Q4 2020 US Foods Holding Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to day U S foods fourth quarter and fiscal year 'twenty 'twenty conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone if.
If you require any further assistance please press star zero.
With that I would now like to hand, the conference over to your first and that's another sunny per thank you and please go ahead.
Thank you good morning, everyone welcome to today's earnings call.
I'm joined by Pietro said, Toronto, 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 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 spark Smart foodservice, which we acquired in April 2020 for.
For the food group, our organic financial results reflect contributions from September 14th 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.
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 on.
I'll now turn the call over to Pietro.
Thanks, Melissa good morning, everyone I hope everyone's years off to a good start.
I'd like to start by thanking our 26000 associates, whose commitment to serving and helping our customers. During what has been almost an entire year of the pond on why.
It's truly been sucking Tim on the results you had called on today 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're 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 on your coughing up 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 strength in the future earnings power of the business.
I will cover the first two topics and Doug will cover the last one.
Moving to.
Sweet.
Great. She made easy strategy has proven to be enjoying.
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.
Well, let's start with innovative products, which is at the heart on great food channel.
He told US there was a shift in the products that customers rely on the most products from travel well and packaging that builds trust with consumers, we adopted our ski platform to quickly to quickly jump on these trends and results from or allow us to steep launches have been in line with prior pre COVID-19 lunches.
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 I was hungry for butter. The lineup features new products underserved good are growing lineup of sustainably sourced products.
A range of plant based meat alternatives for burgers and tacos on a range of functional foods with ingredients that introduce a healthy twist to some old favorites.
Continuing with the theme of product innovation all of US we've mentioned in the past one of the big benefits of the acquisition of food group.
Moving to elaborate some unique capabilities and standard of the plate and produce two categories that drive a higher basket and greater stickiness.
We made good progress on the integration front, we are now beginning to introduce these kidney 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 more off premise dining was made on 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-19.
As a result, we are seeing a corresponding increase in demand from operators for applications on help them ride the growth in off premise.
On a partnership with China now is a good example.
We also continue to invest in our technology platform.
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, but we are evolving with 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.
Sample, we recently rolled out on new warehouse pick process and four weeks something that might have taken us four months in the past.
All of these learnings we are refining our operating model by shifting some responsibilities and resources from our regional teams to our centers of excellence. These centers of excellence have responsibility for identifying and deploying best practices across the country on this shift in resources will result in a more consistent execution.
Conjunction with this shift.
You used a 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 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 on the angry on kombucha.
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, if we keep on smart foodservice.
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 foods completed by early next quarter.
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're also on track to achieve our previously announced $65 million in annualized synergies in the business is performing in line with expectations.
The smart foodservice business continues to outperform our delivered business. 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 sales that drives to our delivery business.
To help capitalize on this opportunity we will rebrand all smart foodservice locations to the U S Foods Schussler brand from the first quarter.
This rebranding will also facilitate our entry into new geographic markets, where U S. Food wasn't established presence for.
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 our 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've started to hire warehouse transportation and sales associates in anticipation of the recovery.
We're also investing in inventory to support our customers, while partnering with several of our larger customers to understand the demand curve, we 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 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 full year 2020 results two contained 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 an 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 on boarded 99% of the $800 million of new large customer wins that we discussed last quarter on 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 basis on based on changes to our product mix some of us which from holiday parties and events. This.
This year, we did not see that margin less lift in 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, third quarter Opex benefited from a $17 million nonrecurring real estate gain.
During the fourth quarter, we also experienced higher health care on 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 cost 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.
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 50 <unk> week contributed five 3% of 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 season seasonal margin improvement as I noted earlier.
Adjusted operating expense in the fourth quarter increased 90 basis points from the prior year.
<unk> to about 50 basis point increase from prior year on Q3, when you exclude the Q3 nonrecurring property game.
The 40 basis point increase on our adjusted Opex as a percentage 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 that negative mixed impact on our gross profit and the negative impact of Opex deleverage to improve.
I would expect the current impacts to be transitory.
On slide nine adjusted EBITDA was $174 million for the quarter, including approximately $8 million per 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 on the fourth quarter compared to the third quarter.
This was primarily due to the opex items I just noted.
Adjusted net income was $10 million and adjusted diluted EPS was <unk> <unk> for the fourth quarter.
Yes were discussed how we're positioning the business for recovery and this remains our primary focus on the present time, but we expect our financial results to significantly improve S 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 the case volume will recover as Covid cases decline.
Restaurant restrictions are lifted.
And vast 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 remains strong and in 2021 will be focused on investing in our business and reducing that day.
<unk> is the priority in the coming years.
In 2020, we reduced our capital spend to those items are central 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.
Actions, we took during 2020 have strength in 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 was 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 at a higher EBITDA margins post COVID-19.
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 'twenty demonstrating.
On the resiliency of our business.
Operator, we can now open the call for questions.
Thank you at this time, you would like to take any questions you might 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 lead you on a request to meet the talent warehouse schemes.
Please standby, while we compile the Q&A roster.
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 gross growth strategy in a post COVID-19 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-19.
So in many ways.
Sorry, Jake on book.
In many ways in terms of where we anticipate the growth as I've said, it's in our <unk>.
Strategy has served us well on our strategy.
Talks to both.
Types of customers, we target and the.
Hum.
On the capabilities, we've developed over time and so.
Independent restaurants remain an important focus point for us.
We've talked about on prior calls those.
Perhaps on a small shift with them on a micro shift in terms of menu types in terms of.
Geographies urban to suburban but independent restaurants, we believe that it will continue.
Drive 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 we expect those two customer types to recover healthcare probably being closer in.
And hospitality, probably taken 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.
Casting are expecting kind of pre COVID-19.
Okay.
The large customer space, because I think I've said.
Uh huh.
Has proven to be kind of fertile ground, probably more than we thought pre COVID-19.
And we're taking advantage of that opportunity.
<unk> business coming in.
We've talked historically about.
Uh huh.
Our.
Foray into retail the foodservice side of retail.
Which we've got a couple of pilots.
Pilots going on across the country, which.
Look promising and then and then the third is cash and carry we've always talked about cash and carry as an important channel for growth.
It's on higher margin profile than the core business that is growing more quickly at.
It helps gross share wallet, obviously with the acquisition of <unk>.
Smart foodservice that presents an opportunity to accelerate that growth and what we've seen from that channel.
Is it some some exposure to the consumer side of things hit us.
Keep comps relatively positive realm.
Relative to the core business.
And I think some of that consumer business, we'll stick, but that is kind of icing on the cake. That's not the main reason for us pursuing that business.
Great. Thanks, so much.
We have our next question comes from the line of John <unk> from Jpmorgan. Your line is open. Please go ahead hi.
Hi, Thank you.
A couple of related questions I think first can you talk about.
The state of the addressable independent restaurant market I mean, obviously there is.
So many different numbers that are out there. They are obviously very different ways that 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 guests your best guess year over year.
The percentage of addressable independent restaurants that you think are going to come back to business basically.
The Springer where summer when the vaccine takes and then secondly can you.
Sure some light in terms of how desperate your performance is.
Across markets comparing for example, the southeast in the northeast or the.
Our California, just in terms of what Youre seeing us maybe green shoots or leading indicators in terms of how the consumer will come back can use restaurants, and specifically U S foods market share on.
Gains within those markets.
Okay.
I'll tie the two questions together, because they're related and.
The headline John is that.
The outlook is very promising for independence.
We.
In January we saw us so Derek 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 a.
Customer accounts and 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 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's levels than we've had a couple of regions the Midwest, California reduce.
Restrictions over the intervening period and in both those regions, we've seen pretty dramatic and quick.
Crease in sales.
As restrictions have reduced.
So from a metric perspective things continue to progress on the recovery front.
And as.
As well as we see different geographies.
Few restrictions, we're seeing them recover.
On 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 us on the horizon.
And the.
The aid from the federal government at the end of December has also helped give us a lot of independent restaurants at a new lease on life.
And if I can ask the question just ask it very directly I mean is the decline in independent restaurants is it do you think at the end of this is that down high single digits us are down 10% or 20% or obviously you can use other numbers that are even higher to get a quote from certain industry sources are you kind of honing in on.
On a number and you know and then just kind of comment on what kind of share. You think you can take on what you certainly is going to be a smaller number of restaurants year over year on the independent but.
How much you think you can perhaps.
Outperform.
On 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 indeed.
Independent restaurants to account for.
The same amount of business as it did pre COVID-19 at some point, we just can't say, we don't have a crystal ball to say you know what you know what quarter precisely it will be.
The number the restaurant count.
No I think that's 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.
So we think the signs are there for healthy recovery on the independents.
And we think ultimately recovers fully to where it was pre COVID-19 for our business anyhow.
Thank you so much from 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.
I'm just wondering if you could share some thoughts on the <unk>.
Small and mid sized competitors, especially as you talk about share gains.
On the presumably the opportunity you see there whether or not youre seeing closures or opportunities there.
With that as a backdrop any thoughts on M&A, especially as you talk about excess cash primarily for debt Paydown 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 Gary talk to part B of your question on return of capital.
So.
There really hasnt been much of a change on the competitive landscape since the <unk>.
Summer I think if you go back.
Now nine months I think we all expected.
More shakeout from smaller and regional competitors I think the speed of the recovery ratio. If you go back to our summer earnings call, where we showed how quickly growth was coming back.
The benefit of not just us, but also some of the smaller and regional player. So so I think the shakeout that we've potentially anticipated hasnt happened and that's just because the industry has recovered more quickly than it has our share gain you know.
We know exactly where your share gains come from when it comes to larger customers.
So as I've said, they typically come from some of the regional players for us.
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 a stability that they may not seem as smaller players when it comes to the smaller <unk>.
Customer wins on the street, it's hard to tell where those where those come from a lot of talk about the second part of Geoffrey'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 because of what Pietro commented that we haven't seen the fallouts really what our team has been focusing on us even though there hasn't been closures or.
Many distressed sales going on of business et cetera, there are still areas, where our teams locally continued to hear about different operators that maybe having inventory challenges on our staffing challenges et cetera.
Outside of buying someone there's still an opportunity to gain share on 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 on that exact point I mean, it seems like in your prepared remarks on.
Even just now you mentioned I guess.
The challenge from your peers are facing and I'm guessing you guys are as well.
<unk> sales weakness on the short term.
And of course elevated ahead of the recovery specific to US like you guys talk about inventory in a variety of labor aspect. So I just wanted to make sure Thats a fair assessment that we're on some quite of a unusual timeframe, where the sales arent recover on 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 day for the year kind of the magnitude of the mismatch potentially thank you.
Sure and you are right.
It's a different kind of unusual than it was last year. We're now it's a matter of managing through the challenges that are still in existence, but.
I think as more and put at the light at the end of the tunnel us closer and so it's managing for that recovery and so as a result likely over the next couple of quarters.
From a little bit choppy as far us.
Sales in 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 work, we're managing diligently for today, but also planning ahead, and so and I would expect likely it's hard to know exactly depending on what that recovery looks like but at least from the first half of the year you would see higher operating costs as you hire up ahead of the volume recovery, but we would.
Spect that to be transitory and as the volume comes back we would expect our cost structure to be lower than it was prior.
Contemplate the different actions we took.
Understood. Thank you thank.
Thanks Chuck.
Yes.
Our next question comes from the line of John Glass from Morgan Stanley. Your line is open. Please go ahead.
Hi, Thanks, good morning.
Just on the services that you offer the independent restaurants, you talked about shout out and I think there's probably others from value added services do you have stats. It 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 has this.
Change your views could that be a revenue stream at some point could you ultimately offer services business, along with the food distribution business, particularly in the independent restaurant space.
Okay.
So we have.
We've talked in the past about how those services result, and typically a higher basket or higher retention and higher retention I should say and that was definitely the case with the channel now customers earlier in the year. The reopening weight was it's much faster the closure.
But it was temporary.
It was much slower.
In terms of part B of your question I think I've used this analogy before it's like it's like the old razors and blades.
Analogy, we make money on.
On the blades by selling food every day and.
The increase back basket size increase retention and in fact that we saw more food is how we make money. We haven't at this point are considered and obviously costs are passed on to the operator, so that we have.
Haven't.
Making it on.
On the revenue stream, but on profit stream.
Alright, Thank you and just maybe a follow up on the seasonality of that business different than a normal year as January and February versus March.
Think that March is a heavier sales volume months.
So I guess the question is how dependent really as the first quarter on March just anyway, and obviously it gives us a lot of change, though even current trends may not really matter much the quarter given you expect volumes.
<unk> the volume from the business.
Sure I'll take that Youre right. So Jan January tends to be lower volume on center ramps up.
Tends to as the quarter goes on and that's why we were.
Measured on 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 the widespread improvements that we saw on 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 to case growth trends have been in January and February versus Q4.
And then 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.
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.
I was wondering guidance you packed a lot into that question.
Yes.
As we are saying so.
We haven't talked about a specific number for January but it is meaningfully better than we were seeing in December, especially on 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 many of those places that have more restrictions have seen more meaningful upticks as they've reopened and so those are all.
Very positive as we as we look ahead, assuming that they continue.
When do 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 <unk>.
Impact where would you see that increase so it has less of an impact than the other quarters and so it's hard to speculate on exactly what margins do depending on what mix, which has been the biggest impact.
On a recovery looks like in Q Q1, Q2, However, we do remain confident that.
As volume comes back that that mixed impacts will reduce and therefore improve gross margin over time.
Okay, and then just a follow up related to the cadence of EBIT performance. So I know there is 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 as EBITDA better than decembers and if the topline trend continues we expect sequentially better improvement in instead of February or March.
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, and then most of the other months of the year. So it's not as straightforward as just.
Steady cadence up.
The other thing that as we look through on the earlier parts of the year.
It's harder to predict exactly what.
The operating cost impact us and volume impact us because so far what we've seen in different geographies is that recovery isn't necessarily linear and so depend.
Depending on that just because of some of the uncertainties that bus about trying to be big as opposed to.
Yes.
That uncertainty leads to just a lack of clarity exactly what the cadence looks like book, but we do expect that as volume improves.
Then we will see improvement in EBITDA.
Alright, thank you.
Thanks.
We have our next question comes from the line of John <unk> from Guggenheim. Your line is open. Please go ahead.
So Pietro let me start with.
How are you thinking about the investments from the sales force right.
Magnitude generally speaking the types of people roles you want to invest in.
And when you think about the opportunity, particularly the.
The existing customer opportunity and drop size.
What do you think drop size ends up right, obviously, it's going to recover with the recovery, but when you think about.
I guess.
12 to 18 months from now on Covid drop size versus what it was before.
It will be significantly greater.
Hello.
Alright, okay.
Okay, Yeah, I apologize for that.
So John in terms of the.
Investments you're talking about.
Interest as a reminder, right.
Its drivers and 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.
On all the way back, but part of the way back.
And again, it's because we just had.
Much greater clarity now as to the recovery.
And as well it's just.
There is more involved right these days and servicing a customer than they might have been a couple of years ago, just given some of the <unk>.
Service challenges that come with Covid and the volatility of demand.
And in terms of the nature of the investment it will be both.
Sellers in new business managers that are as you remember from.
When we talk 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-19.
It could come from the fact that there may be fewer.
Your customers to serve an on demand is being redistributed I think more importantly, our efforts to grow share of wallet on push on produce and center of the plate that I talked about earlier on continued improvements in our execution ability all of those kind of set us up well to grow share.
All of them and have higher drop sizes over time.
Which obviously improve on our supply chain economics.
Okay.
Okay, and then I guess.
As a longer term follow up if you think about getting back right to pro forma 2019 sales and profitability.
Is it fair to think because of the cost takeout and the increase in drop size that.
The EBITDA it gets back to that pro forma quicker.
And could it be could it be as much as a year quicker.
When you think about the cadence or is that still too hard to tell.
Sure.
Sure.
John This is Derek thanks.
I think it is it's too early to tell but I think the way youre thinking about it is definitely the right way to think about it is we would expect it to be sooner because of the cost.
Yes.
Reduction opportunities that we took advantage of last year and improvements of that drives I think the exact timing depending on the recovery and what that looks like what will drive that book, but we do feel it's Jeff and I. Both commented that because of the actions we've taken both from.
Topline from growing share and the new business wins as well as on the cost side really positions the business well too.
Be very successful on a post COVID-19.
Corporate World.
Yes.
Okay. Thank you.
Yes.
We have on our next question comes from the line of Peter Saleh from BP <unk>. Your line is open your line is open.
Great. Thank you.
I wanted to ask.
You mentioned that.
Sure.
The hiring or hiring warehouse employees and other drivers anticipation of the increase in demand could you give us a sense of how many of these employees are coming back to the system are the hires versus new employees, just trying to understand how efficient.
And how much training will be involved to get these employees up to speed and is this something we're going on.
Start to see more efficiencies on our second quarter on the second half of the year or.
I'm, 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 reduced from rehired. The same individuals'. It's also.
On opportunity for talents as we move ahead. So that's part of why it's important to really get ahead of this.
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.
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 shop store on an additional costs you guys expect and what are the benefits on why we should expect to see those.
Yes, so the costs are some onetime costs in terms of lease signing.
A lot of that kind of get it gets absorbed into the.
Regular maintenance or refurbishment budget, you would have for a fleet of retail stores.
In terms of the benefit.
When we made the acquisition, we talked about not just the ability to tap into new customers.
Oh.
Tap into existing customers are now shopping at cash <unk> carry can you talk about how what we call. The one plus one equals three phenomenon work.
We saw.
An increase in our delivered business from customers, who were also shopping on shelf store as a result of leaseback greater share of mind and the effectiveness of our omni channel strategy. So by rebranding we make that link.
More more direct.
And then 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 a market both channel, which again is something we've learned from our experience with our chefs.
<unk> stores in the South so sales benefits show up in terms of enhanced revenue for from those channels.
Hello.
We'll.
Typically when you do these things in terms of timing.
You got at an initial less and over time that that stays on.
You continue to see a little bit over time.
No.
The growth from that lift incrementals on them.
Sure so over a period of time.
<unk>.
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 how much of that impacted the quarter what was the thought process behind that I know, it's always hard to talk about on a on a call, but just curious if you can help us understand the motivation and the changes that youre expecting from that.
So the.
So these were.
Compensation incentive compensation changes for the broader leadership of the company.
And as you can imagine.
As we headed into the second half of the year.
Well, what we did want us just create.
<unk> for.
For the second half of the year that are rewarded the levers you would expect in terms of sales and profitability.
That's really that's a good start that's straightforward.
Okay and just also on expenses in terms of the $180 million.
Cost savings that you identified last quarter should.
Should we just assume that's fully kind of thing.
No.
Realized on a on a.
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.
Following up on the bottom line.
Sure Kelly so yes, that's the right way to think about it is where it is.
That is in full run rate it would be on the Q4 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 a 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 and Q4, you do have some things that offset it with some of the temporary actions that we are still in place in Q3, such as furloughs as an example, or adjustments to sellers pay there was resumed to normal on the fourth quarter, but that is showing up in our expectation is really unchanged.
<unk> 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 Pietro talked about to continue to enable growth as well as things like continuing to enhance our leadership position in digital and areas like that.
Yeah.
Thank you.
Thanks.
We have our next question comes from the line of Alex Slagle from Jefferies. Your line is open. Please go ahead.
Hey, Thanks, good morning.
Follow up on a previous question. If you can comment on your 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 any view on labor inflation dynamics for 2021, and if you have thoughts on that.
So in terms of the.
Staffing question, which which obviously.
On impact on wage inflation question.
On.
So far we've seen some markets I'd say select markets were.
We've experienced a 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 us well.
Well staffed now and we want to say 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 on a little bit on tightness in some markets.
Hard to say, how how enduring a 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 on how permanent that impact will be on what the impact will be on wages. At this point, we haven't seen that quite yet.
Got it.
Net any any thoughts on the freight outlook.
So on the freight outlook yet.
It continues to be a tighter freight markets and.
Similar to recent quarters, and 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 we'll find us as volume recovers and is less volatile than say it was in the fourth quarter.
Can be more effective on the way, we manage our our freight as well on the way in the last thing I would say is that that will continue.
To watch us 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.
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 alright.
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 margin throughout the year.
Sure.
One of the things that we've seen us food inflation overall has been pretty consistent the last.
Several quarters that that roughly 2% and what we've seen in there is not that different than past trends, where sort of the the non commodities more stable and.
And you'll see the commodities that individual commodity so whether its a b per cheese can can can inflate or deflate.
Over periods and our folks so overall I don't see a real difference.
Environment as we look ahead and what our team continues to focus on US where you have that inflation or deflation is happening in the commodities, it's really managing through that from.
On 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 that sort of automatically passed us through whenever that contract reset. So it can be weekly by weekly monthly depending on the particular contract.
And where you find us in the non contract business. It we tend to be able to pass it through relatively quickly the things that can make it a little bit longer us. If you have one particular class that significantly in place 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.
Perfect. That's all for me thank you.
Thank you.
Yeah.
And you have on your last question comes from the line of Fred <unk> from Wolfe Research. Your line is open. Please go ahead.
Guys. Good morning, just wondering if you could dig into the trends that youre seeing outside of the restaurant industry a bit more I think that derrek made a comment that you were seeing that pick up outside of non restaurants as well during January.
Maybe just specifically on the education side can you give an update on sort of the recovery outlook there on timeline given some of the recent.
CVC communications regarding in personal loans.
Okay.
Sure Fred on that one.
To point out maybe focus on three key with health care education and hospitality.
And I'll just start with health care in the sense of health care has been pretty steady.
Uh huh.
As you've seen in the past and that kind of.
Mid to upper single digits, lower and that one I think as you start to see more vaccinations just.
And people being able to get out more we would expect that to bounce back relatively quickly it's been pretty stable on us and senior living et cetera people can have visitors get out et cetera.
Once back hospitality and education, showing signs of improvement, but theyre starting from.
So much softer places on somebody's other customer types, but at Sandoz is.
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.
Those couple of areas say for education. The one thing I will remind us although it is a small and it's also a smaller part of our business.
And the profitability tends to be on the lower end, so that one impacts cases more than it probably does profit but still.
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, do you see us.
On the leisure side, which is the bigger piece to likely snap back quicker than the 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 what I think of the three takeaways from today's call.
First the recovery continues to show extremely positive signs of promise and while there is some question as to the exact pace of that recovery, we feel increasingly confident about the prospects for our industry.
And 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 on future earnings power of the business.
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 your conference for today. Thank you all for participating and you may now disconnect have a great day.
Okay.
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