US Foods Holding Corp.

Ladies and gentlemen, 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 speaker presentation, there will be a question and answer session. And to ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, simply press star 0. With that, I would now like to hand the conference over to our first speaker, Ms. Melissa Nader. Thank you, and please go ahead.

Thank you. Good morning, everyone. Welcome to today's earnings call. I'm joined by Pietro Cetriano, our CEO, and Dirk Lacascio, 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 results to 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 Food Service, 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 ears 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 two 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 our 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. A 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 adapted 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 underserved good, a growing lineup of sustainable resource products, a range of plant-based meat alternatives for burgers and tacos, and a range of functional foods with ingredients that introduce a healthy twist to some of those favorites. Continuing with the theme of product innovation, as we've 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 markets. 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 Wallard 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 Chao Now 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 recommendations 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 best 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 will reduce the number of regions from six to four in the second quarter. This does not change the cost savings that we announced in August. It is simply a logical evolution of our operating model. informed by the experiences of 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 Food Service. So let's move to page four 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 Food Service business continues to outperform our delivered 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 Food Service is the incremental sale it drives to our delivered business. To help capitalize on this opportunity, we will rebrand all Smart Food Service locations to the U.S. Food Chef Store brand in the first quarter. This rebranding will also facilitate our entry into new geographic markets where U.S. food has an established presence. For 2021, we plan to open three to four stores, primarily in existing Smart Food Service 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 five, 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 capability 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 seven. 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 four-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 volume 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 health care and incentive compensation costs. On the health care 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 were 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 Pedro noted, we do expect distribution costs to temporarily increase in the first half of 2021 as we continue to increase hiring and 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 extra 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 mixed 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 5 cents for the fourth quarter. We also 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 in our balance sheet to reduce outstanding debt. The cash flow of our business remains strong, and in 2021, we'll be focused on investing in our business and reducing debt. De-levering 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 $180 million of fixed cost reductions, most of which we expect to be permanent, we expect the business to likely operate at higher EBITDA margins 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 20, 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 that we can have for us today. And as a reminder, to ask a question, you will need to press star, then the number one on your telephone keypad. To withdraw your request, you may press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lauren Silverman 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, wild share expansion, M&A, where do you see the most meaningful incremental opportunities today relative to your expectations pre-COVID?

So in many ways, sorry, Jake, in many ways in terms of where we anticipate the growth, as I said, it's, you know, our strategy has served us well and the strategy, you know, 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, will 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 health care and hospitality, we expect those two customer types to recover, health care probably being closer in and hospitality probably taking a little bit longer to recover compared to the other segments.

Are there any incremental growth opportunities you see today relative to what you were forecasting or expecting pre-COVID?

So the large customer space, as I think I've said, has proven to be fertile ground, probably more than we thought pre-COVID. And we're taking advantage of that opportunity. That's the profitable business coming in. We've talked historically about our foray into retail, the food service 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 of wallet. Obviously, with the acquisition of smart food service, 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. But 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.

Great. Thanks so much.

We have our next question comes from the line of Jan Ivanko from J.P. Morgan. Your line is open. Please go ahead.

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 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 California, just in terms of what you're seeing is maybe green shoots are 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. In January, we saw, so Derek talked about December being a softer month and 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, reduced restrictions over the intervening period. And in both those regions, we've seen pretty dramatic and quick increase in sales as restrictions have reduced. So, you know, from a metric perspective, things continue to progress on the recovery front. And as well, you know, as we see different geographies have fewer restrictions, we're seeing them recover And the last thing I would add is, you know, the sentiment amongst independent restaurant owners is positive. You know, they see the potential impact of the vaccine, good weather despite the horrific snowfall we had in Chicago, you know, yesterday is on the horizon. And the aid from the federal government at the end of December has also, you know, helped give a lot of independent restaurants, you know, a new lease on life.

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

Yeah. 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 we did pre-COVID. At some point. We just can't say, we don't have a crystal ball to say, you know, what quarter precisely it will be. You know, the number, the restaurant count, you know, I think is what you're referring to, you know, may very well be lower for some period. I think a lot of what's published is forecasts 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 independence, and we think ultimately it recovers fully to where it was pre-COVID for our business anyhow.

Thank you so much for the time and color.

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 food service distribution side rather than the customer side, just wondering if you could share some thoughts on your small and mid-sized competitors, especially as you talk about share games 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 pay down, just trying to get your sense for the food service distribution side of the landscape, and then one follow-up.

Okay. So I'll talk about the state of competitors. I'll let Derek 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 the summer. I think If you go back nine months, I think we all expected more shakeout from smaller and regional competitors. But I think the speed of the recovery, 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, you know, we know exactly where our share gains come from when it comes to larger customers. As I've said, they 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 in us the stability that they may not see in the smaller players. When it comes to the smaller customer wins, you know, on the street, it's hard to tell where those come from. Derek, 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. And because of what Pietro commented, that we haven't seen the fallout, really what our team has been focusing on is, even though there haven't been closures or, you know, many distressed sales going out of business, et cetera, there are still areas where our teams, you know, locally continue to hear about different operators that may be having inventory challenges or staffing challenges, et cetera. And, you know, 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 that 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 an 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, 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 uh sales and staffing and because we know that across our supply chain and sales teams you can't step up overnight so it's one of those that we're managing diligently for the today but also planning ahead and so and i would expect uh 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 higher up ahead of the volume recovery but we would expect that to be transitory and as the volume comes back 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 Chow Now, and I think there's probably 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 your 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 Chow Now customers earlier in the year. The reopening rate was much faster. The closure rate, whether it was temporary or permanent, was 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 blades. analogy, you know, we make money on the glaze 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 a 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 is the first quarter on March just anyway? And obviously given there's a lot of change, so even current trends may not really matter much the quarter given you expect volumes, you know, the seasonality of the volumes in the business.

Sure, I'll take that. You're right. January tends to be a lower-volume month, and it ramps up 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 and March play out will be important. But it is still positive to see the widespread improvements that we saw in January.

Thank you.

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, Derek, I'm also curious just around the gross margin performance. What was the impact of acquisitions this quarter and the impact of the loss of the seasonal benefit? And does that go away in Q1 so we should start to see at least some, you know, improvement, I guess, sequentially in Q1 off of that?

Warren, you packed a lot into that question. As we are seeing, so 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 and that is very positive and also that it's fairly widespread. We talked about it different levels, so meaning those places that have more restrictions have seen more meaningful upticks as they 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, you know, it's hard to speculate on exactly what margins do depending on what mix, which has been the biggest impact based on a recovery looks like in Q1, Q2. However, we do remain confident that as volume comes back, that that mixed impact will reduce and therefore improve gross margins over time.

Okay. And then just a follow-up related to the cadence of EBITDA performance. So, you know, I know there's costs, 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?

You know, 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 we looked 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, it's less about trying to be vague as opposed to, you know, 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. Thank you.

We have our next question. It comes in the line of John Heinbacher from Guggenheim. Your line is open. Please go ahead.

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 or roles you want to invest in? And when you then think about the opportunity, particularly the existing customer opportunity in drop size, what do you think drop size ends up? Obviously, it's going to recover with the recovery, but when you think about, I guess, 12, 15 months from now, COVID, drop size versus what it was before, do you think it will be significantly greater? Hello?

Sorry. Yeah, I'm here.

Apologies for that. So, John, in terms of the investments you're talking about, and just as a reminder, it's drivers, it's collectors, it's also salespeople as we talked about. In terms of order of magnitude, it's you know, part of the way back to where we were pre the reductions we made last April. So not all the way back, but part of the way back. And again, it's because we just have, you know, much greater clarity now as to the recovery and as well, you know, it's just there's more involved right these days in 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, you know, in terms of the nature of the investment, it 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 may be fewer customers to serve and demand is being redistributed. I think more importantly, our efforts to grow share of wallet, a push on produce and center of the plate that I talked about earlier, our continued improvement in execution ability, all those kind of set us up well to grow share and 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 to pro forma 2019, 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 as much as a year quicker when you think about the cadence, or is that still too hard to tell?

So, John, this is Derek. Thanks. 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 of 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.

We have our next question comes from the line of Peter Sawyer from VDIG. 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, our 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 it back, especially on the supply chain as we begin to increase that hiring again because it's 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 uh an opportunity for uh talents as we move ahead so that's part of why it's important to really get ahead of this uh in these earlier months because there is a bit of a ramp up, but, you know, 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, you know, 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 can you just give us a little bit of more color around the decision to rebrand the Smart Food Service to Chef's Store? Any additional costs you guys expect, and what are the benefits and what we should expect to see those?

Yeah, so the costs are, you know, some one-time costs in terms of re-signing. A lot of that kind of gets absorbed into the regular business maintenance or refurbishment budget you would have for a fleet of retail stores. In terms of the benefit, I think, you know, when we made the acquisition, we talked about not just the ability to tap into new customers, tap into existing customers who are now shopping at cash and carry. We talked about how, you know, what we call the one plus one equals three phenomenon where, you know, we saw an increase in our delivered business from customers who were also shopping our chef store, as a result of, we suspect, greater share of mind and the effectiveness of an omnichannel strategy. So by rebranding, we make that link more direct in the customer's mind. We've also got, at the same time, ensuring that customers 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 our experience with our Big Chef stores in the South. So those benefits show up in terms of enhanced revenue for both channels. Typically, when you do these things in terms of timing, You get an initial lift, and over time, that lift stays. You continue to see a lift, but over time, the growth in that lift, the incremental lift, matures over a period of time, over a period of years.

Great. Very helpful. Thank you very much.

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

Hi, good morning. I was wondering if you could talk 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 intensive compensation changes for the broader leadership of the company. And as you can imagine, you know, 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, you know, rewarded the levers you would expect in terms of sales and profitability. That's really, I think it's that straight forward.

Okay. And just also on expenses, in terms of the $180 million cost savings that you 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 kind of really falling to the bottom line?

Sure, Kelly. So, yes, that's the right way to think about it. That is in full run rate. It would be in the Q4. Part of, if you remember a bit, when we were talking about our Q3 results, why I talked about 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 with some of the temporary actions that were still in place in Q3, such as furloughs, as an example, or adjustments to seller's 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 to be truly permanent and portions that we reinvest back over time, primarily being in the sales reinvestments, as Petra talked about, to continue to enable growth, as well as things like continuing to enhance our leadership position in digital and areas like that.

Thank you. Thanks. We have our next question. It comes from the line of Alex Stegall 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 getting ahead of 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.

Brad Pacheco- Got it. And any thoughts on the Freight Outlook?

Brad Pacheco- You know, on the Freight Outlook, continues to be a tighter freight market and, you know, similar to recent quarters. We see a little bit more tightening in the fourth quarter. You know, 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 continue 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 that we'll continue to watch is if you look over time, over multiple economic cycles, what you 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. Got it. Thank you. 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.

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?

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 overall don't see a real different environment as we look ahead. And what our team continues to focus on is where you have that inflation and deflation happening in the commodities and really managing through that from a 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 whenever that contract resets. So it can be weekly, biweekly, monthly, depending on the particular contract. And then what you find is in the non-contract business, we tend to be able to pass it through relatively quickly. The thing that can make it a little bit longer is if you have one particular class that significantly inflates and maybe takes, instead of a couple weeks, it takes three or four weeks. But generally able to pass it through and not have an impact overall on our gross margins.

Perfect. That's all for me. Thank you. Thank you.

And you have our last question from the line of Fred Whiteman from Wolf Research. Your line is open. Please go ahead.

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 pick up 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 learning?

Sure, Fred. On that one, you know, 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 in the, you know, as you've seen in the past in that kind of, you know, mid to upper single digits lower. And that one, I think as you start to see more vaccinations, just, you know, If people are 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, you know, showing signs of improvement, but they're starting from, you know, much softer places than some of these other customer types. What I'd say on those is, you know, to your point, as schools, for example, start to reopen, you'd 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'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 is 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 we have no questions at this time. Pedro, you may continue.

Thank you. So I'll just leave you with 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. I 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.