these earlier months, because there is a bit of a ramp-up. But we are hiring, especially on the sales side, typically, individuals who are very experienced in sales. So that, combined with our internal programs, we expect them to be able to ramp up. I would think your specific question on timing, it's hard to know exactly, depending on the timing, but that productivity likely ramps up from those associates ,as you continue to progress through the year.

Great. And just -- can you just give us a little bit of more color around the decision to rebrand the Smart Foodservice to CHEF'STORE? Any additional costs you guys expect and what are the benefits and when we should expect to see those?

Yes. So the costs are some one-time costs in terms of re-signing. A lot of that kind of gets absorbed into the regular maintenance or refurbishment budget you would have for fleet of retail stores. In terms of the benefit, I think when we made the acquisition, we talked about not just the ability to tap into new customers, tap into your existing customers are now shopping at cash and carry. You talk about how -- what we call the one plus one equals three phenomenon, where we saw an increase in our delivery business from customers who were also shopping our CHEF'STORE as a result of, we suspect, greater share of mind and the effectiveness of our omni-channel strategy. So by rebranding, we make that link more direct in the customers' minds. We've also got, at the same time, ensuring that customers and our sellers have the appropriate incentives to equally take advantage of and market both channels, which again, is something we've learned from by experience with our six CHEF'STOREs in the south. So those benefits show up in terms of enhanced revenue for those channels. It will -- typically, when you do these things in terms of timing, we get an initial lift. And over time, that lift stays or -- we continue to see a lift, but over time the growth in that lift incrementally kind of matures over a period of time, a period of years.

Great. Very helpful. Thank you very much.

We have our next question comes from the line of Kelly Bania from BMO Capital. Your line is open. Please go ahead.

Hi. Good morning. I was wondering if you could talk a little bit about -- a little bit more about the incentive compensation changes you made, how much that impacted the quarter? What was the thought process behind that? I know it's always hard to talk about on a call, but just curious if you can help us understand the motivation and the changes that you're expecting from that?

So these were incentive compensation changes for the broader leadership of the company. And as you can imagine, and as we headed into the second half of the year, what we did was just create an incentive for the second half of the year that rewarded the level that you would expect in terms of sales and profitability. Yeah, that's really -- I think it's that straightforward.

Okay. And just also on expenses, in terms of the $180 million cost savings that you've identified last quarter, should we just assume that's fully, kind of, being realized on a quarterly basis at this point? And just any thoughts on how you feel about the execution of that and the long-term potential of that really falling to the bottom line?

Sure, Kelly. So yes, that's the right way to think about it. So it is in -- that is in full run rate, it would be in the Q4. As part of -- you remember a bit when we were talking about our Q3 results, why I talked about that you wouldn't expect to see really any incremental savings because what we saw in Q4, we're definitely seeing it come through as expected and -- in both Q3 and Q4. In Q4, you do have some things that offset it was some of the temporary actions that were still in place in Q3, such as furloughs as an example or adjustments to sellers pay that was resumed to normal in the fourth quarter. But that is showing up. And our expectation is really unchanged that we expect the majority of the $180 million to be truly permanent and portions that we reinvest back over time primarily being in the sales reinvestments, as Pietro talked about to continue to enable growth as well as things like continuing to enhance our leadership position in digital and in areas like that.

Thank you.

Thanks.

We have our next question comes from the line of Alex Slagle from Jefferies. Your line is open. Please go ahead.

Thanks. Good morning. A follow-up on a previous question. If you could comment on your ability to staff back up in the warehouses and drivers to meet demand. Just if you anticipate any challenges actually being able to staff up quick enough if the pool of potential employees is maybe not as deep as it was before. And then any view on labor inflation dynamics for 2021 and if you have thoughts on that?

So in terms of the staffing question, which, obviously, has an impact on the wage inflation question, so far, we've seen some markets, I'd say, select markets where we've experienced tightness in the market. That's been primarily drivers, not in the warehouse side. And that's one of the reasons why we are trying to get ahead of it. We're well-staffed now and we want to stay well-staffed as volume goes up, which is part of the reason we're going to it because we are seeing a little bit of tightness in some markets. It's hard to say how enduring or persistent that will be. There are so many factors. COVID is still an important factor in some communities. And so it's hard to say whether -- what the impact will be, or how permanent that impact will be and what the impact will be on wages at this point. We haven't seen it quite yet.

Got it. And any thoughts on the freight outlook? A – Dirk Locascio: On the freight outlook, it continues to be a tighter freight market. And again, similar to recent quarters, you'd see a little bit more tightening in the fourth quarter. I would expect it to continue to be a tighter market through the earlier part of 2021, at least. The other thing – so even while that's happening, one of the things that we're doing is continuing to work with our vendor partners and logistics teams to really continue to find ways to optimize our network. I think also, what we'll find is as volume recovers and is less volatile than say it was in the fourth quarter. We can be more effective in the way we manage our freight as well on the way in. The last thing, I would say is that, we'll continue to watch is, if you look over time over multiple economic cycles, what you've tended to see pretty consistently is that when it gets tighter, carriers add capacity. So it's harder to know in this case, if and when, but that has been a pretty repeatable thing over time, so we'll watch that as well. But in the meantime, the combination of sort of the things we can impact within our own control are the things that we'll focus on. Q – Alex Slagle: Got it. Thank you. A – Dirk Locascio: All right. Thanks.

We have our next question comes from the line of William Reuter from Bank of America. Your line is open. Please go ahead. Q – William Reuter: Hi. I just have one. In terms of your outlook for food inflation, what are you seeing for this year, and then the timing of when that may roll through? And then how do you think that may impact your gross margins throughout the year? A – Dirk Locascio: Sure. One of the things that, we've seen is food inflation overall has been pretty consistent the last several quarters at that roughly 2%. And what we've seen in there is not that different than past trends where sort of the non-commodities more stable, you see the commodities, the individual commodities, so whether it's a beef or cheese can inflate or deflate over periods. And our folks so -- overall, don't see a real different environment as we look ahead. And where our team continues to focus on is, where you have that inflation and deflation happening in the commodities is really managing through that from our own execution as well as from a margin perspective. When you do see that inflation or deflation, just as a reminder, the roughly two-thirds of our business that's based on contracts, it sort of automatically passes through whatever that contract resets. It can be weekly, biweekly, monthly depending on a particular contract. And then what you find is in the noncontract business, it – we tend to be able to pass it through relatively quickly. The things that can make it a little bit longer is if you have one particular class that significantly inflates and maybe it takes, instead of a couple of weeks, it takes three or four weeks, but generally able to pass it through and not have an impact overall on our gross margins. Q – William Reuter: Perfect. That's all for me. Thank you. A – Dirk Locascio: Thank you.

And we have our last question from the line of Fred Wightman from Wolfe Research. Your line is open. Please go ahead. Q – Fred Wightman: Hey, guys. Good morning. Just wondering if you could dig into the trends that you're seeing outside of the restaurant industry a bit more, I think that Dirk made a comment that you were seeing that pickup outside of non-restaurants as well during January. But maybe just specifically on the education side, can you give an update on sort of the recovery outlook there and timeline, given some of the recent CDC communications regarding in-person dining? A – Dirk Locascio: Sure, Fred. On that one to point out, maybe focus on kind of three key with healthcare, education and hospitality. And I'll just start with healthcare, in the sense that, healthcare has been pretty steady, and as you've seen in the past in that kind of mid to upper-single digits lower. And that one, I think, as you start to see more vaccinations, just people being able to get out more, we would expect that to bounce back relatively quickly. It's been pretty stable. And as – in senior living, et cetera, people can have visitors get out, et cetera, that's to bounce back. Hospitality and education, showing signs of improvement, but they're starting from much softer places than some of these other customer types. But on those is, to your point, as schools, for example, start to reopen, you expect that to come back. We're working with some of our larger customers to really understand that demand in those couple of areas. Say, for education, the one thing I will remind is although it is -- and it's also a smaller part of our business, the profitability tends to be on the lower end. So that one impacts cases more than it probably does profit, but still staying close to that from a product demand and then also with our customers on hospitality. And that one, we would expect just based on survey data, et cetera, that you see as the leisure side, which is the bigger piece to likely snap back quicker than business over the course of the year.

Great. Thank you.

Thanks.

And you have no questions at this time. Pietro, you may continue.

Thank you. So I'll just leave you with, I think, there are three takeaways from today's call. First, the recovery continues to show extremely positive signs of promise. And while there's some question as to the exact pace of the recovery, we feel increasingly confident about the prospects for our industry. Second, our scale, our strategy and the strengthening of our capabilities position us to continue to gain market share. And third, as you can see, we've clearly strengthened the future earnings power of the business. Appreciate everyone joining us today and we look forward to speaking with you next time. That concludes our call for today.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating, and you may now disconnect. Have a great day.