US Foods Holding Corp. (USFD) Q4 2020 Earnings Call Transcript

Ladies and gentleman, thank you for standing by, and welcome to the US Foods’ Fourth Quarter and Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please provide your name, your firm, and limit yourself to one question. During today’s call, unless otherwise stated, we’re comparing our fourth quarter and full fiscal year result for the same period in fiscal year 2019. Please keep in mind that the fourth quarter in fiscal 2020 included 14 weeks versus 13 weeks in 2019, and full fiscal 2020 results included 53 weeks versus 52 weeks in fiscal 2019. References to organic financial results during today’s call exclude contributions from Smart Foodservice, which we acquired in April 2020. For the Food Group, our organic financial results reflect contributions from September 14, 2020, which is the one-year anniversary of the completion of the acquisition through the end of the 2020 fiscal year. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2019 Form 10-K and last quarter's 10-Q filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendices to the presentation slides posted on our website. I'll now turn the call over to Pietro.

Thank you. Good morning, everyone. Welcome to today’s earnings call. I’m joined by Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an overview of our results for the fourth quarter and fiscal year 2020. We’ll take your questions after our prepared remarks conclude.

Thanks, Melissa. Good morning, everyone. I hope you are all starting the year well. I want to express my gratitude to our 26,000 associates for their dedication to serving our customers throughout nearly a year of the pandemic. Their hard work has made today's results possible. I will begin with a brief overview of the three main topics we will discuss. First, we are pleased with the success of our Great Food. Made Easy strategy, and we are continuously working to improve our capabilities for even greater success in the future. Second, we have taken steps to prepare for recovery, and we believe these measures will enable us to continue increasing our market share as the recovery unfolds. Finally, the adjustments we've made to our cost structure and the new business we have secured in the last eight months have bolstered our future earnings potential. I will address the first two topics, and Dirk will discuss the last one. Our Great Food, Made Easy strategy has proven sustainable, but we are not becoming complacent. We are continuing to evolve our capabilities to further improve the customer experience and take advantage of future growth opportunities. Let's start with innovative products, which is at the heart of Great Food. During COVID, there was a shift in the products that customers rely on the most, products that travel well and packaging that builds trust with consumers. We adopted our Scoop platform to quickly jump on these trends and results from our last two Scoop launches have been in line with prior pre-COVID launches. Even with the pandemic, consumer interest for more sustainable, healthier choices continues to grow. That's why the theme of our spring Scoop, which launches in two weeks is Hungry for Better. The lineup features: new products under Serve Good, our growing lineup of sustainably sourced products; a range of plant-based meat alternatives for burgers and tacos; and a range of functional food with ingredients that introduce a healthy twist to some of those favorites. Continuing with the theme of product innovation, as we have mentioned in the past, one of the big benefits of the acquisition of Food Group is the ability to leverage some unique capabilities in Center-of-the-plate and Produce, two categories that drive a higher basket and greater stickiness. Having made good progress on the integration front, we are now beginning to introduce these Food Group capabilities into legacy U.S. Foods market. And while it will take some time to roll these capabilities out across the country, we are excited about how these capabilities will accelerate the opportunity to grow share of wallet in those two categories. Moving to technology, which is at the heart of making things easy for customers. The consumer shift to more digital and more off-premise dining has made our technology and e-commerce offerings even more important than they were before. For example, 68% of consumers say they are more likely to purchase takeout than they were pre-COVID. As a result, we are seeing a corresponding increase in demand from operators for applications that help them ride the growth in off-premise dining. Our partnership with ChowNow is a good example. We also continue to invest in our technology platform, having recently improved our product search capabilities and our analytics platform to allow us to drive more targeted pricing and product 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 its practices across the country. As an example, we recently rolled out a new warehouse pick process in four weeks, something that might have taken us four months in the past. As a result of these learnings, we are refining our operating model by shifting some responsibilities and resources from our region teams to our centers of excellence. These centers of excellence have responsibility for identifying and deploying best practices across the country and this shift in resources will result in a more consistent execution. In conjunction with this shift, we have reduced the number of regions from six to four in the second quarter. This does not change the cost savings that we announced in August, but is simply a logical evolution of our operating model informed by the experiences over the last 12 months and they end up providing more consistent execution. Also in conjunction with this shift, we are consolidating merchandising and local sales under Andrew Iacobucci. Andrew has been overseeing these two functions on an interim basis for the last 12 months, and so now he becomes our Chief Commercial Officer. Also critical to advancing our strategy has been the capabilities we now have access to as a result of the acquisitions of Food Group and Smart Foodservice. So, let's move to Page 4 for an update on the business performance and integration, starting with Food Group. Integration and synergy capture are on track. So far, we have completed two warehouse system conversions, and we expect to have the third completed by early next quarter. The conversions to date have gone very well, and we expect to have the remainder completed in the second half of this year, in line with our original plan, despite some of the early delays from COVID. We are also on track to achieve our previously announced $65 million in annualized synergies and the business is performing in line with expectations. The Smart Foodservice business continues to outperform our delivery business, and we continue to be excited about the future growth opportunities in the cash and carry space. You will recall, part of the strategic rationale for the acquisition of Smart Foodservice, is the incremental sale, it drives to our delivery business. To help capitalize on this opportunity, we will rebrand all Smart Foodservice locations to the US Foods CHEF'STORE brand in the first quarter. This rebranding will also facilitate our entry into new geographic markets, where US Foods has an established presence. For 2021, we plan to open three to four stores, primarily in existing Smart Foodservice markets. But we do expect the pace of store openings to pick up in future years, as we expand the footprint into new geographies. I'm now on Slide 5, where I would like to close with a quick overview of how we are positioning our business to gain market share as our industry recovers. In prior calls, we talked about the $800 million of annualized new customer wins with larger customers in 2020. We feel good about the 2021 pipeline and our ability to continue to profitably gain market share with larger national customers. To prepare for the expected increase in case volume that we foresee in the coming quarters, we have started to hire warehouse, transportation, and sales associates in anticipation of the recovery. We are also investing in inventory to support our customers while partnering with several of our larger customers to understand the demand curve they are seeing in their business. And lastly, the evolution of our capabilities and our operating model, that I discussed earlier position us to emerge from COVID as a stronger and more effective business. I would now like to turn the call over to Dirk, for a discussion of our fourth quarter financial results, and how we have strengthened the future earnings power of our business.

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

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

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

So in many ways, in terms of where we anticipate growth, our strategy has served us well. This strategy focuses on both the types of customers we target and the capabilities we have developed over time, with independent restaurants remaining a key area of focus for us. As we have mentioned in previous calls, there’s a slight shift happening, a micro shift in terms of menu types and geographies, moving from urban to suburban areas. However, we believe independent restaurants will continue to thrive in the post-pandemic era.

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

So the large customer space, as I think I've said has proven to be kind of fertile ground, probably more than we thought pre-COVID, and we are taking advantage of that opportunity. That's the profitable business coming in. We've talked historically about our foray into retail, the foodservice side of retail, which we've got a couple of pilots going on across the country, which look promising. And then the third is cash and carry, we've always talked about cash and carry as an important channel for growth. It's a higher-margin profile than the core business.

Great. Thanks so much.

We have our next question comes from the line of John Ivankoe from JPMorgan. Your line is open. Please go ahead.

Hi, thank you. I have a couple of related questions. First, can you discuss the current status of the addressable independent restaurant market? There are many different figures available, and various definitions of what qualifies as an independent restaurant. As we are in mid-February, could you provide your estimation of the year-over-year percentage of addressable independent restaurants that are expected to reopen this spring or summer as vaccine distribution progresses?

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

Thank you so much for the time and color.

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

Great. Thank you very much. Two questions. One, just following up on the last one, but I guess, thinking about it more from your competitors on the Foodservice distribution side rather than the customer side. Just wondering if you could share some thoughts on your small and mid-sized competitors, especially as you talk about share gains and presumably, the opportunity you see there, whether or not you're seeing closures or opportunities there.

Okay. So I'll talk about the state of competitors; I'll let Dirk talk to part B of your question on return of capital. So, there really hasn't been much of a change in the competitive landscape since this summer. I think if you go back nine months, I think we all expected more shakeout from smaller and regional competitors, basically, depending on the speed of the recovery. Our share gains, we know exactly where share gains come from when it comes to larger customers. And as I've said, they've typically come from the regional players for a couple of reasons. One is, our standard operating model across the country just makes it easier for those larger customers to do business. And they see an accessibility that they may not see in smaller players.

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

Got it. As a follow-up, Dirk, on that exact point, it seems that in your prepared remarks and even just now, you mentioned the challenges that some of your peers are facing, and I assume you are experiencing similar issues with short-term sales weakness and elevated costs ahead of recovery, particularly regarding inventory and various labor aspects. I want to confirm that we're in an unusual timeframe where sales have not yet recovered, but costs remain high. I'm curious about how we should think about this in terms of sales and EBITDA.

Sure. And you're right. It's a different kind of unusual than it was last year, where now it's a matter of managing through the challenges that are still in existence. But I think, as Lauren put it, the light at the end of the tunnel is closer. And so it's managing for that recovery. And so, as a result, likely, the next couple of quarters become a little bit choppy as far as sales and staffing. We understand that increasing our staffing across the supply chain and sales teams takes time. We are diligently managing the current situation while also planning for the future. It’s challenging to predict exactly how things will unfold, particularly in relation to the recovery. However, for at least the first half of the year, we anticipate higher operating costs as we hire in anticipation of recovery in volume. We expect these costs to be temporary.

Understood. Thank you.

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

Hi. Thanks, good morning. First, just on the services that you offer the independent restaurants, you talked about ChowNow, and I think there's probably other some value-added services. Do you have stats that would suggest how independent restaurants perform relative to others, those that embrace those services versus those that don't?

We have previously mentioned that our services generally lead to a higher basket size and better customer retention. This was certainly true for ChowNow customers earlier this year, as their reopening rates improved significantly while closure rates, whether temporary or permanent, decreased. Regarding the second part of your question, I've used this analogy before: it's similar to the razors and blades model. We generate profit from the food we sell daily, as the increased basket size and customer retention contribute to our revenue. At this time, we haven't considered changing this model from a revenue generator to a profit-focused approach.

Thank you for your question. Could you elaborate on the differences in sales between January and February compared to March in a typical year? It seems March typically sees a higher sales volume. So, how much does the first quarter rely on March sales? Considering the significant changes happening, it's possible that current trends may not have much impact on the quarter, particularly regarding volume seasonality in the business.

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

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?

Good morning, Ed. You asked a great question. We haven't specified a number for January yet, but it is significantly better than what we experienced in December, particularly in the restaurants. While it's still early to draw definite conclusions, the trend is very encouraging and appears to be widespread. When considering acquisitions, we haven't discussed their specific impacts, but they had a modestly positive effect on our overall EBITDA and gross margins as a business. The seasonal factor mainly affects the fourth quarter, where we do see an increase. This effect is less significant in the other quarters, making it difficult to predict exactly how margins will vary based on the product mix, which has been the largest factor influencing the recovery seen in the first and second quarters.

Okay. And then just a follow-up related to the cadence of EBITDA performance. So I know there's cost investments that need to be made to prepare for the reopen. But as sales get better, should we still expect the cadence of EBITDA to be better over the next few months? So for instance, was January's EBITDA better than December's? And if the top line trend continues, do we expect sequentially better improvement in sort of February or March?

Edward, so a few things that I'll point out on that is that, so different months have fairly different levels of EBITDA based on sort of the volume base in those periods. So January, for example, tends to be a lower volume month than most of the other months of the year. So it's not as straightforward as just a steady cadence up. I think the other thing that as we look through in the earlier parts of the year, it's harder to predict exactly what the operating cost impact is and volume impact is because so far, what we've seen in different geographies is that recovery isn't necessarily linear.

Great. Thank you.

We have our next question comes from the line of John Heinbockel 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, roles you want to invest in.

So John, in terms of the investments you were talking about – and just as a reminder, right, it's drivers, it's selectors, it's also salespeople as we talked about. In terms of order of magnitude it's – part of the way back to where we were pre the reductions we made last April. So, not all way back, but part of the way back. And again, it's because we just have much greater clarity now as to the recovery and as well, it's just – there's more involved, right, in these days and servicing a customer than there might have been a couple of years ago, just given some of the service challenges that come with COVID and volatility of demand. And in terms of the nature of the investment that will be both sellers and new business managers are – as you remember, from when we talked about this a couple of years ago, the investment in new business managers has been one that has paid off for us. We're very pleased with it, so we'll continue on that front as well. In terms of drop size, we would expect drop size to be at least as high, if not higher than it was pre-COVID.

Okay. And then, I guess, as a longer-term follow-up, if you think about getting back right to pro forma 2019, right, sales and profitability. Is it fair to think because of the cost takeouts and the increase in drop size that the EBITDA gets back to that pro forma quicker?

So John, this is Dirk. I think it's too early to tell, but I think the way you're thinking about it is definitely the right way to think about it, we would expect it to be sooner because of the cost reduction opportunity that we took advantage of last year and improvements that that drives.

Okay. Thank you.

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

Great. Thank you. I wanted to ask, you mentioned that you're rehiring or hiring some warehouse employees and other drivers in anticipation of the increase in demand. Can you give us a sense of how many of these employees, are coming back to the system or rehires versus new employees? Just trying to understand how efficient and how much training will be involved to get these employees up to speed.

We expect that most of these individuals will be new hires rather than returning employees, particularly in the supply chain, as we start to ramp up hiring again across our approximately 70 distribution centers. The situation is similar on the sales side, as this is not about reducing and rehiring the same individuals. It also presents an opportunity for new talent as we move forward. This is why it's crucial to get ahead of this in the earlier months, as there is a bit of a ramp-up needed. But we are hiring, especially on the sales side, typically, individuals who are very experienced in sales. So that, combined with our internal programs, we expect them to be able to ramp up. I would think your specific question on timing, it's hard to know exactly, depending on the timing, but that productivity likely ramps up from those associates, as you continue to progress through the year.

Great. Can you provide some additional insight into the decision to rebrand Smart Foodservice to CHEF'STORE? What additional costs do you anticipate, what benefits do you foresee, and when can we expect to see those?

Yes. So the costs are some one-time costs in terms of re-signing. A lot of that kind of gets absorbed into the regular maintenance or refurbishment budget you would have for fleet of retail stores. In terms of the benefit, I think when we made the acquisition, we talked about not just the ability to tap into new customers, tap into your existing customers are now shopping at cash and carry. We observed an increase in our delivery business from customers who were also shopping at CHEF'STORE, which we believe is due to greater awareness and the effectiveness of our omnichannel strategy. By rebranding, we aim to make that connection clearer for customers. Additionally, we are ensuring that both customers and our sellers have the right incentives to effectively utilize and promote both channels, which we've learned from our experience with the six CHEF'STORE locations in the south.

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.

Good morning. I would like to know more about the changes you made to the incentive compensation and how they affected the quarter. What was your reasoning behind these changes? I understand it can be difficult to discuss this during a call, but I would appreciate any insights you could share regarding the motivation and expected outcomes.

We made some changes to the incentive compensation for the company's leadership. As we approached the second half of the year, we established an incentive structure that would reward expected levels of sales and profitability. It’s really that simple.

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

Sure, Kelly. Yes, that's the correct way to view it. It will be in full run rate in Q4. As I mentioned when discussing our Q3 results, you shouldn't expect to see significant additional savings because what we observed in Q4 is certainly coming through as anticipated in both Q3 and Q4. In Q4, you do have some things that offset; it was some of the temporary actions that were still in place in Q3, such as furloughs as an example or adjustments to sellers pay that was resumed to normal in the fourth quarter. But that is showing up. And our expectation is really unchanged that we expect the majority of the $180 million to be truly permanent and portions that we reinvest back over time primarily being in the sales reinvestments, as Pietro talked about to continue to enable growth as well as things like continuing to enhance our leadership position in digital and in areas like that.

Thank you.

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

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

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.

Got it. And any thoughts on the freight outlook?

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

Got it. Thank you.

We have our last question 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. We have observed that food inflation has been relatively steady over the past few quarters, hovering around 2%. The trends we're seeing are consistent with historical patterns, where non-commodity prices tend to be more stable, while individual commodities such as beef or cheese can experience fluctuations. Overall, we do not anticipate a significantly different environment as we move forward. Our team is focusing on managing the impacts of inflation and deflation in commodities through effective execution and maintaining our margins.

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

Thank you.

And we have our last question from the line of Fred Wightman from Wolfe 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 pickup outside of non-restaurants as well during January. But maybe just specifically on the education side, can you give an update on sort of the recovery outlook there and timeline, given some of the recent CDC communications regarding in-person dining?

Sure, Fred. On that one to point out, maybe focus on kind of three key areas: healthcare, education and hospitality. And I'll just start with healthcare, in the sense that, healthcare has been pretty steady, and as you've seen in the past in that kind of mid to upper-single digits lower. And that one, I think, as you start to see more vaccinations, just people being able to get out more, we would expect that to bounce back relatively quickly. It's been pretty stable. And as in senior living, et cetera, people can have visitors get out, et cetera, that's to bounce back. Hospitality and education are showing signs of improvement, but they're starting from much softer places than some of these other customer types. But on those is, to your point, as schools, for example, start to reopen, you expect that to come back. We're collaborating with some of our larger customers to gain a better understanding of the demand in those specific areas. For education, I want to highlight that while it is a smaller segment of our business, its profitability tends to be on the lower side. This affects cases more than it does profit, but we are maintaining close monitoring on product demand and our hospitality customers as well.

And that one, we would expect just based on survey data, et cetera, that you see as the leisure side, which is the bigger piece to likely snap back quicker than business over the course of the year.

Great. Thank you.

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

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