US Foods Holding Corp. (USFD) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the US Foods First Quarter Earnings Review Conference Call. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Melissa Napier, SVP, Treasurer and Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, everyone. Welcome to our first quarter fiscal 2020 earnings call. Joining me on today's call are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Since mid-March of 2020 towards the end of our first quarter, the business operations of our restaurant, hospitality and education customers were significantly disrupted by the spread of the COVID-19 virus. On today's earnings call, we will focus our commentary on trends seen in the business for both a pre-COVID and post-COVID time frame, extending through the week ended May 2, 2020. We'll also be discussing the actions recently taken to strengthen our liquidity and provide an acquisition update for both Food Group and Smart Foodservice. Today's presentation slides, which include volume trend information for the first few weeks of Q2 as well as the Q1 slides that we typically prepare, can be accessed on the Investor Relations page of our website, along with our Q1 earnings release issued earlier this morning. 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 quarter and full year fiscal results to the same period in fiscal year 2019. Also during today's call, references to organic financial results exclude contributions from the Food Group, which we acquired in September of 2019. 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 our Form 8-K filed with the SEC on April 23, 2020 for further information on these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. 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, Melissa, and good morning, everyone. Welcome to our first quarter earnings call and our first call since COVID-19 has had such a dramatic impact on our country and our industry. As Melissa said, we'll spend most of the time reviewing the impact of COVID-19 on our business and our response to this unprecedented challenge. But before I do so, I would like to take a moment to say thanks, first, thank you to all the health care workers who are on the front lines, fighting the COVID-19 outbreak every day. Thank you to our associates who every day play a vital role in maintaining the food supply of our country, and then thank you to our customers and their staff, many of whom have suffered devastating losses during this period. In this time of need, we have tried to do our part to provide meals to those less fortunate and we encourage all who can to do the same. Slide 3 provides an outline of the agenda for our discussion today. As Melissa mentioned, our focus will be on recent trends and our response to COVID-19, but we have provided the standard quarterly slides at the end of our presentation for your review. Since the outbreak, our response has been formed by three guiding principles: keeping our associates safe, helping our customers, and conserving cash and generating additional liquidity. Ultimately, these three guiding principles are what will ensure the long-term health and success of our company. Let's go to Slide 4 for a very brief overview of the first quarter. January and February case growth and EBITDA performance was in line with our expectations for the quarter prior to the COVID-19 outbreak in March. Volumes rapidly began to decline starting the second week of March as many states enacted stay-at-home orders. Case volumes stabilized at just over minus 50% and now have begun to recover in the last few weeks. Our gross margin rate was negatively impacted as a result of the change in customer and product mix, which we do expect to recover as volumes return. And lastly at the end of first quarter, we implemented a number of actions to bring our costs more in line with our reduced volumes. But the timing of these actions resulted in less impact to the Q1 results. In the first quarter, we also booked an incremental $170 million reserve from collectible accounts based on the expectation that COVID-19 would impact our ability to collect outstanding balances from customers. Moving to Page 5, I would now like to talk about volume trends by customer type from the middle of March to the end of April. The yellow line shows volume for restaurants, which includes both independents and chains. After falling close to 60%, volume for restaurants has improved in recent weeks. We attribute this to a number of factors, including restaurants reopening in part as a result of SBA loans under the CARES Act, stimulus payments hitting consumers' bank accounts, and both restaurants and consumers taking greater advantage of curbside pickup and delivery. Looking forward, we do see opportunities to gain share with this customer type as we see prospects and customers, some of them approaching us and expressing a concern with the viability of some smaller distributors in our sector. Our healthcare volume, shown in orange, has been less impacted than other areas of the business. The decline in case volumes as a result of the postponement of elective and preventative procedures across most of the country's hospitals and we do expect this volume to recover more quickly as hospitals have begun to reinstate these procedures. Not surprisingly, hospitality, the blue line has been one of the hardest hit customer types as travel and large gatherings have come to a virtual standstill. We expect that it will take longer for this particular customer type to recover. Lastly, I am pleased with the progress we have made signing over 30 partnership agreements with grocery retailers, providing some baseline volume, and additional opportunities for growth in the restaurant section of these grocery stores which is right in our wheelhouse. These trends across the varied customer types are roughly in line with what we've observed in the industry as reported by third-party data. Moving to Slide 6, while no one knows exactly when or how our industry returns to normal, we can point to some promising signs about the resilience and the ultimate recovery of our industry. According to consumer research conducted by Technomic, consumers do long to get back to eating out, with 49% of consumers saying dining out is the activity they look forward to the most after social distancing restrictions are lifted. Another promising sign is the growth in spending in the last two weeks, estimated close to 30% and this coming mostly from takeout and delivery. So while a recovery is likely to be gradual and potentially bumpy, our trends those of the industry and consumer attitudes do point to an eventual recovery for our sector. Helping our customers remains one of our guiding principles. And on Slide 7, we illustrate how we have pivoted our team-based selling and value-added services to help our customers make it through this challenging period. We've conducted numerous webinars on various topics, including helping customers navigate the CARES Act, activating social media, implementing takeout and reopening their businesses on the constraints of social distancing, including helping them create opening orders and checklists to successfully reopen. In addition, our chefs and our restaurant operations consultants have been available for one-on-one consults with customers. To-date, over 10,000 customers have taken advantage of these services and have provided overwhelmingly positive feedback. We believe this natural extension of our differentiation strategy, not only helps customers with these - with their current challenges, it also creates a tremendous future engagement and loyalty towards the U.S. Foods brand. Until, the virus is no longer a threat, keeping our associates safe is our first guiding principle. In our facilities, we put in place measures early on to ensure the health and well-being of our associates. These measures included conducting associate wellness checks before entering our facilities, practicing social distancing, including assigning associates to specific work zones within warehouses, enhancing cleaning procedures and instituting new protocols for deliveries. These measures have resulted in a very low number of COVID cases and minimal risk to business interruption. Nonetheless, early on, we also put business continuity plans in place to ensure we could continue to serve our customers, prioritizing health care from any node in our network of over 70 distribution centers. Lastly, given the dramatically reduced volumes, we quickly put measures in place to bring both fixed and variable costs in line with reduced volumes so as to conserve cash, our third guiding principle. In distribution, which accounts for the majority of our operating expenses, we quickly accomplished the rightsizing of our cost structure through a combination of furloughs, and temporarily contracting some of our drivers and selectors to retailers who have experienced a surge in demand. This latter measure has the added benefit of helping us retain this experienced workforce for an eventual recovery. I will now turn it over to Dirk, who will begin by discussing the other measures we have taken to align our costs to current volume and the measures we have taken to strengthen our balance sheet. Dirk?

Thank you, Pietro, and good morning. You heard Pietro talk about the steps we've taken to manage our variable distribution costs. We've also taken a number of actions on our selling and admin costs and other activity in managing our CapEx and working capital as well. Within our selling organization, we furloughed some sales support associates and reduced the size of our sales force to match the lower case volume we are likely to experience over the coming months. Our team-based selling model and technology position us to continue to support our customers in the way that we have before, which is important in this challenging environment. We will continue to actively monitor the pace of the potential recovery and believe we are well positioned to take advantage of the future growth opportunities. On the admin, one more fixed cost side of the business, we've also taken actions to address our cost structure, including inactive furloughs for corporate and field admin associates, implemented hiring freezes and deferring annual merit increases, taking temporary salary reductions put in place for associates at the manager level and above and Board compensation temporarily reduced. Finally, we've also significantly reduced discretionary spend and costs such as travel, marketing and consulting. All of these actions are designed to preserve cash as we navigate the current unprecedented situation. More broadly, in cash management, we've also paused noncritical CapEx spend and are actively managing all areas of working capital. To date, we've had good success collecting outstanding accounts receivable balances with approximately 80% of our pre-COVID balances collected. While this is a good start, it is too soon to know the full extent of customer losses and the resulting impact on our working capital. Pietro previously mentioned, we recorded the $170 million uncollectible account reserve as an early estimate of future receivables of total losses expected and are actively working to lower this reserve amount through our collection efforts. We're also managing down our inventory levels to reflect the lower volume and temporarily extended our accounts payable terms. As volume returns, we would expect, accordingly, to reinvest to increase inventory and expect to resume to our normal payables cadence. On slide 10, specific to acquisitions, the Food group business has seen case volume declines that are very similar to those Pietro discussed for the U.S. Foods legacy business. As a result of social differencing restrictions, we've paused integration activities until travel resumes and restaurants reopen. As a result of this pause, we do expect a delay in achieving synergy targets that is in line with the delay for integration activities. Once it is safe to resume, we're prepared to quickly restart our integration activities. On April 24, we closed the Smart Foodservice acquisition. As a reminder, Smart Foodservice is a network of 70 small-format cash-and-carry stores that generated $85 million in 2019 adjusted EBITDA at a 7% to 8% margin rate. One of the reasons this business is attractive to us is that it’s leading position in the $17 billion cash and carry channel which has higher growth rates and better margin than our delivered business. Our existing CHEF'STORE have shown us that cash-and-carry also results in greater share of wallet with delivered customers. The sales growth opportunity, combined with Smart Foodservice attractive EBITDA margins, make the future growth opportunities that much more attractive. In addition, the cash-and-carry business typically performs well during the economic downturns. April case volumes were down 5% to 10% from a year ago versus down roughly 50% for our delivered business. In the economic downturns, more customers appreciate the value offering of cash-and-carry and our Smart Foodservice and CHEF'STORE locations provide. Moving to Slide 11. The financing actions we've recently completed position us well regardless of the length for depth of the economic recovery. Securing this additional liquidity was important given the uncertainty surrounding the impact from COVID. We believe our available liquidity positions us to emerge as a strong competitor post-COVID and grow at above-market rates. We've spent quite a bit of time understanding potential impacts to the business, depending on duration and severity of COVID. We've modeled various recovery scenarios and believe two are the more likely. A quicker recovery, which would entail a gradual and phased recovery across the country beginning in 2020 and continuing into 2021, or a slower recovery, which entails more choppy case volumes through 2020 and a more fulsome recovery beginning in 2021. This includes the possibility of a second downturn. In both of these situations, we have ample liquidity. Furthermore, we've also modeled a stress test or downside scenario. Our modeling indicates that even under the stress test scenario with no recovery until the second half of 2021 and only a gradual recovery even after that in the second half, as well as a significant slowdown in customer receivable collections, we have sufficient liquidity to weather this type of extended downturn. Moving to 12, on Slide 12, you can see the number of transactions we completed recently that I referenced. We thought it would be helpful to provide an estimated view into net debt and liquidity and as of the end of April 20, post these transactions. So the April view here is our pro forma estimates of net debt and liquidity as of the end of the month. To summarize, we completed a $500 million preferred equity offering that will fund tomorrow, a $1 billion senior secured notes offering and a $300 million term loan. Before completing the KKR transaction, we evaluated different forms and sources of capital raise, including public common equity. And ultimately determine the preferred equity investment from KKR was the best option in part due to the fact that is expected to be less dilutive over time for existing shareholders. The proceeds from these offerings were used to fund the Smart Foodservice acquisition and to strengthen our overall liquidity position. On the left side of the page, you can see the change in our debt structure and liquidity as a result of these transactions. We completed one other change to our capital structure as it relates to our revolving credit facilities. We closed and paid off the ABS facility and are moving the receivables that back that facility to our ABL facility. The ABL facility will now be approximately $2 billion. The covenants under the ABL facility are more flexible and moving our receivables to this facility better preserves our liquidity during this downturn. As of the end of April, we had an estimated $1.6 billion of pro forma cash on hand, which gives us flexibility and allows us to operate the business from a position of strength. The net effect of the recent financing actions results in approximately $800 million of additional liquidity, giving us total estimated liquidity amount of $2.4 billion as of the end of April. Over time, liquidity amount will likely decline some as our receivable balance declines. Until such time, the case volume rebounds in a more meaningful way and as we return to our normal payables cadence. As I previously mentioned, we believe this is more than enough liquidity to weather this crisis regardless of the duration and even the stress test or down scenario that I spoke of previously. Moving on to Slide 13, on March 23, we withdrew our fiscal 2020 fiscal guidance, and due to the uncertainty surrounding COVID-19, we're unable to provide an update on fiscal 2020 guidance at this time. We do expect COVID-19 to have a significant impact on our Q2 2020 results with some form of recovery coming after the second quarter. At the present time, it's too early to tell what this recovery looks like. We do look forward to providing more details on our next earnings call. Regardless of what the recovery looks like, the new recent financing activities that we've completed are expected to allow us to operate from a position of strength when COVID-19 passes. While the future is uncertain, we operate in a large, resilient industry and are well positioned to serve customers' needs as this recovery occurs. With that, operator, we can now open the call for questions. Thank you.

[Operator Instructions] Your first question comes from Judah Frommer with Credit Suisse. Your line is open.

Thanks for taking my question and for all the color. Maybe if we could just start out, what are you seeing between your independent customers versus your chain customers, not only in terms of recovery off of the bottom but as we see the independents kind of continue to struggle with volumes in their store, are you seeing any accelerated level of closures from those independents that could potentially offset the faster recovery from chains?

So thanks, Judah. So during the - most of the last six weeks, there was minimal difference between chains and independent restaurants in terms of the volume declines and the speed with which those volumes declined. There was a little bit more resilience from the QSR sector, but generally, both were very much in line with each other. And it's premature to say, we do expect some closures. I think the NRA has called for closures on the order of 10% or 15%. I don't know that anyone knows exactly where closures will be. And there will be closures on both the corporate side, the corporate chain side and on the independent side. So we believe that, ultimately, both - as this sector recovers, I think both chains and both independents have an ability to thrive.

Okay. And I thought I heard Dirk say that, that the sales force was rationalized to some extent. I think your public competitors have kind of talked about leveraging the size of their sales force as others kind of pull back and don't necessarily have salespeople selling into existing and new accounts right now. So can you just remind us of the approach between the team-based selling approach and maybe some technology on top that's allowing you to make sure you continue to kind of build market share while others may be pulling back through all this?

Yes. So you're right, Jud, the combination of team-based selling, our strong e-commerce platform, our value-added services, we believe is a better way to grow profitably and with both existing customers and to acquire new customers. And that model continues. We did make some small adjustments to the size of the direct sales force or not the support side of things, not the team, behind the team-based selling, but the direct sales force. And that's because, again, as we expect a lower, smaller number of customers due to some closures. We wanted to right-size the sales force and ensure we put our best talent forward as the sector recovers.

Your next question comes from participant [indiscernible]. Caller, please state your name and company name. Your line is open. [Operator Instructions]

William Reuter, Bank of America. I was just wondering if you could talk a little bit about - if you've experienced any challenges with regard to perishables and those becoming stale? And I guess, if there could be future write-downs of that inventory in the subsequent quarters? Thanks.

This is Dirk. So yes, we've had some limited losses to date. And really, as we've quite actively managed through that across each of the perishable categories, let's say is not a sort of meaningful driver of the overall results and now are quite actively managing that from week-to-week as we go forward with the volumes where they are. And have done a combination of things of moving things around in our distribution centers and finding partnerships with various retail and others in order to minimize the losses that incur in that space.

Great. And then just one follow-up for me. Can you talk about maybe quantifying any headcount reductions that you have thus far implemented? And if you expect there could be further reductions that are going to be required if demand remains at lower levels? That’s it. Thank you.

So far, we haven't talked about a specific amount, but what we've done is - so Pietro talked about some of the actions we've taken on the sales organization and the rest of the organization from admin. We've taken a number of steps where we've handled it to date, primarily through temporary furloughs and meaningful portions to reflect the environment we were in. And really handling those on an ongoing basis, so as the environment continues to evolve, we'll continue to specifically manage through that from short-term and long term and permanent actions, as far as managing that, just being really smart with our ongoing admin costs in the environment we're in.

The next question comes from participants whose information is [indiscernible]. Caller, please state your name and company name. Your line is open. [Operator Instructions]

This is Jeff Bernstein from Barclays. I have two questions, just one looking at Slide 5, I appreciate the granularity. And specific to the - presumably the yellow line for the restaurant industry, I'm just wondering - or one, maybe you can provide the data points, but it looks like the trough is down more than 60% the week of March 20, it seems like you saw a last improvement from there, but maybe it’s kind of flattened out and stalled out at down what looks like 45%. So I'm just wondering whether you'd anticipate meaningful further gains from here or the timeframe for that and whether you’re surprised by the lack of further upside of late. Just wondering maybe what sales assumption you have in your models for coming months for that restaurant line? And then I had one follow-up.

So I won't put too much emphasis on just one week, which I think is what you see in the flattening. I think we continue to see a steady increase in business with restaurants, both chains and independents. And as I mentioned, that business is - that incremental business is coming from takeout and delivery as both restaurants and consumers become more interested and more adept at participating in that channel. And then as more and more restaurants continue to open over the coming weeks as the shelter in place orders get lifted. And we know from our conversation with the field that our salespeople are having with customers that they are all over the coming weeks, they're all planning to reopen. And I think you'll see that yellow line continue to trend steadily upwards.

Great. And then I believe you made comments in your prepared remarks about potential market share opportunities from perhaps some of your smaller distributor competitors. Just wondering, if you have any qualitative commentary in terms of the challenges, they're facing in terms of the opportunity to take accounts from those smaller competitors. What you've seen in the past in periods of challenge or whatnot in terms of the survival rate of those independents and the opportunity you have to take share?

Yes. I think it's - what we are going through is really unlike anything we’ve seen in the past. So it’s hard to really use the path as a predictor. But as you can imagine, given our scale and the strength of our balance sheet, you would expect for us to have the ability to profitably gain share. And as I mentioned, there are some customers out there, for example, regional customers with whom we're having conversations who are concerned that their existing smaller regional players or smaller, more local players are being significantly stressed by this crisis. Again, because of the liquidity we have from an inventory perspective, we have the ability to respond quickly to anticipate the needs of our customers, something that perhaps competitor who's not as well capitalized might not be able to do. So, I think there are a number of reasons why you would expect the larger more well capitalized scale players to come out of this stronger than perhaps some of the other players in the industry.

Understood. And then lastly, just to clarify. I think, Dirk, you mentioned on your liquidity slide, roughly $2.4 billion currently. And I know you mentioned that you're very confident with that amount going through the middle of '21 or even through the end of '21. It seems like you got a 1.5 years or so when you feel very comfortable that would seem to imply a cash burn rate of north of $100 million a month. I'm just wondering if that's a fair assumption, assuming sales at these current levels with no presumed recovery? Just trying to get a ballpark on that cash burn rate by week or month or however you look at it.

Sure. I'll just reiterate my comments about the confidence over that time frame. As you point out, that it's a very stress test scenario of no improvement through the middle of next year and even modest after that. And then there's also working capital, which is just as important from a cash impact and the uncertainty in exactly what that recovery looks like makes working capital a little less predictable. So I am really not sharing a specific burn number for these reasons. But as I commented earlier, I feel very good about our liquidity and that we are managing cash quite prudently across the operation or working capital during this downturn period.

Your next question comes from Carla Casella with JPMorgan. Your line is open.

I'm wondering if you've added a lot of retail customers, grocery-type. After COVID, do you see the overall mix shifting longer term, and where do you think that could go?

So this is Pietro. I think there is two opportunities with the retail business that we've been able to - take advantage of or anticipate. The first one is we've provided additional capacity call it, surge capacity for - while those retailers were stressed additional access to perishable inventory that wasn't necessarily available at the time. And that business has been good for us because, as I said, it provided some additional baseline volume and helps keep our workforce - experienced workforce in place. I don't expect all of that business to be in place over the long-term, but some of it will for sure stay in place. And we'll be judicious about the right profile of that business where there's a good fit. Having said that, what we've talked in the past about that section of the grocery store, which looks and feels more like a restaurant, the grocerants, and that is right up our wheelhouse in terms of the types of products we serve. The margin profile associated with that business. And that's where we anticipate that these - some of these new relationships that we have formed will allow us to accelerate our ability to penetrate that part of the grocery store, which we see as an extension of food away from home.

Give - a sense for how big that business can be? I'm just wondering if the business that you're bidding on for that is continuing to grow and how saturated that market is?

You're talking about that second part, the grocerant-type business, how big that is?

Exactly, yes.

It's hard to say. There's no real good estimates at this point, but we do see an opportunity to kind of accelerate our position in that sector. Exactly how big the size of the price is, I think it's a little bit early to say.

Okay. And the competitive set dramatically different when you're looking at that part of the business?

It is a little bit. I think you've heard some of our other competitors also be interested in that space, and they also serve by a different mix of competitors. And I think what the recent crisis has done is just allowed new relationships to be formed, right? It shaken things up a little bit, which provides an opportunity for us.

Your next question comes from John Heinbockel with Guggenheim. Your line is open.

Pietro have you yet seen or is it too early to see a significant pickup in incoming inquiries from some of your scale challenge competitors? And at this point, are you pretty channel agnostic, meaning independent chain. You pretty much take - because you have a lot of capacity take business where you can get it?

Is that inquiries from competitors? Do you mean competitors or customers, John?

No - inquiries from customers who want to leave scale, challenge competitors?

Yes that's what I thought. Yes, we have. I thought I actually made that point in my prepared remarks. We have seen some and they've just expressed concerns about some of the competitors or distributors who serve them, hard to say whether just some of those concerns are well-founded or not. But I think it's what you would imagine. And so, we have and we believe when we look at our pipeline for the second quarter, we believe there will be some customers we are able to bring on because, again of some of the concern about the viability of some of the smaller scale competitors.

And the idea of being agnostic as to - right in New York you run a warehouse network that supplies both independents and chains, so it kind of works for you, but fairly agnostic at this point or trial agnostic?

Sorry, I didn't answer that second part. Thanks for the reminder. Look, we - as the landscape evolves between independents and chains, obviously, we'll continue to be flexible and opportunistic. I know there's a lot of concern out there about independents. But independents are very resilient bunch and I think from a consumer mindset perspective, there's always going to be, for many, a preference for independents. You just look at how they've gone into the curbside business. I mean it's - the fact that they have recovered as quickly as some of the chains, I think, is telling. I would say we definitely - the margin profile with the independents continues to be - we expect to continue to be more favorable. But we do see from the chain side of things, especially if capacity in the industry shrinks a little bit as a result of this crisis then I think that potentially narrows the gap between the independents and the chains, which makes the chains relatively more attractive to us. And as well - we've always said we're very opportunistic and selective about the kind of business we bring on. We're kind of done with some of the pruning that we did in the last few years. In fact, in the second quarter, we have a number of regional chains that we are bringing on board that will help that business.

And then just lastly right, if you look at your average existing customer, I know there's probably no good average, but look at your market share and share wallet, right? So is that kind of in the mid-30s? And where can that go, right in an environment? Would seem - it's much easier, right, for someone to just consolidate more business with you than to leave somebody else entirely. So that would be a bigger opportunity or no?

Yes. I mean I think we said at our Investor Day that our share of wallet, and you're right, it's an average, which has a big distribution around it’s around 30%. And I do think that there will be opportunity to increase our share of wallet. If demand is lower for some period of time, I think that presents an opportunity for the restaurants to consolidate the number of distributors they have to make it economic for them and for us. And again, I think we are well-positioned from an inventory perspective. I'll give you an example. We have this exclusive relationship with ChowNow, which puts customers in the takeout business, the economics of it are very favorable compared to Grubhub or DoorDash, the way those economics traditionally were positioned. And the percent of the customers who stayed open who were on ChowNow versus those who were not was significantly higher. And the amount of interest we've had - has been really through the roof. So, again, our offering that perhaps customers didn't think they needed, I think, position us well to make those kinds of share wallet gains that you're referring to.

Your next question comes from Edward Kelly with Wells Fargo. Your line is open.

First question I have for you is, just on the uncollectible accounts right down the $170 million. It's more than what we've seen at peers. So I'm just kind of curious if there's something different about your account base, how it's calculated, and then how you would assess any risk from here?

Ed, it's Dirk, I'll take that. So as you noted, we increased our reserve for bad debt to $170 million, specifically related to pre-COVID AR. And that's our best estimate of total expected losses. And so, we were a little more conservative in order to reflect that estimate of full losses so, our current collection so far actually trending favorably and as we have our sales and credit teams working quite closely together along with our customers. And so we've got about 80% of our pre-COVID balances collected already to-date. So we would hope that the end collections exceed our original estimates and would be able to product the reserve in future quarters if collections do come in better than our initial estimates. And ultimately, are monitoring that pre and post-COVID balances and really not seeing any deterioration in our post-COVID compared to what we saw in our historical AR. So think of it as full expectation of losses and we’re working to overachieve that.

Okay, good. And then just over the next few quarters, I know it's very difficult to give any kind of guidance at this point. But over the next a few quarters as we start to think about a Q2 trough and then reopening after that, how do we think about the cost structure of the business, like what you've been able to take out in Q2 to offset the lower volumes? And then as things reopen, how does cost come back and that variable component change given the drop sizes will be larger, things like this - which are smaller that you've got to deal with?

So Ed on that like if we start with the variable costs. We've really managed quite actively to try to take a high percentage of our variable costs out. So call it relative to the early 50% reductions in volumes, taking roughly 30% of variable cost out. So there is a portion in there that you're not going to fully take out. So it's really managing and putting good process in place as volume declined, and then we would expect to manage effectively on the way back up. So its adding cost back smartly aligned with that. And I think that positions us quite well as volume comes back with those variable costs across the distribution, selling and the like. I think on the admin side, what we tried to do is just - we've tried to be really smart in the way we've done that the furloughs and the reductions is really, so that we're not taking people away from those business critical functions. And then again, we'll reinvest back in those areas of bringing those folks back as volume recovers. So, what I would expect is, I would expect the results to continue to get better and trying to really minimize the noise as we're seeing volume increase back up, because also we want to make sure as that volume is increasing back up, that we're doing our best to really serve our customers effectively, both from an inventory, deliveries, et cetera.

Okay. And then just last question, Pietro for you probably. Could you maybe just help us understand the mindset of a privately run distributor who is over half of this industry. I would assume today, they're trying to work down inventories just generate cash. What does recovery look like for this group, if you had to - and I know this is hard, but if you had to take a guess, sort of as we think about the other side of this? How much of that competitive set is actually going to remain? I think that's the one thing that, obviously there's a lot of unknowns right now. But it's obviously a large opportunity, but difficult to size, figure out the timing, right, what it could actually mean for you guys? I don't know if you have any thoughts there whatsoever?

Yes no, it's a good question. And as you said Ed, it's one that's hard to answer. I think it depends and depends on where that distributor is on a number of dimensions, one kind of succession generational planning. Some of them have good succession plans in place. Others do not. And we know that from just not our - just M&A activity over the last few years. And then the other one is, just how well capitalized they are. Some have been very conservative in terms of how they've managed their balance sheet and others have been less so, which is what you'd expect. And we've heard that there's a set of players whose names keeps popping up in terms of - have been potential stress. So it's hard to quantify the mix of the two and the timing of decisions being made. From our perspective, what we're ensuring we do is - from a market share gain perspective and ability to respond to those customer needs that we are there [indiscernible] seen us as the best alternative for those customers.

Our next question comes from Kelly Bania with BMO Capital. Your line is open.

Thanks for taking my questions and for all the color. I wanted to just ask a little bit more on independents. Any help on just how many of your independents or what percentage are operational right now? And just any color on how PPP has been for that sector? What percent of your independent customers were able to secure some assistance there? What the feedback has been? And just, as we think about the opening process across the country, what these capacity restrictions, how that could impact these independents, whether it's 25 or 50 or whatever is happening in each state. Just what kind of feedback you're hearing from customers on how they're kind of managing that restriction on the dining-in portion. Lots of questions there but?

Yes, lot of questions. And I think the general headline would say is, we're still learning. They're still learning. That's why these seminars we do and these one-on-one consultations we do with those customers are helpful to us in terms of being agile and nimble in terms of what the kind of help we provide for them, and they're also helpful for them. On the PPP, some definitely have received - we definitely heard of customers receiving the funding, and some have used that to reopen. As you know, the PPP is directed towards payroll and a certain percent has to be towards payroll to be forgivable. So it's created, in some places, kind of odd incentives for customers to perhaps bring back more workers or works at higher wage than they otherwise might. But it's definitely had an impact in terms of reopening. I don't know that, we know what percent of customers have actually received PPP. The second one, in terms of the opening and closures, look, there's more restaurants reopening every week. That's what we hear from our field leaders that we talk to every week. And going to your third part of your question is about the restrictions, I think some are planning to reopen, but - we've actually surveyed our customers and in terms of how quickly they plan to reopen and it's in the neighborhood - but you would imagine, the next one to four weeks. Some are waiting to see or to - for the restrictions to be a little less strict than they are. So 25% capacity seems hard to manage. And they are waiting for the 50% threshold, there is opening right way, because just they want to get back in business. It really is a mix bag, and I think - I don’t know that what we see today, or next week or the week after, is ultimately representative of - how the industry recovers. I think we want to be there to help our customers every step of the way. But I think we have to look out a few months when we get something that is not pre-COVID, but closer to a level of normalcy that provides relatively good traffic for customers and relatively good business for us.

Okay. Thank you. That's helpful.

And then the other thing I would add.

I am sorry?

Sorry - as that was in part what motivated our desire to strengthen our balance sheet and get the additional liquidity. I know we've had some questions around that. And we said to ourselves, look, no one really knows, there's a range of broad outcomes that are possible, and no one really knows which of those outcomes is most likely. It depends on public health decisions. It depends on how the virus develops, depends on a consumer mindset. So what, our posture has been to have the utmost flexibility and the utmost agility to respond to the situation as it unfolds.

That's helpful. I guess in terms of potential market share gains as this unfolds, do you see more opportunity on the chain side or the independent side? Because I guess I would think that some of those smaller regional distributors maybe over-indexed to the independents. But maybe just help us think about what that looks like and what - in your markets that could potentially look like over the next couple of years?

Yes, I think the opportunity is both. I mean, you'd be surprised that some of these larger national concepts, they've typically take the country and break up into a number - not always, but they often take the country and break up into - and allocate it to a number of smaller regional distributors. I mean, we have some customers. They share their business with 12 other distributors across the country. And so, in there lies the opportunity, because we believe and others believe that some of those will be stressed. So I think the opportunity for market share gains is I think, at this point equal in both some of the chain business and some of the profitable chain business and some of the independent business.

The next question comes from John Ivankoe with JPMorgan. Your line is open.

I hope everyone is well. It’s just a couple for me. Firstly, both you and Sysco talked about 30% market share per customer. Can you remind us like what - if there's any type of commonality of the 70% of share you don't have kind of coming through this crisis whether there’s an opportunity to kind of add into that 70%, you're currently not serving is the first question. And then secondly, I mean you haven't - you talked much about acquiring some of the regional or local distributors that are financially stressed for a number of different reasons. I mean, are you in a position just in terms of overall integration and balance sheet to where if certain businesses were offered to you at a very low price. I mean, a very low price is something better than zero, if that operator thought zero was going to be the eventuality whether you could actually start to actually buy companies at this point as opposed to just having their customers come through attrition? Thank you.

Okay. I'll talk about the share of wallet question. And the answer there is, I think we've talked in the past how you get two types of customers. It's interesting that our large competitor also estimates their share of wallet at comparable to ours. Within the independents, you have some who tend to have a more exclusive type relationship with their distributors. We have some of those. And I think those are the ones that we prefer because they provide certainty and provide a better cost to serve. And then for the others, I think as I've said in the past, they typically either are hedging their bets in terms of pricing or supply or they prefer some of the local fresh distributors from a reputational perspective. And I think opportunities in those two segments of distributors, the local and regional, I think, will occur. And like I said, some are well-run and well-capitalized and others are not, but you don't need too many of them to be stressed, to provide some good market share opportunities. And that's where our focus will be. We'll really be in terms of gaining share from those competitors. Dirk?

Sure. And I think - John, I think from an integration and such. Our immediate focus is around really continuing to integrate Food Group and now Smart Foodservice, which is a much less effort to integrate and really doing that well along with getting our core business going. I think it's kind of TBD as some of these other mid- to smaller-sized distributors, if they struggle more, what that may or may not entail from - whether it was a transaction or just focus on taking the business via those opportunities. But again, our top priority remains really around getting those other two really integrated quite well and continuing to strengthen our core business and those two opportunities that we're excited to have completed.

Your next question comes from Chris Mandeville with Jefferies. Your line is open.

Dirk, I guess, as you continue to engage with your customers throughout this time frame and as they kind of comeback online, doing their best to reduce costs while they're realizing limited capacity or just capacity constraints in general. I'm just wondering if you could touch on private label penetration today. Saw on the slide deck, it's up 80 basis points as of Q1. But where is that in terms of overall penetration? And really, could that be somewhat of a silver lining with respect to the current environment where you might be able to notably bridge your gap between yourselves and your peers in terms of that penetration rate?

Sure. That's a good question. I think that, to your point, it's up and so similar overall percentages to where we've been running. And this is just as we've talked about, I think, in the past from time-to-time and even just typical downturns, you tend to see more operators who have opportunities to do this conversion and helps them from a cost and so our sellers are going to continue to focus on those penetration opportunities. And that is, I think silver lining is a good term to use, an opportunity for us to continue because it really is a great way for us to help those operators see value, along with increasing our penetration rates.

Is there any way to really just articulate where you are today on penetration versus your peers?

Well, they don't all necessarily distribute. So the one compared to our larger competitor, what we've looked at historically is that we've been a few hundred basis points below where they are and have continued to focus in recent years about growing by that 80 to 100 basis points per year and getting our penetration up, because as we think, over time, there is no reason that our penetration can't be at that level. And the question about why can't we go faster, it really comes back to just because operators tend to want to try new products, et cetera, as they do conversions. So we see lots of runway ahead of us still for growing here.

Okay. And then just on the inflation front. So you realized some modest inflation in the quarter itself, but in light of some severe declines in dairy and really where the protein complex is in great flux right now. I mean, any way to square up or frame up how we're looking today or what the expectations are for calendar Q2?

It really is, to your point, saw some modest inflation in Q1. It was a little bit lower than where we've been. And I think just because of some of the potential volatility in some of the center of the plate, it's going to be hard to predict exactly. What we are doing is really managing through that, trying to do it effectively as when we talk a lot of times in the center of the flight, it's really a benefit of most of our businesses that it tends to be passed through, and it's just a matter of contract being a set duration or through reps passing that through. And in this scenario, as you see that, it's also going to be about reps working with our customers, so that if you have inflation in a particular category hoping those individuals whether its portion sizes or alternative solutions, alternative protein source et cetera as we work through. But the actual level by itself is a little harder to break at this point.

Your next question comes from Rebecca Scheuneman with Morningstar. Your line is open.

Good morning, and thanks for squeezing me in. I know it’s early but do you have a sense of how willing consumer have been to go back into restaurants in the region they have reopen their dining rooms. Are your field leaders out there doing any kind of check? Thank you.

So the - I mean I think what was remarkable about this crisis is that volume fell or declined very quickly in every part of the country whether there was a shelter-in-place or not. Just consumers seem to respond very quickly to what was being proposed in terms of flattening the curve. I think since then what we’ve seen is rural areas recover a little bit more quickly than some urban areas. I think the research shows that younger consumers are probably more willing to get out more quickly than perhaps some of the older populations. But again those are trends or that may impact what happens in the next few weeks and months. But in terms of the ultimate health of the industry longer-term, I would be hesitant to put too much weight on some of that.

And your last question comes from Karru Martinson with Jefferies. Your line is open.

So when we look at the mix of the business as you guys talked to it. In my old notes I had you guys as one-third chain, a third independents and a third hospitality and health care and other. How we look at that mix today where you guys are seeing that change?

Sure. Good afternoon. So what we haven't specifically talked about that we focused more on is that's a proximity two-thirds of our business is across independents health care and hospitality and the remaining third has been across chain, education, government, et cetera. And what I'd say is our focus there in more recent times is again about profitably growing those target segments. And then as Pietro alluded to earlier for the chain, it's about really smartly adding those customers where it makes sense for us from a capacity and profitably. And that's where even some of the new business prospects that he's talked about that we expect to onboard in the coming months that our chain business is about really making sure that they are the right fit. And in these cases, we're looking forward to bringing them on board.

Yes. I think that's the end with questions. So I'll just make a couple of closing comments, and then we'll end the call. So I want to, again close by thanking our associates who have been just terrific and who continue to play a vital role in ensuring the food supply of this country. And while our industry has clearly been dramatically impacted by the crisis, we do believe that our industry will ultimately recover and that the combination of our differentiation strategy, our ability to become a leaner and more agile company and the ample liquidity that we have in place leave us in a position of strength to emerge from this crisis. We appreciate all of you tuning in today, and please be safe. Have a good day. Thank you.

This concludes today's conference call. You may now disconnect.