US Foods Holding Corp. (USFD) Earnings Call Transcript & Summary

Okay. Good morning, everybody. My name is Ed Kelly. I am the staples retail and food service analyst at Wells Fargo. I am pleased to be introducing US Foods today at the ICR Conference. It's been a challenging year for the industry in 2020. The company has executed well through the crisis. And with the stock still down considerably from pre-COVID levels, the company's presentation today is certainly timely as investors continue to focus on the recovery. So with us today are Chairman and CEO, Pietro Satriano; and CFO, Dirk Locascio. The company will start with a formal presentation, and then we will move to Q&A. You will have the opportunity to ask a question, I think, by submitting questions, and I'll be able to read those out for you, if you have anything. So with that, I will turn it over to the company.

Thanks, Ed, and nice to virtually see everyone, happy new year, and thanks for the opportunity today. As Ed said, I am Pietro Satriano. I'm the CEO, and Dirk and I will walk through about a dozen slides or so that give you an overview of US Foods. I know some folks here are perhaps new to the story, and the story will focus on 3 points. Scott, if you can advance to Page 3. The fact that we see this as a resilient industry, always have seen it as a resilient industry and one that is poised to recover post pandemic. Secondly, US Foods is a national distributor with scale advantages that allow us to take advantage of this recovery. And third, and probably where we'll spend the most time, is our differentiated Great Food. Made Easy. strategy that has driven profitable share gains, and Dirk will walk through some of the results associated with this strategy. So those are 3 themes we're going to cover. Before I do this, just going to take a minute or 2 to provide an update on recent volume trends. I know that this is of high interest to folks tuning in. This is a slide that we have used in recent earnings calls, and so we've update it for today. And you can see that, over the course of June, July, August, September, there was a really healthy recovery in the segment after the crisis that Ed referred to. But in the last couple of months, November and December, there has been a bit of a softening in volume, not surprising given some of the restrictions that have been put back in place in some jurisdictions. But this doesn't affect our view of the industry, which I'll get into in a minute. However, it does have an impact on Q4 EBITDA. On the last earnings call, we had provided an outlook for Q4 EBITDA that was in line with Q3. And as a result of this transitory softening of volumes, we do expect that will have an impact on Q4 EBITDA. So having talked a little bit about a recent update, I do want to spend the bulk of the time focusing on the medium to long term. And this chart, actually,, is a good segue to the next chart, which is a little bit about the industry. And I'll start with the chart in the top left, which is a chart we've shown before, which shows restaurants in the green line, food consumed away from home in the green line and food consumed at home purchased through grocery stores in the red line. And you can see that, over the course of the last 10 years or so, expenditures and food away from home have caught up to in terms of share of wallet or share of stomach to food consumed at home. And this was a trend that predates the last 10 years, goes back decades. These are habits that are firmly embedded in our society, in our country, habits that did have a temporary interruption, as you can see from the gray area in the chart. But we do fully expect and this is a perspective from an industry analyst that those -- that interruption will reverse itself, and food consumed away from home will continue to gain share from food consumed at home. There are 3 factors that kind of give us further confidence in this. The first one is when we look at sales in our markets that have the fewest restrictions, those sales approach 2019 levels. So that's one factor. The second is, when we look at other countries, like Australia, where, as you probably know, there were some fairly significant restrictions put in place which resulted in a good handle, good control of the virus, you can see how this proxy for in-store dining, which is reservations on OpenTable, is pretty much back to prior year. And the third is, from research, we've seen consumers do miss eating out as one of the activity or the top activity that they have missed the most. So not only is the industry a fairly resilient one, which we've known for some time, but it is poised for a recovery in the medium to longer term, as in the short term, outdoor dining returns, and in the medium term, as the vaccine gets broad distribution, which brings me to theme #2 and what we can do and what we have to offer in this industry. And there's 2 things I want to talk about. One is our scale, our advantaged position as a result of our scale. And then as I said, the third theme where I'll spend most of our time is the differentiated strategy. So this chart, this map gives you all the locations for our distribution centers across the country. You can see our national footprint, which is an advantage in terms of serving multi-geography customers and our scale in a fragmented industry. We're the #2 player, the top 3 players account for less than 40% of the industry, does give us some advantages when it comes to procurement, especially when it comes to cost of goods on the private brand side, when it comes to investments in technology. And then the second -- 2 things I want to point out is we have made 2 significant acquisitions in the recent 2, 3 years. The first is the acquisition of SGA Food Group, whose distribution centers are shown through the yellow dots. And you can see the rationale here. That significantly improved our footprint in the West and Pacific Northwest. And so that was an important acquisition, which we completed in September of 2019 announced in July of 2018. And then most recently, in March of 2020, the acquisition of the 72 stores, Smart Foodservice stores in the cash and carry channel. And as we'll talk about in a minute, cash and carry has been the faster-growing channel, faster than delivery. It's a more accretive, more profitable channel. And we seized on the opportunity to acquire the #2 player in the space because of the opportunity to grow share of wallet through an omnichannel strategy. So that's a little bit about our scale and our footprint. Let me now turn to the third theme, where I'll spend most of my time, and this is around our differentiated strategy, which we call Great Food. Made Easy. So you can see on the left, we have a broad array of customers. Half of them are restaurants, of which the majority is independent restaurants. And over the last number of years, we have focused our differentiated strategy on independent restaurants, health care and hospitality, which, interestingly, share many characteristics with independent restaurants. And our strategy has had these 5 distinct elements, each of which I will walk -- we'll walk through for a minute or 2: product innovation; our private brands; technology; expert support; and omnichannel, which I've already alluded to. So let's talk about the first one now of these 5 distinct elements, which is Scoop. Scoop is the name we give to our product innovation platform. These innovative products are developed by US Foods. They're exclusive to US Foods. They're versatile. Typically, they help restaurants beyond trend or save labor. And since its inception 10 years ago, we've launched 500 products. And somewhere in the country, 80% of these products are still offered, which is a really remarkable stick rate. But even more remarkable, I would argue, is the impact on basket, 21%; and the impact on retention. So Scoop continues and remains one of the centerpieces of our Great Food. Made Easy. strategy. Go to the next page, another aspect of our Great Food. Made Easy. strategy on the product side is our extensive portfolio of private brands. We have 21 brands. They cover all price points, all categories, and they account for about 35% of our sales. As I've said, scale -- this is where scale can really matter in terms of cost of goods, and you can see the impact of this. The portfolio of private brands, on average, is 2x more profitable than products sold through manufactured brands. And we believe that we still have significant upside in terms of growing the private brand portfolio in terms of its importance in terms of sales. The third element that makes us distinct and one folks have talked about quite a bit on the next page is our e-commerce platform. So our e-commerce platform, 70% of sales go through this platform. It's rated as the #1 e-commerce platform by customers and surveys we've done as a result of the customer experience, as a result of the degree to personalize the experience. And here, too, you can see the significant impact on basket and retention. And we've used the fact that we have encouraged customers to push their sales to our e-commerce platform. That has allowed us to take a more consultative, less transactional approach to selling, which gets to our fourth distinct element on the next page, which is the combination of value-added services and team-based selling. So let me unpack this one a little bit. If you're a restaurant owner, it's not an easy business. And the primary pain points you face as a restaurant owner, especially if you're an independent, are the opportunity to reduce waste, the opportunity to optimize your staffing and the opportunity -- especially these days with the explosion and takeout and delivery is the opportunity to drive traffic in unconventional means. What we've done is we've built a series of apps and services that help customers with these 3 pain points or opportunities, and we support them with specialists, whether they are Restaurant Operations Consultants or category specialists who work hand in hand with our sales force of 3,000 folks to figure out which of these tools and services can most help customers with the pain point that is most important to them. And this also drives loyalty and retention. The other thing which we have talked about for many years is that we support this effort with a fairly advanced tool of predictive analytics and big data, which is now enabled through machine learning, which gives us the opportunity to optimize pricing, to prioritize which efforts to cross-sell, which customers might be at risk, all of which happens in the background and supports our sales force. The fifth and last distinct element of our Great Food. Made Easy. strategy or differentiation strategy is around omnichannel. This one is not as, I would say, advanced, as mature as some of the others I've talked about but presents a lot of upside and in itself has these 3 elements. So the first is our cash and carry channel, which I talked a lot about already in my opening comments. The -- what we have learned over the years is that customers have an inclination to sometimes not buy off a delivery truck, which is the traditional means in our industry, but to buy by shopping at one of these cash and carry outlets. Think of all these with -- but totally aimed at the restaurant industry. And these are customers that are either more price-sensitive, are looking for a fill-in occasion or literally just a change in scenery. And what we found through our own experiments with this channel going back to 2012 and '13 is that the margins are higher, return on capital is higher, and there are some significant revenue synergies and show well opportunities with existing customers. And that explains why we made the acquisition of the #2 player back in March. A second element of our omnichannel strategy is around US Foods Direct. So a typical distribution center can stock anywhere from 8,000 to 12,000 stock keeping units, or SKUs. Think of this as an online marketplace that dramatically expands the offering for customers. Currently, we have 50,000 additional SKUs available on US Foods Direct, and what this does is this prevents leakage to online competitors. And thirdly, Pronto, this is our fleet of smaller trucks. They are aimed at more densely populated geographies where our large trucks don't navigate as easily, where restaurants don't necessarily have the back rooms to accommodate large deliveries. And so this, too, has presented an opportunity for us to provide both a more convenient offering to customers that is also more accretive to us as a company. So that gives you a bit of a flyover in terms of the distinct elements of our Great Food. Made Easy. strategy that have led to our profitable market share 2gains over the last few years. I'm now going to turn it over to Dirk, our CFO, to talk in more detail about some of those results.

Thank you, Pietro, and good afternoon, everyone. Pietro's talked about a number of the key elements of our strategy, focused on growth, leveraging our scale and our differentiation. So as part of the strategy, we've talked quite a bit about the focus on growing at twice the market rate with independents and enabling that with the added value we can bring versus many other distributors. This higher level of growth is a key enabler of gross profit but also overall profitability because these customers tend to be more profitable. As you can see on the left-hand side here, we've grown profitably with the independents at roughly 4% plus over the last 4 or 5 years, and that's about 2x the 1.7% estimate that Technomic put out for that same period for independents. The main exception was in 2018 when we were centralizing activities related to our purchasing team to really enable a more standardized and effective process for the future. So over these 5 years, we've effectively really shifted our mix toward higher-margin independents, and we'll continue that focus while we also continue to grow with health care and hospitality and opportunistically target other customers such as chains, which we've focused on this year. Our top line growth, along with a number of other improvements across gross profit and OpEx, resulted in, as you can see on the right, strong adjusted EBITDA growth CAGR of 7.6% over this period and a cumulative 90 basis point expansion of EBITDA margin over the 4 years. It's really that balance of growing dollars and margin that we've focused in recent years. On the next page, you can see that we've converted our earnings growth into cash effectively with operating cash flow growth CAGR over 8% for the same period. Our business generates a large and consistent amount of cash that we can use to continue to drive growth and reduce debt. One of the things we have a consistent history of is paying down debt with a strong growing cash flow and really reducing our leverage ratio. Our leverage increased, you can see, at the end of 2019 and early '20 due to the 2 acquisitions that Pietro talked about earlier and then our leverage ratio recently based on the COVID impact to earnings. We do expect, though, to follow the same path of debt reductions post COVID, and our mid- to long-term goal of leverage is unchanged at about 2.5 to 3x levered. So in closing for today, we've talked about a number of actions we've taken to define and refine our strategy in recent years and expect that we're positioned for US Foods to be successful post vaccine as the industry recovers. Large players like us with scale and liquidity have been advantaged, and that's evidenced by our recent addition of $800 million of new business with chains and health care customers and a strong pipeline going into 2021. We've made share gains in the second half of 2020 as we've been enabled, in large part, by our national footprint, technology and product offerings, and these share gains have been across small and large customers. We've shown here over multiple years how we've got a strong history of growing EBITDA and expect to do so in the future. For now, due to the volatile environment we're operating in, we are investing in inventory to maintain customer service. And the ability to make these investments is one of the advantages we have over smaller, less well-capitalized competitors, again a help for serving our existing customers and for winning new customers. We're prepared for the recovery also looking ahead by really hiring ahead on warehouse, transportation and sales associates to make sure we have the right staffing levels in place as the recovery occurs, also focusing on further enhancing our e-commerce capabilities to continue to provide that best customer experience that Pietro talked about. So the balance of looking at -- balancing -- managing today and looking ahead as the recovery progresses. If you then look at the recent cost reductions, combined with our new customer wins, we believe we've set the business up to succeed when this recovery does take place. And we expect that these actions have set the business also up to operate at a higher EBITDA margin post a recovery. So I think that hopefully gives you a good overview of the business. And with that, I think we can turn it over to Ed to start questions and answers.

Great. So we will be moving to the Q&A session now. And again, if you have questions, you could submit them, and I'll read them out. So just to get started. Obviously, you guys provided your update today, and sales trends early in December did deteriorate a bit, but then it looks like they got better as the month went on. Could you just provide some color here, more additional -- like additional color around what transpired in December?

Sure, Ed. So as you saw there, really, volume trends with almost all of our customer types were down November to December. And the biggest drop in December, though, has been in restaurants. And volume also has been more volatile during December. And as you said, the bigger drop earlier in the month and then some recovery. One thing I do want to point out is that last week around Christmas, the way Christmas falls in the weeks creates a bit of an artificial improvement that we saw during that particular week. So if you look at the couple of weeks leading up to Christmas, it's probably more indicative of the recent trends. So restaurants, down nearly 10% from November to December and overall down roughly 500 basis points or so. These drops, I do just want to note, they've been fairly broad geographically as COVID cases increased, meaning we aren't just seeing in reductions in states with restrictions. Although these states with fewer restrictions and warmer weather, they do continue to perform better even in this shorter-term downturn. And so with the COVID cases high, it's harder to speculate in the coming weeks. We'll watch closely, like many of you will, but we're likely to continue to be challenged for the first quarter. However, with the vaccine distribution appearing to increase each week and the warmer weather approaches, that should meaningfully help. These near-term. More recent volume changes don't change our outlook in a post COVID from what we've talked about recently and still believe, as Pietro talked about earlier, the industry is very solid and expect a strong recovery.

Okay. So is it fair to say, Dirk, that as we sort of think about early January that things are probably similar to that 2- to 3-week period prior to that last week of December?

Likely. I mean there's not a whole lot that appears to have changed in the broader market from restrictions in that. I think there are some things that if we think about -- it's early on with some of the stimulus checks and/or the new PPP package, it's kind of hard to tell how that impacts, if that's a help at all in the coming weeks. So like you, we'll be watching closely on there.

Okay. And then geographically, you did mention that there are some differences. How big is the performance gap in markets that are open in warmer states versus some of the tougher markets, maybe like California?

So we haven't talked about specific numbers, but it's quite broad. We have a number of markets that have been down single digits that, in some cases, are down maybe a little bit more in recent weeks in December but single digits versus others that are down much higher than that. So those warmer weather in Southern states, Southeast states with fewer restrictions have definitely fared well. I think what that also shows us, though, is in a recovery, again, because these have been so resilient held up so well. So that gives us some more of the confidence of the strength of the recovery as we start to see COVID cases decline and warmer weather also return.

Okay. And then on EBITDA, you did mention that EBITDA won't be at the level that you thought when you gave that update in early December. Any color that you could share on how far below Q3 we could be talking about? I would have to imagine there was probably some conservatism in that update.

So we're not going to talk about more specifics. I think the thing I'll just remind is a month ago we talked about this a little over a month, it was really less about wanting to provide a new guidance as opposed to just highlighting that the consensus that was out there, which was built, assuming meaningful improvement trends that we had seen in the third quarter as an industry continued and highlighting that with that stall that we wouldn't see there, and we had not sought to estimate if volumes decline what that would look like. It just simply said if volume declines, we would expect EBITDA to decline, and that's really what we're seeing show up. And overall just wanted to highlight that. Overall, as I said earlier, it doesn't change our outlook for the business post COVID. And for the near term, some of this messiness as a recovery, there's not perfect timing and consistent, and we'll work our way through it. And what I'd say is in a month when we do our Q4 earnings call, we'll give a little more specificity around how the quarter shaped up.

Okay. All right. And then just related to the independent customer base, I think this is the other area that obviously has had -- has generated a lot of attention. The recent COVID-related headwinds and the resurgence has kind of once again just raises questions around how that customer base is doing. Can you just provide an update on percentage of your independent customer base that's closed -- percent that's permanently closed and just sort of color on your end as to how you think that customer base is doing at the moment?

Yes. Maybe I'll take that, Ed. So just as a broader point, we've really emphasized the demand side of the equation, the fact that consumers are -- have demonstrated a real appetite to take advantage of takeout, to go back to eat out when restrictions are lifted. And for us, that is really the reason why we think the industry recovers to pre-pandemic levels and resumes its growth rate from there. Having said that, to your question on the supply side, obviously, this has been a tough environment for restaurants, especially in some parts of the country. In terms of the closures, it's a little bit hard to measure because we're not exactly sure why a customer will stop purchasing from us. Did they permanently close? Did they temporarily close? Did they move somewhere else? But based on the qualitative feedback from our local sales leaders, it does appear that the permanent closure rate continues to be what we've heard in the past, that we've called in the past of low to mid-single digits. There is, on top of that, some temporary closures, especially in the colder climates where folks are just going to set it out until the spring. That's potentially another mid- to low single digits. So incremental closures, mid- to high single digits, when you -- both temporary and permanent, when you add all that up, again, based on qualitative feedback. We're also hearing though, Ed, that there are -- and Dirk mentioned the most recent stimulus that was signed in last December. We did hear from a number of customers that, that was quite helpful. Some of them are looking at expansion opportunities because they see the recovery. They see opportunities from a real estate perspective. So I know there's a lot of press on the number of closures or potential closures today. There's also some promising signs in terms of the future.

And there's been a lot of talk around independent units that closed. And the question I have for you, Pietro, is how important is that metric. I mean, obviously, it matters directionally. That being said, it's the weaker players that probably closed, right, not the stronger players. And consumer behavior really dictates how many independent cases you sell, right, not as many -- as much on the unit side. So just sort of thoughts there on as you're advising us how to look at your business, how focused should we be on just the closure number. And I guess, in the end, is anything that you're seeing right now, does it concern you about the margin structure of the industry when the vaccine is here?

I think you said, well, Ed, and this is what I was trying to articulate. It's -- the link is directional. Obviously, demand and supply have to meet at some point, but what really drives the industry is these decades-old habits of eating out and taking out. And as I said, there are restaurants who operate are some of the stronger ones, right? As you said, the weaker ones will be more negatively impacted. We're looking at this as an opportunity. And from a margin structure perspective, Dirk can comment more on this, we haven't seen any negative headwinds. We've seen impact on margin as a result of commodity impact. We've seen a little bit as a result of some transitory menu mix impact, right? So some categories that have been -- some menu types have been more in favor or slightly lower margin. But when we normalize for all that, margins are where they would have been historically.

And just a question from the audience here is related to, historically, when we have these periods, and the Great Recession is probably the best example of where you may have an outsized number of closures on the independent side, how long does it take before that rebuilds?

Yes. I don't know that there's anything -- any historical presence compared to what we're undergoing as an industry and as a society now. And if you remember, too, the recession when I speak more broadly than restaurants, the recovery took a long time. And I think some of the very significant stimulus that we experienced in Q2 really led to a much faster recovery than we all would have anticipated. And I think that's why some of this most -- more recent -- not just the stimulus, but the aid to small businesses, which was streamlined, which was not only streamlined but made more forgiving and more extendable to other categories, I think that helps us well on the supply side of things in terms of restaurants who are in the more challenging parts of the country stick it out. The other thing we're seeing is we're seeing a bit of a shift, right? We're seeing -- I think you were alluding to this from a geography perspective. But even within geographies, Ed, we've seen suburbs and outlying areas hold up much more than the downtown core, and there's been a shift. So folks may not be going to the office, but they're still consuming in terms of eating out from their local coffee shops or local restaurants which are now in the suburbs. So we've really redirected some of our efforts, and this was -- this is one of the benefits of the team-based selling in this small army of new business development folks who we've been able to redirect them to the places where we believe the geographic pockets where we believe demand has been much more resilient.

So that gets me to my next question, which is really around the shape of the recovery and maybe even how the P&L sort of looks in this, right? I think many expect that life could return back to normal maybe by the end of the summer, if we're lucky, that this could lead to a period of unusually high demand. Maybe there's a lot of pent-up demand here. I guess how do you think about that one? And then secondly, as we think about that, what does that mean for incremental margins on your business as those sales come back? Because you have cut costs, and it does seem like if we get ourselves into a period here where demand is strong, that the margins on that could be good. So just your thoughts around all that.

Dirk, do you want to take that?

Sure. I can start. So I think you're right. So as the volume recovers, what we would expect is we would expect that not only the incremental cases, but then also, we've talked about some of the gross profit challenges that have come with just negative mix impacts from that customer base. As we've gone volume down, we'd expect that to all continue to improve. The thing that's harder to speculate is really the pace and then the exact timing because I think as we think about a "return to normal", one of the things we know is that not all will probably recover at the same pace, whether it's geographically or customer types. And so it's not that we're not managing EBITDA for the near term, but we're also balancing that for making sure the business is set up well as the recovery continues to be able to support the business. So a couple of things that I would just talk about there are because, as you said, we did take the costs out to the $180 million of fixed costs. We tried to really be balanced when we did that about things that would not impact serving the customers. But right now -- so 6 months ago, it wasn't focusing on a recovery. It was 9focusing on managing just through the day-to-day of COVID. Now it's managing through that day-to-day, but also, at the same time, looking ahead to a recovery. And so it's things like as volume recovers, beginning to hire incremental warehouse associates, delivery drivers and some market sales associates really to be ready for that. So that means that it can create a little bit of incremental costs ahead of when the volume is back, but it's really -- it's not a structural cost change per se as opposed to just setting the business up for that recovery. So I think it could still be a little noisy or messy for these coming months as the business is managing through lower volumes but yet getting ready. But we would expect in a, I'll call it, if you look whenever way ahead that normal recovery time frame is, that the business should be able to operate at a higher-margin level because of the reductions. So out of the $180 million, we haven't talked about a specific number, but we would expect the majority of that to stay in place over the longer term with the portion that we reinvest largely being in areas of making sure that we have -- continue to add sellers where we need those, and in some cases, some limited incremental resource around digital to maintain our leadership in the light there. So these are -- today, where you've got the challenge of carrying incremental drivers and selectors because in December, the COVID cases are going up all over, so you're carrying incremental costs, but that also helps from a hiring of having more associates that would be ready for when that business recovers.

And then related to the $180 million, it sounds like the majority and probably not all but a lot of it maybe stays around and is permanent. But could you provide a little more color on where the savings really came from? Was it pull-forward of sort of future initiatives? And then are -- how confident are you that the cuts won't prevent you from capturing business on the upside?

Yes. So we have -- the majority of the $180 million of fixed costs have come from headcount, but there is a large portion that's non-headcount, things like travel, relocation, lower insurance due to improved safety results, so things like that, that came from improved performance. Nothing really has changed on the pieces or the amount since I would have talked about them last time. But that's why also we've not talked about expecting the full $180 million to be permanent as opposed to investing some portion of it and just leaving at this point as though the majority we expect to be permanent because we do want to make sure -- so we've taken that balanced approach, as I talked about, to ensure that the reductions didn't keep us from growing. You can see in 2020, it didn't as we had -- with larger customers, we had one of our best years in history as far as onboarding new customers. And we were very focused on not just bringing cases through the system for the sake of cases as opposed to profitable growth. And those customers that we onboarded were at the high end of profitability for those customer types. So the pipeline remains solid. So we're going to continue to invest where it makes sense to continue to enable that growth so it doesn't get in the way. And then also really setting us up so that the business can structurally operate at a more profitable level but enable the growth across small customers and large customers that we know is there. I think one of the things, even in these recent months where volume is down, our sellers and our new business managers have not been standing still. They've been out talking to prospects and signing new customers, et cetera, because we know that, in many cases, they're interested in those changes now as opposed to just waiting until after a recovery happens.

So as it relates to new customer wins, you've obviously had some good success during the pandemic. Could you provide us with a little bit of an update on what you're seeing there, what the opportunity looks like at the moment and really the reason that you're winning this business?

Yes. I don't know that we have much of an update. Last year, in 2020, we signed and have mostly onboarded $800 million of new business. That was a great year for us. It's the result of at this development -- business development effort for some time. And I think in 2020, the pandemic allowed us to take advantage of some opportunities that might have taken longer. This $800 million, right, Ed, is all in the, what we call the large customers, whether it's chains or health care and hospitality. And I think for many of them, 2 things were appealing. The first, which was a result of the pandemic, was the staying power we have, being well capitalized and clearly having the staying power that they fear some of their smaller providers might not have. And then this operating model we have that is more advanced, I believe, than our competitors in terms of being able to consistently serve customers in different parts of the country through a consistent service model that led to the -- especially on the restaurants side, that led to those wins. And I think very early, but I think we'll have another good year in 2021.

So I guess, related to that, can you just talk about maybe what you're seeing from a competitive standpoint in the industry? What's happening with some of your smaller competitors? Any incremental signs of stress there? And then from your larger, more -- better-capitalized competitors, it would seem like price competition would intensify during the pandemic -- I actually don't think that's happened but just kind of curious as to what you're seeing on that end as well.

Yes. So it hasn't happened. The -- it's already a fairly competitive industry, as we've talked about. And I think the larger competitors, I think we do a good job of -- we've always said what matters is dollars to the bank. We're not just going to gain share for the sake of gaining share. In terms of the first part of your question and the smaller competitors, there was, when we talked back in April, a half dozen or a dozen names that came up as being stressed, but that hasn't changed. I think the speed of the recovery over the early summer and fall probably prevented more names from being added to that list. So that has been the level of stress on the smaller competitors, additional stress. We haven't seen it. We've seen, as I said, customers be concerned about that, and that's why they've made decisions to move, but we haven't seen any more competitors come out of business. We've been approached by salespeople from, again, some of these competitors who were concerned, and that's provided a really good opportunity from a talent perspective for us.

Another question from the audience here is just related to freight and freight costs. And let's put driver pay in this as well since a lot of your freight costs is really on the outbound side. Any incremental pressure here in 2021? I mean, obviously, things like spot rates have been going up and freight generally. I'm just not sure whether it's working its way at all into your driver community.

Sure. So you're right. It's been a tight market for freight this year. It continues to tighten, even as we've gone through the fourth quarter a bit more. And I would expect at this point, we would expect that it will continue at least for the first half of 2021. That's more so on our inbound freight. Hiring with drivers for our own outbound has -- continues to be a tight market. It has been for several years, but we are able to continue to hire in those areas. So I don't know if there's anything different per se that I would call out, but it is -- the teams are working hard to ensure that we're hiring and staffing. And that's why also another reason why we've tried to get ahead of hiring backup for a recovery knowing that you can't just hire these individuals overnight, aside from even the training that they would need. But from a -- back to the inbound freight, one of the things, if you look back at multiple economic cycles, it seems like you see each time is that as the markets get tight, operators add capacity. And so they add fleet, and I wouldn't be surprised or would expect as we get further into 2021 that to be the case, but we'll be watching closely on that one, just to see if that repeats. And in the meantime, we're focusing on partnering with our freight partners and managing our freight where we can and optimizing it. One of the things that doesn't help in the more recent months is as volume is more volatile, up and down, it gets harder to optimize freight when ordering patterns are not as consistent. But again, those are more temporary or transitory as opposed to longer term. And we're going to continue to do that work. And whether it shows up immediately or shows up as volume recovers, that's an area that we'll continue to focus on. The other thing and final, I guess, I would say is that we put in place just, especially after 2018, continued process improvements that have allowed us to adapt a little bit more effectively than we would have in the past. But it's all about just managing the best we and others can through this tighter market.

Okay. And I wanted to ask you about your direct competitor, Sysco. And I know you don't like to necessarily comment directly on competitors, but there's been a lot of change within this company. I'm sure you've had internal discussions around the things that they're doing. I mean, to some extent, it looks like a lot of what they're doing is kind of what you've been doing. I'm just kind of curious as to what you're seeing there. When we think about things like eliminating minimums on customers, how meaningful is that? I'm sure no one fires a customer because they can't make the minimum during a pandemic, but, I'm just kind of curious as to whether anything that's going on over there has you thinking about adjusting your strategy differently at all.

Yes. The quick answer is nothing's really caused us to adjust our strategy. I think the main reason , Ed, is what you said, which is if you think of the 3 main things they've talked about, the regionalization structure, the greater emphasis on digital and kind of what we call team-based selling, those are things that we've -- a journey we've been on for many years. So we'll continue to push on that frontier. In terms of specifically the minimums, so our local markets have the ability to waive a minimum or for certain customers or certain routes, depending on the circumstance, depending on the reason. And so we have not seen an impact on our business from that decision, from their decision.

Okay. I wanted to ask you, Pietro, if you could just take a step back for us. And how do you think about sort of like the state of the underlying fundamentals of the company at this point? So if you think about the recovery, right, and the recovery in stocks, for instance, your stock has lagged your other peers despite the fact that you've executed very well during this period. So putting a COVID -- putting COVID aside, how would you assess the underlying state of the company strategy? I think you have KKRs back on the -- sorry, is on the Board now, right? Does that change anything? Just kind of curious as to your sort of state of the union here.

Yes. So we've -- that's why I really tried to get at with the 3 themes we covered. We believe that what we offer to customers and then as a consequence to investors is the scale model, which really matters increasingly, as I talked about, in terms of cost of goods, in terms of the ability to leverage technology with a differentiated platform that seems as relevant as it's ever been to our target customers. We did -- the team did some fantastic work in terms of pivoting our Restaurant Operations Consultants over the course of the summer to helping customers navigate the CARES Act and the reopening when restrictions were lifted. So in terms of our offering, we feel that we've got a really good story for customers. Obviously, we continue to enhance and advance that strategy. And from a balance sheet perspective, you mentioned KKR, we feel we're -- we've got a very well -- I know some folks out there are concerned about the degree of leverage, and that may explain some of the discounted multiple relative to our largest competitor, but we believe we're in very, very good position from a balance sheet perspective, and we've taken advantage of that, as Dirk mentioned, where we have to in terms of investing inventory because of the volatility from the vendor side. I think, as we've talked about before, Ed, I think there have been some decisions we've made from an acquisition perspective that perhaps concern investors. But I am fully confident that we will deliver on the promise of the strategy, deliver on the promise of those acquisitions, whether it's Smart Foodservice and the ability -- the opportunity to really make that channel much more meaningful. The integration of Food Group has gone very, very well in terms of that integration. So I think the future will deliver the kind of results that we've committed to over the course of time to come, and I think that ultimately will be the proof in the pudding.

Great. And just one last one for you. So you have mentioned that you're optimistic around sort of margins post COVID. Prior to all of this, there -- you had always gotten a question around the margin gap to Sysco and how much of that can you close over time. And you've kind of alluded to about 2/3 of it, right? Has anything changed related to that? And do you still believe that you can obtain that over time? And what does over time mean, by the way? Like how long does that take? I'm sure it's a big slice.

So I guess the short answer is, Ed, no, nothing has changed. You're right. So we're about 200 basis points difference in EBITDA margins and about half gross profit, half OpEx. We believe the gross profit, which is primarily, we believe, is private brands, can be closed over time is not a reason and then OpEx, about half of that. The other half being the scale of their size. So it's hard to say what the specific time frame is because of -- it's always an evolving world. I think the thing I'll come back to is that over that -- using that 2015 to 2019 time frame that we talked about, you saw where we grew EBITDA dollars at almost 8%. We also expanded margins at about 90 basis points. So we have tried to run the balance of both of those over time.

Great. Excellent. Well, I think we're out of time. So thank you again, super helpful. And thanks, everyone, for attending.

Thanks, Ed. Thanks, everyone.

Thanks, Ed. Thanks.