Q3 2020 Earnings Call

[music].

Good day and welcome to P. of cheese fiscal year, Q3, 2020 earnings conference call.

If he would like to see question at the conclusion of the prepared remarks. Please press the star keep all by the number one on your telephone keypad and in time.

I would now shouldn't comment you Bill Marshall Vice President Investor Relations for PMT.

I had sir.

Thank you Brenda and good morning, we hear with George home, PFT, CEO and Jim Hope PFT CFO, we issued a press release regarding our 2020 fiscal third quarter and nine month results. This morning.

Results discussed in this call will include GAAP and non-GAAP results adjusted for certain items.

Reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release.

You can find our earnings release in the Investor Relations section of our web site at P.F. GE Si Dot com our remarks in the earnings release contain forward looking statements and projections of future results.

Please review the cautionary forward looking statements section in today's earnings release, and our SEC filings for various factors that could cause our actual results could differ materially from our forward looking statements and projections now I'd like to turn the call over to George Thanks, Bill Good morning, everyone and thank you for joining our call today.

As the World continues to grapple with the coated 19 pandemic, we've been working hard to protect Pfcs associates, who business.

Before I discuss our business results and actions we've taken over the past several months I would like to offer a heartfelt. Thank you to all our associates in the PSC organizations that have worked tirelessly to keep our nation's food supply chain up and running.

These associates on the front lines of keeping Americans fed and their contribution is not going unnoticed like many other organizations across the world. We've taken steps to keep our associates safe and healthy and appreciate all the support we have received over the past several months.

The restaurant industry, which is our primary customer channel is experiencing significant disruption to their business model. Many have had to close their doors for pivot to takeout and delivery PFT stand side by side with our customers, who will do whatever we can to help them weather the storm.

With also added new partnerships to keep the supply of groceries flowing to the communities we serve.

We are proud of how our organization has adapted to this new landscape by sharing workers and drivers.

We've also begun selling or inventory of products directly to the grocery channel.

Adding business that was not part of the PSC platform, just a few weeks ago.

The effort to soar to logistics.

And the challenge is to make this a reality has been impressive and I'm pleased with our progress at this point our grocery channel revenue is certainly not material, but it is encouraging to see that we are building important relationships and the grocery industry.

Through this effort, we have signed agreements with 25 retail partners and ship groceries to approximately 1275 new locations.

We're also engaging our workforce and assets in new and exciting ways that were not available to us just a few weeks ago.

Looking at our business results, we had a strong start to our fiscal third quarter in fact through the first two months of the calendar year, our business was tracking in line with our expectations with solid independent case growth and profit contribution.

But as the quarter came to a close the final two weeks of March began to quickly deteriorate as stay at home orders spread across the country.

Importantly, our company moved quickly and decisively to protect our associates help our customers and put our business in the best financial position possible.

I'm pleased to say that despite the significant disruption being experienced across the world Woolfolk, we feel confident.

That we will come through this period stronger in many ways I'm also proud that our Salesforce continued to add new accounts through this period of time.

Our integration of Reinhart. Despite the external challenges also continues to be on track.

Similarities between our legacy foodservice business.

And Reinhart have made the integration smooth and I'm pleased to see the two organizations working well together.

Given recent events, we have accelerated several other reinhard synergy activities, we had originally planned.

We're also proud of the work being done at Vistar.

We anticipate the challenges in the theater in concessions business to continue for the foreseeable future.

Theater and important channel.

To both Vistar into PFT.

Represents about 15% of total vistar sales, excluding ETB brown or 6% of Vistar E. Brown combined theater was just 2% of Pfcs total sales for the first nine months for the year with that said we are pleased with several other channels that have proven resilient in particular.

For the convenience store channel, resulting from the Brown acquisition continues to pay dividends for PMT is a relative bright spot in our portfolio.

As consumers will have to minimize retail trips, we would expect the relative outperformance to continue while smaller from a contribution standpoint the value storing correction channels have also performed in recent weeks.

We recognized that our third quarter results only provide a partial view of our industry and business trends and with that suggest for the weeks months and even quarters ahead.

We like nearly every company or managing our business through this period acknowledging the high degree of uncertainty that lies ahead still we have started to see some early indications.

That the market has settled into a relatively stable pattern that could represent industry dynamics over the next few months.

In particular after 50% sales declines for the last week of March our fiscal week 39.

Calendar week 13, our performance in the restaurant channel has improved sequentially.

Each week as we move through April Directionally. The larger quick service chains have outperformed with those that are set up for delivery and take out in the best position full service restaurants continue to be the hardest hit during this period.

We've also taken several steps to fortify our balance sheet, including successful capital raises in both the equity and fixed income markets with a strong balance sheet. We are confident turning our attention to the needs of the business.

And our customers and strengthening our market position, our strong balance sheet, coupled with our customer focused sales force should provide market share opportunities in the months ahead, Jim will provide more details in our financial activities in a moment.

Each quarter. During this calls we like to highlight one associated goes above and beyond to serve our customers and colleagues.

This quarter, it's impossible to recognize just one person I'm very proud of our entire team has embraced PFT his role and keeping our country's food supply chain strong.

Thanks to our talented sales associates with continued to be engage with their customers.

I want to especially thank our hardworking warehouse associates and professional drivers on site and on the road.

I want to thank them for answering our call to temporarily help our businesses meeting increased demand and keeping the shelves stocked. Thanks for your willingness to work while others were sheltered safely in place. Thanks to the generous period of our associates and operating companies were proudly, helping those in need by using our resources to get food to families.

In Hartford areas like New York can support those in the front lines and other vulnerable populations.

We're also partnering with experts to help our customers adapt their businesses and manage through their challenges from promoting takeout delivery and a website show me to eat stock comp to help families easily find which of their favorite local restaurants are open.

These are just a few of the many examples of how associates are helping others during the unprecedented time.

Im grateful for the care concern and creativity. Our team is delivering right now PFT associates are more than helping hands, there heroes and I'm honored to be part of this team with that I'm going to turn things over to Jim who will give you more detail on our third quarter and financial positions. Thank you George and good morning, everyone.

As George mentioned fee of GE has taken decisive steps to fortify our financial position.

Adjust our business to the realities of the current environment and utilize our assets to whether the current pandemic impacting businesses across the world.

Before I review some of our third quarter financial highlights I'd like to discuss our current financial position liquidity and expectations for the months and quarters ahead, we took quick action to improve our balance sheet position over the past several weeks.

These actions built upon an already strong financial position ahead of the covert 19 pandemic as our business results through the middle of March were tracking well within our expectations.

However, given the uncertain depth and duration of the current economic reality, we thought it was prudent to protect our company against the downturn that persists longer than any of us would like.

To that end, we took a past that included a mix of equity and debt instruments to maximize our capital structure. We did this enforced specific actions.

First we drew 400 million from our 3 billion credit facility and put that money to cash on the balance sheet.

This was done prior to the close of our fiscal quarter and is reflected in the cash balance. We reported today. This left about 849 million of availability on our credit facility as of March 28 2020.

Second we accessed the equity markets issuing over 15 million new shares for gross proceeds of 349 million.

Before underwriter discounts and fees.

Third we issued 275 million of new debt structured is five year bonds at a rate of 6.875%.

And finally, we agreed to a 364 day term loan was several lending institutions raising an additional 110 million.

We have also managed our working capital closely to align with our business with our with the market environment than we have worked to lower inventory levels, which is a cash generative process.

While there are many unknowns, including the pace of collecting receivables after taking all of these actions. We believe we will have ample liquidity for the foreseeable future.

Turning to our fiscal third quarter results. Our business was strong through mid March before being significantly impacted by the shelter in place orders that swept across the country.

Still due to the Brown and Reinhart acquisitions, our reported case volume net sales and gross profit all increased double digits during the quarter.

Total case volume increased 26.4% for the third quarter compared to the prior year period underlying organic case volume declined 7.2% in the third quarter.

Net sales for the third quarter of fiscal 2020 improved 49.3% compared to the prior year period to 7 billion.

The increase in net sales was primarily attributable to Avi Brown and reinhart as well as sales growth in vistar, particularly in the corrections retail and hospitality channels.

The acquisition to be Brown contributed approximately 1.2 billion to net sales for the quarter, including 257 million related to tobacco excise taxes.

Brian Art contributed approximately 1.4 billion to net sales in the quarter.

The increase in net sales was also due to higher selling price per case as a result of inflation and mix.

Overall food cost inflation was approximately 2.5% in the third quarter driven by inflation in cheese and do a lesser extent produce and meets.

Gross profit for the third quarter fiscal 2020 increased 33.5% compared to the prior year period to 807.5 million due to recent acquisitions.

Gross profit per case was up 25 cents in the third quarter versus the prior year period gross profit margin as a percentage of net sales was 11.5%.

For the third quarter compared to 12.9% for the prior year period.

The gross margin decline was driven by the addition of VB Brown, which has lower margins due to tobacco sales.

Operating expenses rose by 51.2% to 824.9 million in the third quarter compared to the prior year period. The increase in operating expenses was primarily due to recent acquisitions, an increase in case volume and the resulting impact on variable operational expenses.

The increase in operating expense in the third quarter was also driven by an increase in professional fees related to acquisitions, and an 18.3 million increase in bad debt expense.

These items were partially offset by a $46.2 million decrease in bonus expense in the quarter.

EBITDA decreased 25.9% to 74 million in the third quarter and adjusted EBITDA Rose 23.6 billion.

So 131.1 million compared to the prior year period.

The effective tax rate in the third quarter was approximately 33.6% compared to 26.1 in the third quarter fiscal 2019.

The diluted loss per share was 35 cents in the third quarter compared to diluted EPS of 31 cents in the prior year period.

Adjusted diluted EPS increased 38.1% to 58 cents per share over the prior year period.

Let's turn to our third quarter results for our two segments net sales for Vistar increased 129.7% in the third quarter compared to the prior year period to 2 billion. This increase was driven by the acquisition of HIV Brown and strong sales growth in the corrections hospitality and retail chain.

Channel.

Third quarter EBITDA for Vistar increased 10% to 40.7 million versus the prior year period.

Gross profit growth of 43% in the quarter was fueled by the acquisition of EBIT growth.

Our foodservice segment generated fiscal third quarter net sales growth of 30.4% to 4.9 billion driven by the acquisition of Reinhart.

Food service EBITDA decreased 7.7% in the third quarter.

Turning to our cash flow.

And the first PSG generated 17.6 million in cash flow from operating activities.

In 231.3 million for the first nine months of fiscal 2020, excluding 213.7 million of outstanding checks that were treated as an offset to cash.

The remaining decrease in cash flow from operating activities was largely driven by lower operating income and investments in working capital.

For the first nine months to fiscal 2020, PSG invested 101.1 million and capital expenditures, an increase of 8 million versus the prior year period, excluding the impact of the outstanding checks free cash flow would have billion.

In the first nine months of fiscal 2020.

As you know we withdrew our fiscal 2002 a guidance in late March as the coated 19 pandemic added uncertainty not only to our business and our customers.

But the business around the world.

While we are encouraged by some early signs that the restaurant friends have stabilized sequentially. There is still significant uncertainty for the next several months.

For this reason, we have taken prudent steps to strengthen our balance sheet to be able to take advantage of any market share opportunities.

And protect from a prolonged downturn.

As a picture becomes clear we will provide more color on our financial projections.

For now we will continue to serve our customers and communities look after the health and welfare of our associates.

And take appropriate action to protect the financial standing of the company.

We hope to emerge from this period stronger in many ways and with that we'd be happy to take your questions.

Operator, do we have any question Im sorry, yes.

Josh How your question. Please press Star John Heinbockel Guggenheim.

Hey, George let me start with.

You talk about.

I know its.

Very disruptive out there, but the pace of incoming.

Inquiries from.

I think I think you've picked up some chain business.

We are pretty recently.

Is the pace of that.

Grading here.

In the short term.

And I know you have capacity to deal with it.

Yes, we have some business coming in their.

Actually in in all three cases, there public companies so.

We don't like to announce news for them.

But I would call the pace highs I've ever seen.

Sure.

There's there's a lot of opportunity in spite of what's going on now doing our best to sort through that.

And kind of figure out what the best route for US to Bill is I think it was prudent to pick up that business.

Yes, I don't think any of us knows what business is going to be like when everything comes back.

But there seems to be.

In opinion out there that.

The chains are probably going to do better than the independence and it just seemed like a wise thing for us to make sure. We got some additional business on board to kind of spread these fixed expenses across.

And then maybe as a follow up to that if you think about me going back to capacity.

How much capacity do you have in the customized facilities I assume you're not going to run chain business through more maybe we'll through the independent facilities and then can maybe more broadly how do you think about.

Using in the entire network.

Well.

Business, we have comment on.

Two of the three chain one will be handled through customized.

If you if you look at our customized.

Pre.

Corona virus.

I would say we may be have the capacity for and account.

During Q1, a virus, we got all kinds of capacity right.

So what we need to figure out is kind of what the new normal will be instincts come back and then we can make better decisions from their last thing your commentary about.

Hi, Mike.

It's.

Maybe it's just too.

Variable week to week.

Like its.

Relatively quickly.

We've kind of hit a bottom is.

Bounced a little bit off it doesn't sound like it's huge improvement week over week or is that is that wrong.

It's improved every week.

And I can because we follow so closely the number of customers and we follow so closely our business and we tend to right now to look more sequentially than at last years since it doesn't matter much.

There were really two things that that took place one was that.

I think our our customers got better and better do and take out.

A lot of them got into curbside, which had not done that before so that got us some sequential improvement and as we got further into this kind of shelter in place period of time.

More of them started to get into takeout.

And and delivery I think a lot of that was around making sure. They solidified a back of the house staff. So that they only had front of the house to really deal with as things come back. Thank you.

Your next question comes from.

Hi, good morning, guys.

Hey, George just to start is fine.

Chen can you give us a census, so what run rate is looking like currently I know, you're saying sales have improved each week, if you trust it down call. It 50.

How are you running now sort of like pro forma year over year.

Yes, we're real hasn't there Ed because.

We don't know.

Kind of what's going to take place coming up.

We're probably best just to say, it's improved every week and it hasn't been.

Slight improvement I mean, it has gotten better.

Each week.

And it doesn't give us a good sense of what it's going to be like as things come back are we going to see takeout and delivery go down.

We're going to see that stick and that's just going to be incremental business.

To throw numbers out there.

Okay.

And George you know you've raised a lot of cash and there's obviously a defensive component to this right. But then there is an offensive component.

There's been a lot of focus on a defense right. So can you talk about the offensive component you know sort of like what you what you mean by that.

And then.

What formed as this play out I assume you're not just talking about gone out and just buying business right.

What does the timing of the share gains look I mean, obviously you talk about picking up a few change what's the pricing of that look like.

Any any color on on how you're playing offense to benefit in the timing.

Well for right now it is to grow our customer base I think thats really important I think that when we get through this soon we have a good sense of what things are going to look like.

Thats, where were gone with our capital structure more long term.

Certainly want to get through this potential second wave if that there is such a thing versus currently.

Not experts on that.

So we want to make sure that we have a capital structures in the last us all the way through this.

We certainly don't discount.

Being acquisitive I think it's.

It's very hard to figure out what.

And acquisition would look like as part of US when we don't know what we're going to look like when we come out of this.

We're really pleased with the two that we've done.

Beat Brown has come than they had isn't as an independent.

And Reinhart, we had excellent January and February where they had been flat and say, hey sales and EBITDA going.

Going into the period in and they had nice growth in both and we just feel so good about.

Where we're at with that acquisition. So we certainly want to be acquisitive. It just probably isn't the right time.

Maybe just lastly for you than George.

Sort of like a follow up you, obviously have a ton of industry experience and I, obviously, what we're going through today is clearly unprecedented bye.

I'd be really valuable to get your opinion on what you think the industry looks like on the other side of this how much damage will there be the independent units, how much consolidation and damage will there be amongst share can your private confidence are you on what the earnings power on the business looks like when the dust settles and I know, there's a lot of questions out there.

But you know better than most of US obviously plateauing, just kind of curious how you're thinking about it.

Yes, I am barely.

Don't have a good feel for how many restaurant.

Since we are going to come back.

I've been saying for a few years, just too many seats out there and there needs to be less.

If we did come back with less restaurants.

And.

Higher unit sales average unit volume I think that'd be good for the industry.

We just need to assess what kind of the with the new world looks like.

And then go from there.

We we dialed this business down.

And we needed to do that maybe we could have done it a little bit quicker, but I'd like the way we did it and we feel good that we can dial it up.

I think businesses that pulled the plug are going to have a tough time.

Coming back and you know there's lot of restaurants that aren't open.

And have not been opened through this and opening a restaurant is a very very difficult.

It's just hard to do that and that's what we're going to have we're going to have a lot of new openings. So we just have to kind of sit back and see how those go and just work as closely as we can with those customers.

Alright, Thank you not put add to that I would add to that we.

In March is kind of a tough months to judge because it does have to four weeks and really another half a week of.

Of coven 19 impact but.

When we looked at the NPD report that came out from March we built more share than we've ever built in one month.

So that gives us a good feeling.

As we come out of this but.

We don't we just don't know how strong.

Restaurants going to be as we come out I.

I'm going to turn optimist about that because.

I could go sit in a restaurant alone right now feel great can't wait to get in one I think a lot of people feel that way.

Great. Thanks search.

Your next question comes line of Chris Mandeville with Jefferies.

Hey, good morning.

George I guess, just sticking with the sales trends here, maybe looking at the independence organic cases being down only 2.7%.

At least we'd argue that that's quite a bit better than what may be some within the market. We're hearing so.

Is there any way to speak to the independent organic trough and then the radar week Henrique improvement relative to overall performance.

We have a minus 2.7 that yes, we have a minus 2.7 that was it was minus because of those last two and a half weeks, but.

We've always aspired to be above that 6% number in independent case growth than.

We slipped below that for a couple of quarters, and we were doing better than that going into that period of time.

So we feel good with it but the comment on the improvement we just aren't comfortable with that.

From the trough week to now because we there's just too many variables and.

Sure.

We would we would rather get through this and then I think we can give a pretty good idea of if we think we're back to normal or what normal is.

Okay and continue maybe speak to just the resiliency that you saw possibly within the pizza Italian business, how that overall influence the numbers and then Jan and thinking about.

Mark and having some concern surrounding independent closures some longer term. If we would is kind of look at the PFS performance in the core itself is there any way to reference that the year on year gross margin decline.

Well I'll start with the pizza the pizza has outperformed the other parts of your business done.

As far as independent and sequentially, it's improved similar to the other business that just started out with.

With a much lesser decline and then Jim There was a question for you too.

Yes, Chris.

I think if you're asking about the number of store closures, we very difficult to determine that is certainly is difficult to predict.

I can tell you, we're managing our working capital, including receivables very close.

As you would expect we're monitoring it daily and our goal is to stay on top of that and make sure that we're on track with all the details were reducing inventory levels at the same time, which tends to generate cash though.

Yes, Theres certainly a risk was store closures and a risk with receivables and we're paying very close attention to that one.

Okay, Yeah, and I guess I was I was looking Marcel along the lines of or focused more so on the gross margin rate a decline in foodservice sadly the business, yes in light of that's how independents performed.

Yes, you know look the overall, it's no doubt independents provide good good margin improvement on the topline.

And help on the bottom line as well.

The Brown has come in with.

Large amount of tobacco sales, which improves the overall profit margin.

So I get it thats, probably a tough one to dissect, but I don't have any more color to add there.

Okay and then maybe just my last question years just.

Looking at the castle on balance sheet. It doesn't appear to us that you necessarily saw much.

The benefit on cash from working capital improvements in Q3 is that a fair statements and then I guess is there any way in a really sizing that up as we move forward and on the Capex front also.

But the rate of reduction that we saw in fiscal 2008 that that really a true reflection of your flexibility or could you in fact be 11 more drastic going forward.

Yes look I think is things happened.

Quickly.

End of March at the same time, we're working through an inventory build and so both those things.

Cause the results that you're calculating there.

And your analysis, that's not a true fixture.

The cash flow profile going forward and typically in and now as we would reduce inventory will generate cash and we know that.

We have a good deal of flexibility in the last this the in working capital we're managing through through all three components of the.

I think it's important Chris that you don't look at the ended the quarter as the point in time.

We had single digit increases in accounts receivable on accounts payable at the end of the quarter, but 33% increase in inventory and Thats normal.

If you would call anything right now normal, but I mean, if you have a sudden drop in sales like that.

Youre not going to see a sudden drop in inventory.

While working capitals come in line since then and I think Jim that.

Receiving had been good right.

Okay. That's I was looking for thanks guys.

Your next question comes line of Jeffrey Bernstein of Barclays.

Okay.

Great. Thank you very much.

Three questions. One just wanted to follow up on that Georgia earlier comments about the independent restaurant outlook.

Like a lot of investors are looking back a dozen years to the great recession in terms of comparable.

It just seems like based on the data we've seen there really wasn't much in a way of net unit closures back then, whereas this time around it does seem like there's more challenges in the industry and more likely that you would see these actually being net closures I'm. Just wondering if you could compare to that period and why you think this go around.

That would actually be some significant net closures, maybe just the new players aren't willing to fill those old boxes for whatever challenges the industry is facing any thoughts there.

Yes, I don't think we know this was so sudden.

That is it's just very hard to tell and where our salespeople are keeping constant contact with those customers as best I can.

And we're not hearing them say that there's going to be a huge amount of closings are not reopening I don't think we know.

And what happened during that great recession, I think these are two totally different events.

Yep.

Then in terms of.

Your comment about the grocery store distribution I think you mentioned 25, or so partners in well over 1000 in grocery units that you now distributing to and how obviously right now it's extremely small but can you just talk about the vision you might have or.

What it could be or maybe why you hadn't pursue that business in the past as it.

Presumably a lower margin business kind of like the chains. Therefore, it wasn't that.

Target customer, but now seems more attractive or how do you see that business playing out over the next few years.

Well, we've always done some of that business, particularly.

Where they are preparing food.

A lot of the sales that we had into that channel. We're perishable inventory that we want it to get out of the system.

We will see kind of when this is our over we're going to make sure that we keep in touch with these people.

We really for the most part wanted to spend our time going through this picking up new business that is business that is in our wheelhouse and we know is long term or has the potential to be long term business. So I wouldnt say that we've given it a huge effort.

We thought it was important to help where we could so we did.

We did supply and many warehouse people in many drivers.

We just have to see from here, but we certainly will.

Hang onto as much as that business as we can.

Absolutely and then my last question, Jim I'm, just wondering as you talk about liquidity.

Between the cash you had on hand, and then the equity and debt offerings. Most people feel comfortable especially from a short term. It's all about defense that you've got the proceeds to hold on well I'm just wondering.

Taking a lot of restaurants have provided color in terms of maybe a cash burn rate I'm. Just wondering how you would qualitatively or quantitatively offer color in terms of.

Sales had stabilized that down 50, or presumably there now down less than 50, but how you think about your burn rate relative flat billion plus some cash in terms of weekly or monthly at any kind of sales level any help there would be great.

Yes, no im sorry look I respect the question, but but I'm not going to give.

Any numeric color around a cash burn rate, but what I can tell you is that.

We are encouraged we're certainly pleased with how the markets responded our capital raise we believe we've done really well we've protected comp the company for the long term even in a prolonged downturn.

It's given us quite a bit of flexibility. So we think we think we're in very good shape there for the long term.

Understood your current cash position without giving specifics you feel like you could go much longer than you anticipate this current downturn with your existing cash balance.

Correct.

Very helpful. Thank you guys very much.

Thanks.

Your next question comes the line of junior from Credit Suisse.

Yes, hi, guys. Thanks for taking the questions first I just wanted to get back to you know trends clearly it sounds like.

You don't want to give kind of kind of weak. We can we understand that but is there any color you can give on.

Kind of the.

Progress versus trough for independence versus chain.

How much one of those have recovered better I mean, obviously chain never got as bad.

As independent did but kind of curious.

Which of those is actually seen better growth in recent weeks and then any color from states, where you've seen some restaurant openings in the last couple of weeks.

Yes the.

From the trough to today there are about the same the independent in the chain very similar.

We're getting some feedback.

On on how restaurants are doing.

First of all it appears as if you.

Finally, we're not in.

Physically in either one of those states, we do have distribution centers and we're in constant contact with the people a lot of restaurants have not opened yet that's still happening as they are getting ready to too.

To manage to what that state is allowing to have happened, but I did get messages from people over the weekend that had very full.

Full restaurants from the standpoint that if 50% was the guideline they were 50% full and they were managing to that 50% for.

So I I found it to be encouraging what I heard in the press was not encouraging but.

I think we might be a little bit closer to that than than may be the general press.

But I think it's encouraging I think theres a lot of.

Kind of cabin fever, and pent up demand. Okay. That's helpful. And then just as we think about kind of the new accounts coming online specifically the chains and you mentioned.

Probably similar to the last recession. It makes sense to have incremental exposure to change you maybe survive a bit better how do you think about balancing foodservice margins. If it is the independence going away and kind of chain business.

Hi, becoming an outsized piece of the pie do you think about offsetting that at some point and getting back to your mix of higher independent proportionate total sales.

Well, yes.

We're starting to see of course, what our mix is going to be when we come back from that but I think it was prudent to go get that business. We got it at what we consider to be acceptable margins.

And.

I think that if we come back with a higher mix of business in.

Change I think we'll also be able to come back with lower expense ratios.

And we want to get everybody back here and back to work as quick as we can.

But we also understand that.

We do have an opportunity to to look very closely at what our expense ratios are and to make sure that as we bring people back that our mix of people.

Fits with the mix of business that we come back with.

Okay that makes sense and then maybe lastly, just.

Jim Health with kind of food inflation, obviously me was a bit inflationary, but thats situation has changed.

In the last few week with facility closures, you know just kind of thoughts.

On meet inflation, the impacts to the business or maybe remind us how that flows through both independent and contract cases.

Yes, so inflation came at around 3% for the second quarter, it's almost impossible to predict where it's going to go going forward.

We saw we saw some.

Serious inflation in a handful of categories and some balance that others as to be expected.

How it flows through his is I would describe that is very fair and expedient.

Simply flows through cost of goods straight into the customers pricing and we do our best to manage that from a from a reasonability standpoint, our systems are very adapted.

Passing on inflation through supply chain as our suppliers.

Okay. Thank you.

Your next question comes the line of Kelly Bania of BMO capital.

Hi, good morning, Thanks for taking my question.

I realize you're not really giving much guidance and talking about current trends, but is there any help you can give us and just how you're thinking about operating expenses.

And I guess, how just what the cost of doing business is now in terms of.

Safety, and Sanitization and protective equipment and so forth.

For you and you have test I guess.

Yes, Kelly, we're we're not being that we're not trying to be evasive, we just want to make sure that.

Everybody understands that very uncertain.

We've spent a lot of time around the I am sure, but in the industry has.

Around what type of things, we need for a different world from masks to.

Sanitizer to those type of thing. So we spent a lot of time to make sure that we got plenty of that for our own use and for our customers use in that by the way hasn't been easy and it's been expensive to do.

But.

When you ask about expense ratios I think it is very difficult for us to determine that.

But I think we havent opportunity here to make sure. Once again, we're sized to the mix of business that we have from an expense standpoint and were size to the amount of business that we had with the intent of getting as many people back here to work as we as we possibly can.

Okay.

Okay. That's that's helpful. I guess just in terms of your independent customer base.

In terms of PPP and what are you hearing about how that's going for that matter, how that's helping them.

And just.

Managing kind of the resources around.

Working through those those programs.

Yes, well, we've we've had these web access for our customers and Im sure our competitors have done that as well I mean, we've tried to help as much as we can as far as the feedback that I've received from it is very mixed.

Some people have had trouble getting it some people have been able to get it pretty quickly.

I've talked to customers that.

Just look at it and say I don't need more debt. That's the last thing I need it's more debt.

I'm just going to plow through this.

So I think it's just like everything else with this it's a real mixed bag.

Some some people just very happy to get to get that money and some people that just don't want to touch it.

Thank you.

And our business, though I think that lot of times people. They just they find a way to figure it out.

And.

You know I've, just seen such improvement in takeout and delivery I think that.

They'll find ways. So the good operators going up going to find ways to to be successful in this environment.

That's helpful and I guess, maybe this will be in the queue, but we've had a lot of questions asked about bad debt.

Can you help us think about what that was for the quarter, how you're thinking about that going forward and.

Any color there.

Yeah look we recorded a 18.3 million increase in bad debt in the quarter.

We think we're being conservative of course, and reserving for bad debt that May go bad in future periods.

Your next question comes through Marty from Jefferies.

Good morning.

With the.

I guess caught shutdown furlough when you look at the Reinhart integration is it.

You are just speed up step process as things are shut down or do you feel that.

It's going to be dragged out over the process now.

Yes, it was easier.

We had more time.

We kept everybody engaged we had more time from our people. So we were able to get.

The systems and processes in place that that would have taken us longer if we had the.

Good day to day challenges of though.

Oh for business.

So we feel like we've been able to accelerate that I think another quarter from now we can put a little bit more color around that.

But but it's been.

It's been helpful for us to have that time.

I agree with Georgia, I think it's been really helpful. When we've certainly taken advantage of it to find the synergies.

But I'd also say is as we looked at the right on acquisition that business and those folks were exceptional levels a great acquisition for us.

And no time more than ever has shown that that that group is just a really good fit into our organization.

Yes, if you think about it by the end of this week they would have been in.

And Corona virus.

Backdrop half the time that they've been part of this company I think when you go through this period of time, where you're having.

Kind of force daily contact and.

I just feel like these people been around for a whole lot more than than one quarter.

Certainly.

And then when we look at the liquidity raise that you guys had certainly supportive of any near term trends I guess from a bigger picture. How are you in the industry looking at the potential of the covert 19 coming back in the fall and how do you look at your liquidity.

Against that.

Well first the potential of a comeback in the fall we leave that to the scientists in the doctors and folks that.

It really understand it better than us, but we certainly are tuned into every piece of news that you can possibly get and we know that that is a scenario that.

Thats been given merit and attention.

Were to come back as we said earlier, we took a very conservative approach and strong approach to raising liquidity, we're very very successful at our ability to do that.

And the project plan the strategy and the execution.

And we are in very good shape.

As I've mentioned earlier for the long term.

Thank you very much guys appreciate it.

Your next question comes the line of William Reuter of Bank of America Securities.

Good morning.

So some investors have brought up issues of spoilage here and if these are risks I guess can you talk about the ability of view to keep your your goods towards safely for extended periods of time and is this something that's a risk.

Well we.

We went to work on the perishable product that we had very quick.

We didnt want to.

Not except inbound orders that we had placed in good faith.

So we had a lot of perishable products that we had to deal with.

We went to retail is for some of it some of that we donated some of it we froze and some that that we froze.

We've been able to move out sometimes at it at a discount that's one of the things that affected margins. There at the ended the quarter because we we moved quick.

To get that done.

And we're past we don't have perishable issues now.

These are just things that we had to move quicker one thing I I've told several people is that I.

I sat with Jim.

In early March.

At lunch.

And we were in the process of of having another record week and he said to me you don't seem to be real happy about it and along unlike well.

We're we're just a couple of months away from Cinco de Mayo and mother's day weekend I don't know, how we're going to find warehouse people and drivers to handle that.

And it was it was worrying me, we always find a way, but it was worrying me well instead of that.

Within within a couple of weeks were worried what we're going to do with all this produce some fresh meats. So things change I'm, just saying just to give to help.

Pass things changed and when things change that fast it's tough to get on the call like this and say this is where we're going to be three weeks from now or a months from now because we've just been through.

Such incredibly quick change.

So at this point.

I think worth through with any issues to deal with perishable product.

But if you also think about perishable products were ordering it now in anticipation of more business and we don't really know what's happening. So we talked about second ways to Libya second wave of perishable product issues I don't think so.

But.

We're going to have that product available.

Yes, that's a I'm sure it's incredibly tough and then.

In terms of you mentioned you have an 18 million dollar bad debt expense, which in the context of all your receivables is really not that big of a deal.

I guess does the GAAP accounting require you to take the information that you've received subsequent to the end of the quarter and put that into your expectations around.

Receivables in getting paid for those or is it just the information you would have received as of March thirtyth.

No if we've seen significant change in information since the time, we closed yes, we would be required to.

Post the subsequent event and we did not.

Okay and then just lastly from me I think you had furloughed.

A little more than 10% of your workforce do you feel that that day sufficient amount at this point.

Based upon where you are.

Yes, what we did as we manage resources in payroll to the demand we're seeing at that time.

And we will continue to manage it closely and as George indicated earlier.

That was the bottoming out point that we saw in late March and roll up well just continue to watch everything closely.

All very helpful. Thanks, so much.

Again as a reminder to ask your question. Please press star one on your telephone keypad.

Your next question is from Edward Kelly of Wells Fargo.

Hi, guys again.

Jim just I wanted to follow up on on variable costs.

We had some discussion around variable costs and I started going down.

Just curious now that you're.

You have more information and as we sort of think about modeling going forward, how should we think about the variable cost component.

You know within within the Panellists, thanks for taking.

In adjusting cases on a go forward basis.

Yeah that I think the best way is to go back and look it for instance to Q1 or Q2 and think about it is.

The cost structure is between 60 and 70% personnel.

[laughter] excuse me typically.

Mostly thats from truck drivers warehouse workers in the Salesforce.

And we've adjusted our workforce since then including wind EMEA poised to the grocery channel the furloughs eliminating positions.

To adjusted the volume reality today, and we've taken other steps to reduce other expenses were possible. So if you calibrate back to that point in and know what we've done with expenses.

Including almost eliminating TNT.

And Additionally filed on rerouting trucks, which gave us quite a bit of efficiency you can model back from there.

Okay, and then related to Reinhart.

Synergies and accelerated synergies can you just provide a little bit more color on what got accelerated and then as we think about the synergy opportunity going forward.

Is there potential for it to be larger than expected because of all this somewhat I mean by that is has any of this change their thinking about the consolidation opportunity.

On the operational side.

Yeah, we talked about a number we put down a market we put down on synergies across three years and we've talked about how the largest component of that was procurement was there was also some operational and head count synergies to be at.

What we've done is made sure that we took advantage and manage the headcount resource synergies, but we've also we've also paid attention to procurement as well I don't I'm not going to raise the target for synergies of course at this point and then the moment, we don't expect.

Change our three year target.

Okay, and then can I just ask you about this a you know the checks outstanding issue. So I guess, what why does that accounting change take place now and just to confirm there's there's no real impact to actual cash around this correct.

Thats right. Thanks to add its a good question. So normally we don't carry cash on the balance sheet normally checks outstanding would be carried in trade payables.

But because we drew down on our a b L and carried cash we're required to net checks outstanding against cash on the balance sheet. So that change in accounting mechanics moves checks outstanding to cash flow for operations.

And our objective in the release commentary was to clarify that we should move checks outstanding out of free cash flow to generate the free cash flow number we reported.

Okay, Great and George can I, just actually one more question I'm sure if any on the new business that you've you picked up the new chain business any color on on why the business move is what's your sense like normal business that was happened to be up for bid or is it is at the environment I'm just kind of curious as to.

How you're sure how like how all this is changing the way your customer just sort of thinking about it at this point well.

Those those accounts are our chain accounts that we do business with another parts of the country today.

And.

They're just doing some consolidation of distributors and actually in each case, we were speaking with them before this happened.

Matter of fact.

Seeing the two of them with the last trip I did before this act.

So it was something that was in process, so I wouldnt related to that.

This coated 19 at all.

Okay, great. Thanks, guys.

Yes, and the last thing I wanted to add but before we are we sign off here is just so thanks for understanding that it's difficult right now to to give any color on what we see coming up than I thought that questions were great and I hope that you understand that we weren't being.

Face if we're just given the best information that's available to US now and thank you.

Thank you that is the conclusion of <unk>.

Thanks.

Call back over to Georgia home for any closing.

Thank you for joining our call today, if you have any follow up question. Please contact us at Investor Relations. Thank you.