Q2 2020 US Foods Holding Corp Earnings Call
[music].
At this time, all participants Arnold listen only mode.
So to speak this presentation, there will be a question and answer session. SASSA question. During this session you will need to press star one on your telephone.
It's your car any further assistance please press star zero.
Oh, no like Honda conference over to your Speaker today mother nature. Thank you. Please go ahead.
Thank you and finding good morning, everyone welcome to our second quarter fiscal 2020 earnings call.
Joining me on today's call, our Pietro Satriani, our CEO and Dirk Locascio our CFO.
Yes render will provide an update on our results for the second quarter and the first six months of fiscal 2020.
Well take your questions after our prepared remarks conclude.
Please provide your name your firm and limit yourself to one question.
During today's call it unless otherwise stated we're comparing our second quarter results to the same period in fiscal year 2019.
Our earnings release issued earlier this morning, and today's presentation slides can be accessed on the Investor Relations page of our website.
Also during today's call references to organic financial results exclude a contribution from the food group, which we acquired in September of 2019 and from Smart Food service, which we acquired in April of 2020.
In addition to historical information certain statements made during today's call are considered forward looking statements. Please review the risk factors in our 2019 form 10-K and last quarter is 10-Q filed with the FCC for these potential factors, which could cause our actual results to.
Differ materially from those expressed or implied in those statements.
And lastly, during today's call, we will refer to certain non-GAAP financial measures.
Reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release as well as in the appendix cease to the presentation slides posted on our website Pietro I'll now turn the call over to you to get a startup.
Thanks, Melissa and good morning, everyone.
Corporate 19 continues to have a significant impact in our industry in our company and.
And as I did last time I want to begin by taking all our associates with exemplary fashion.
We have continued to help our customers make it especially amidst this challenging environment.
Your three topics, we will cover today.
The industry, our position in the industry and second quarter results.
I summarized on page two here are the main takeaways for today.
First a perspective on the industry.
We believe that despite the impact of cold in 19 prospects for our industry remain very good.
Based on what we saw in the markets that we opened earlier, we believe volumes will ultimately recover close to pre called levels.
Gross profit and operating costs and trending in a way that augurs well for returning to profitability close to pre called levels [noise].
Second a reminder of our advantaged position.
Our nation wide scale and differentiated value proposition remain as relevant.
Providing customers with innovative products.
Knowledge in business tools, that's why was the extra support needed to navigate this uncertain environment.
And third a recap of the corner given the environment I would characterize our performance for the quarter solid and promising with margins and profitability improving sequentially throughout the quarter. In addition, we continue to make good progress in reducing our cost structure to get along with current volumes and lastly, or.
Focus on collections resulted in reversing a significant part of the uncollectible account reserves, we talked at the end of the first quarter.
Let's now take a deeper dive on the industry and move to slide four.
Here, we show recent volume trends for sales to restaurants for both the industry and for Us foods.
And why we are optimistic about an eventual recovery.
On the left hand side, you can see NPD data on transactions that restaurants. This is a good proxy for restaurant sales.
You can see transactions recovered quickly from their low in March and by June transactions were about 50% lower than a year ago, which is where the industry has since leveled off however, it's important to note that the industry, it's still far from fully reopened according to NPD only 70% of Russia.
I'm, sorry geographies that permit on premise 90.
And even when permitted to reopen dining rooms capacity, he's got a fraction of what it could be.
This recovery illustrates what consumers want to get Dr. reading from restaurants, and this bodes well for restaurant demand those code.
The question does remain despite a robust recovery during the quarter well the restaurant industry continues its recovery.
Here, we true to our own sales to independent restaurants, a key determinant of the health of the restaurant industry.
On the right hand side, we have group are roughly 60 markets, but you have cohorts organized by date reopening.
Restrictions lucky.
At the end of June our sales to independent restaurants in markets that open. The earliest shown by the Green line, we're only off 10% to 12% versus prior year.
That's the stock despite the fact that restaurants still had seating restrictions in many areas.
This compares to markets and later phases shown in Blue and Rad, whose variance to prior year was greater anywhere from 2030, 20% to 30% at the end of June.
Again, Michelle just that once consumers feel safe they will return to restrooms, and that's what gives us the confidence that when markets do fully real but we will see a recovery in volume close to pre called levels.
Lastly.
In both industry and our own trends, we've seen QSR chains recover to greater degree than full service restaurants. The QSR model is more oriented to off premise consumption and his favorite in the current environment, having said that full service restaurants, which includes many independents have shown a remarkable about ability to adopt yeah.
Sure ago, when we 19% full service traffic was for off premise consumption.
In June.
Even though dining rooms, where reopening in many parts of the country, 55% of traffic was off premise.
Normally does this highlights the resiliency of restaurants and also shows that consumers still very much won many diversity that full service restaurants offer.
Let's now go to page five to cover our volume across all customer types.
Continuing with sales to restaurants, which include independents in change on this chart and as shown by the Yellow line you can see that this line very much follows the pattern we saw for the industry data on the prior page, but at a slightly lower level.
This is because we are slightly under weighted with QSR.
Given how well chains and QSR have held up in the current environment. We've put some additional focus on targeting those customer types and we've had good success so far.
The second and third quarter of this year, we are onboarding over $500 million of new business. Several times the amount of similar business that we onboarded in the same time period last year.
This business is that a good contribution margin.
Our success demonstrates two things first desired by many multi geography customers to put their trusted large scale distributors like us foods, and secondly, our own ability to quickly pivot to segment experiencing more favorable tailwinds.
Let's not go to health care, which is represented by the Orange line.
Which shows that volumes, partially recovered as the pace of elective surgeries have picked up through the middle of the quarter and stay at home restrictions began to eat.
We believe with absolute certainty that this segment will ultimately recover Capri cobot levels, that's health care facilities return to a more normal operations in the future.
Hospitality, which for US is the smaller between healthcare and hospitality portfolio is showing a modest frequently thanks to summer travel.
We expect this part of our industry will take longer to recover to prequalified levels, that's consumers potentially travel less and business. This place greater reliance on virtual work.
Some of the decreases in healthcare hospitality.
And education have they have been made up by an added emphasis on retail where a few significant large partnerships have led to meaningful volume.
As mentioned in previous calls while these volumes.
May not be as margin accretive some of the loss volume. They do operate at a very low cost to serve and do provide some based on for underutilized facilities.
This is yet another example of our ability to pivot to those customers with more favorable tailwinds.
But overall volume in July when we exclude hospitality and schools to segments that were the hardest hit was down 13% on prior year.
Our longer term prospects for returned to pre cobot profitability depend not only on volume, which we just discussed around gross profit and operating margin and I'm now on page six.
Category margins at the customer levels, I've held fairly constant, which augurs well for margins for volumes as volumes recover over time.
Similarly.
On the operating expense side variable cost, which for us to account for about half or operating costs have come down proportionally with volume except for a slight lag.
And as dark will discuss we have adjusted or fixed costs to be more in line with reduced volumes.
These trends in gross profit and operating margins along with a promising signs of the volume recovery, we saw nearly markets.
And our added emphasis on segments with more favorable tailwinds.
What leave US confident we will ultimately recover close to par levels and volume.
And profitability.
Moving to page seven.
And the second theme of our presentation today, a reminder of our advantage position.
As we have said in the past part of what makes US foods attractive is our nation wide scale in our differentiated value proposition.
We expect these factors to continue to drive future market share gains.
I want to spend a minute reminding us of these advantages and how we are evolving our strategy for the current environment.
Our nationwide footprint and or scale give us multiple advantages and where the myriad of regional and local competitors.
Our scale gives us significant purchasing power, which results in better gross profit margins in our footprint and operating model gives us the ability to serve multi geography customers in a way that it's difficult for most competitors to match.
With the uncertainty created by the current environment, we can offer stability and consistency to these multi geography customers.
The fact that we're currently onboarding more chain business and that the same time last year is evidence of this.
We also continue to evolve our differentiated platform to ensure we continue to be see as a leader in terms of innovative products tools and technology an expert resources.
First let's talk about our exclusive innovative products.
Keeping up with trends seen by operators as no less important in the post covered world.
[noise], 82% of operators in the recent essential survey thing and it's equally well even more important to remain on trend.
Our September Scoop, which is about to launch is oriented to helping operators with today.
With particular focus on takeout and delivery sanitation and labor saving products.
Second our tools and technology, especially those that enable restaurants to offer off premise dining continue to be in high demand ingest. The last three months, we have doubled the number of customers who utilize the child now platform takeout and delivery.
And third.
I mean based selling.
Our army of specialists in restaurant operations consultants that support our salespeople continue to offer webinars and consultations that are very well received by restaurant operators.
Since cold that began our restaurant operation consultants have conducted roughly 125, webinars with over 20000 customers and prospects attending virtually.
And some are scale gives us an advantage position, which is further reinforced by our differentiated platform, which continues to evolve to ensure we remain leaders in our industry.
I'll now turn the call over to jerk for the 13, the third key must today, our second quarter results.
Thank you Petro and good morning, everyone.
[noise] business closures and the actions to promote social distancing due to cold, but significantly impacted our industry and business in the quarter as Pietro noted.
The highly unusual quarter also met some fairly fairly different results even across the three months with April seeing large negative impacts as cobot sedan and may and June improving significantly.
As you heard Pietro also talk about we like the industry experienced a significant improvement in our volume and results at the quarter progressed.
Total case volumes improved from the trough of down more than 50% overall to down 20% to 25% more recent weeks.
In the past pendant restaurants, followed a very similar trajectory.
We believe the case volume decline, we experienced in late March and April.
Represented the bottom.
And we experienced sequential week to week improvement in case volume trends throughout the ended the quarter as you saw the earlier chart.
Escape case volume trends improved so that our volume bizarre financial results with positive adjusted EBITDA dollars in both May and June.
The rapid decline in case volume at the end of March in early April, especially in restaurants and hospitality.
Impacted our typical gross margin and operating expense structures, which I will talk more about more detail on the next slide.
We took swift action in the quarter progress both areas of the piano.
And believe we are well positioned compared to just few months ago.
I'm happy to report that strong collection efforts from our credit and sales teams resulted in us being able to reverse almost half or $75 million of the reserve for uncollectable accounts that we discussed on our last quarterly call.
The additional cobot, a our reserve now sits at $95 million, we're actively working on collecting the remaining pre cobot balances to further reduce this reserve.
In addition to supporting our existing customers, we're focused on growth with new customers.
As you heard Pietro mentioned, we signed an annual run rate over $500 million in new business was but most of it being national chain restaurant business.
And a good portion of this focus and the QSR area, which as you know isn't performing better in this environment.
She said some of this business has already started shipping in the second quarter and other customers are slated to begin shipping in the third quarter.
We will continue to pursue new business that makes sense from a profitability and geographic perspective.
Moving to slide 10.
Our net sales were down 29% for the quarter.
Driven by the lower case volume discussed earlier.
Inflation for the quarter was 190 basis points with beef as the largest driver.
Our GAAP gross profit dollars declined 41%.
GAAP gross margin was 14.7% for the second quarter.
Our adjusted gross profit dollars declined 37% and our adjusted gross margin was 16% for the quarter.
Gross profit was negatively impacted by several factors that we believed to be temporary.
The rapid decline in case volume caused a higher level of inventory write offs and product donations as well as lower logistics income.
We also experienced a negative impact on gross margin as a result of changes to customer mix, including lower independent restaurants, and hospitality a more retelling chain.
Our adjusted gross margin was down 190 basis points versus the prior year with April contributing most significantly to the decrease.
As we look at May and June the decrease was about 100 basis points with roughly 40 basis points of the decrease coming from the combination of adding the acquisitions into our base and the impact of year over year product inflation on sales.
The remaining impact was split between inefficiencies in our logistics network from buying it smaller quantities and customer and associated product mix shifts.
It's Petra said customer margins have remained similar to pre kogan levels, and we're seeing a rational competitive environment.
Its case volume recovers, we expect our mix and logistics income will also recover.
Leading to an overall recovery and gross margin to near pre Kobin levels.
Operating expenses, we were able to successfully manage our fixed and variable cost structure to be relatively in line with lower case volumes.
In fact across May and June adjusted Opex as a percent of sales was in line with the prior year, including the roughly 40 basis point benefit from adding the acquisitions into our base and the impact of year over year products inflation on sales.
Thus the Q2 Opex basis point increase was due to April.
We actively manage variable labor and in fact saw warehouse and delivery productivity levels that were meaningfully better than pre tobin levels.
We also took actions during the quarter to address a dress fixed costs through employed furloughs across the business reductions in discretionary costs and salary reductions.
As case volume rebounded, we did add back some fixed costs to match the volume recovery you were saying.
Our cost structure remains flexible and we're continuing to actively managing cost targeting to be largely in line with case volumes.
This positions us well to manage through this challenging environment.
Moving to page 11, I was very pleased with our team's ability to navigate a difficult operating environment generate positive adjusted EBITDA for the quarter.
After a difficult April where we saw negative adjusted EBITDA dollars. The business produced positive adjusted EBITDA dollars in both May and June with June being the strongest so the quarter a positive sign for the second half of the year as we would expect to continue to see positive EBITDA of the current environment.
We believe our margin structure will return close to pre coven levels in time supporting a further recovery our mid to long term earnings power.
Second quarter, adjusted EBITDA was $88 million and year to date, adjusted EBITDA was $265 million.
Second quarter adjusted diluted earnings per share was a loss of 25 cents and year to date was a loss of 10 cents.
As a result of the preferred equity investment that we discussed earlier in the second quarter.
Our earnings per share calculations are now based on that income or loss available to common shareholders. This new line in the piano factors and the 5 million dollar preferred dividend for the second quarter.
In the second quarter GAAP net income available to common shareholders was a loss of $97 million for the quarter and a loss of $229 million on your day basis.
Adjusted net income available to common shareholders for the loss of $54 million for the quarter and a loss of $22 million on a year to date basis.
I'll note since we're in on that loss for the quarter and year to date. The total number of diluted shares outstanding does not reflect the recent preferred equity investment at such time, we returned to the net income position. Those additional shares will be included at the diluted share count in factor into our job adjusted diluted EPS calculation.
I'm now on page 12.
Food group and smart foodservice businesses, both performed in line with our expectations given the current operating environment.
Our food group business saw trends that were very similar to organic business in the quarter.
While a number of markets in the northwest have been Florida to reopen food group markets also have a higher mix of national chain restaurants in the base and volumes with that chain business have continued to perform well.
We've also resumed integration activities beginning with the facility near Seattle that was first on our original integration timeline. We will complete this first warehouse conversion later in August and still expect a $65 million or run rate synergies that we previously communicated however, the ramp up maybe longer as result of reduced volume.
The smart foodservice business held up very well in the quarter with same store sales down low single digits from the prior year. This is due to two reasons first and primarily the cash and carry business model typically performs well and economic downturns as customers turn to the value offering it provides and secondly, the cash and carry channel has allowed.
As to capture some of the spend that has temporarily shifted to food at home.
In addition, you may recall this channel is attractive across economic environments due to its higher profit margins and because of the incremental business. We can drive from our existing delivered customers, which allows us to profitably consolidate our share of wallet with those customers.
And lastly, all of the Smart food service stores remained open through the quarter and EBITDA held up extremely well despite the challenging external environment.
With respect to our plans for this business, we still expect double the store counts and still anticipate limited integration activities.
In total the acquisitions contributed approximately 17% of our case volume and approximately 23% of our adjusted EBITDA for the second quarter, due primarily to smart foodservice and EBITDA being closer to prior year.
Turning to page 13, I would like to spend a few minutes discussing our current liquidity position.
Recall that during the second quarter, we completed a series of financing activities to fund the smart foodservice acquisition and further strengthen our overall liquidity.
As a result of these actions we're in a very strong cash and total liquidity position.
At the end of the quarter, we had $1.7 billion of cash on hand in total liquidity of approximately $3 billion.
During the second quarter, the business was operating cash flow positive, primarily but not solely from working capital benefits.
In the second half of the year, we do expect some of this benefit to reverse as underpayments revert returned to a more normal schedule and we rebuild inventory levels to support our customers.
Factoring out the working capital reverse I just noted I would expect our operating cash flow to be positive in the second half of the year.
Our cash and liquidity positions give us an advantage over the smaller distributors in the industry, we're better able to support customer needs and can invest to support faster growth.
We are focused on winning new business through organic market share gains and helping our existing customers navigate this difficult operating environments.
Operator with that we can open it up for questions.
As it sounded like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
First question comes from the line of Chris Mandeville from Jefferies. Your line is now open. Please ask your question.
Hey, good morning.
This quarter.
Pincher can I ask.
Maybe is there a way whereby you could characterize their ability to take share with independence right now and then separately as it relates that $500 million in new chain business that you're you're onboarding over the next quarter or too.
Can you comment on just the level of profitability, but you're seeing with those contracts relative to maybe what you would have otherwise observed six to nine months ago.
Sure.
So let's start with the your question on independents.
Look I think going back to my second theme around.
Our differentiated value proposition, what we're seeing is that.
It's as relevant and as ever as long as you know you meet the when I would call the table stakes that the customers require in terms of service.
The work we have done in terms of evolving.
We're.
Support resources for independent restaurants in terms of helping them navigate needs.
These channels and turns I mentioned 125 Webinars have done we've done a I think those for sure over the longer term will serve us well in terms of creating kind of goodwill and equity to gain share in the short term, it's a little bit harder to to quantify and to assess.
Customer mix becomes a little bit more the driver in the short term. So as an example, pizza restaurants have done have done relatively well in the current environment, we're not as heavily weighted in those in that segment across the country and so I would say that.
No the things we have done in the past and we continue to do or what's going to drive market share gains.
Over the future.
In terms of that book of.
Business, we've been able to bring on that Durcan I referred to the margins are or the margins are good look I think the here's what I would say.
The reason those customers are switching isn't because [noise].
We are awarding the business.
Very little margins, it's because again, our scale and we're operating model give these customers the confidence that we will be around for the long term.
And as I've said before prices tend to find their equolibrium and large connected business. We have seen over the last few years now because I've mentioned this no margins slowly creep up in that a larger multi geography business.
Okay. Thank you very much.
[noise] next question comes from the line of John Ivan Coal from JP Morgan. Your line smelting. Please ask your question Hi. Thank you I'll first a question on the competitive market and then a question on.
Fixed costs up at least in the news you know there has been you some discussion of as a means bankruptcy and on the other hand ethic was Cheney brothers that received some private equity capital. So that's what you know I guess I've read about I mean could you make some comments you know <unk>, even if you don't want to use names just kind of the capitalization of the overall.
Foodservice distributor industry, and you know their ability to kind of recover their own a working capital needs. A you know as their customers recover I mean, I know you made a comment that you're seeing rational competition, but are you beginning to see some signs that you actually may have some competitors go away or perhaps consolidate is the first question and then secondly.
You know there were some comments made around a fixed cost reductions I think those were specific to the second quarter around furloughs and I guess, what should also been in the first quarter as well.
How do you identified any costs on a fixed cost side that could actually be permanent that won't necessarily come back as volumes come back. Thank you.
Okay, I'll take the first and and let them talk through the second so there has been a there's about a half a dozen names John that continue to come up in terms of.
Ah competitors regional and small or that are experiencing some degree of stress.
It's hard to know exactly how stress. These competitors are in most at this point seem to be hanging on.
Hi, there, they're all private companies. So it's hard to know exactly will be to wish her well capitalized you gave a couple of examples when the kind of infusion and one that you know went to bankruptcy proceedings you know our our intent is where we know that those opportunities exist is to really positioned ourselves favorably with the customers that they serve that's the most accrue.
Right of way to.
Gainshare, which has to take advantage of those situations and.
The more uncertainty or the more of a roller coaster. There is seen in the short term like I said the prospects with industry longer term are good but the more uncertainty there isn't a short term than I think the more in that will present other opportunities that nature.
Okay.
Sure good more John So we are as you noted a lot of the cost reductions in cost actions that we've taken done to dates have been more temporary and a lot of that is also as we find our way through and see what what the recovery looks like in the industry looks like as we work through there.
I would say is.
To date, though we have used some combination of permanent temporary reductions and continued use both of these as we ensure our cost structure is right sized for our business and this will continue to evaluate but like I said that the bulk today have been temporary but.
As I said earlier aligning our costs with our volumes going forward is important and we'll continue to be a very flexible in order to to do that.
Thank you.
Next question comes from the line as Edward Kelly from Wells Fargo lifestyle Open. Please ask your question.
Yeah, Hi, good morning, everybody I wanted to ask you picture about the a the independent customer first it looks like in your slides I guess that the the trends at your independent customers have maybe stepped back a blip that recently with reopening issues total case growth I don't think has so is that just new business offsetting that and then.
What I really wanted to ask you is can you tell us what percentage of your pre covert customer base is currently ordering product just to kind of get a sense as to how many of these guys are still open for business to give us a senses to.
Much damage. There has been has been done today and then how critical do you think P. P. P is you know another round here by the way to.
The mix of your customer base remaining stable and good on the other side of all this.
Okay I'll try to cover all your questions that if I if I missed one just just remind me so you're right. If you look at you know them the right hand side of page four and even the left hand side, which is.
A good proxy for the industry.
The growth has slowed and in some cases may have stepped back a little bit and that's really a function of like tickets cases, a spike in the number of parts of the country.
Either governments have gone backwards in terms of the phase of reopening or consumers are trading a little bit more cautiously or stay a little bit on the sidelines. They picked up the broader point I was trying to make you know with respect to the restaurant sector is that consumers clearly have demonstrated the you know if we had talked.
A few months ago, we wondered whether consumers were in fact going to go back to eat out or to buy from restaurants and.
Bringing the food home and I think we've clearly seen that there isn't a secular movement to people you know now cooking at home a lot more than than they did before and I think that's that's what we think is promising so the consumer will drive the recovery, which then gets to another part of your question, which is the health of the independents.
So our customer count is I think roughly in line with what it was.
Pre cobot.
So we've had some new business because there's always some natural level of churn in the industry and obviously a lot of the the restaurants, even with the off premise sales are doing our operating on lower levels sales than than prior year, which is why we're not quite back to prior year levels, but the account is is.
In line when you look at seasonally adjusted to last year.
There are.
A number of restaurants, who are closed.
It's actually hard to tell whether there permanently closed or temporarily closed somebody then don't know you know when I talk to our field leaders and asked them you know they believed that the number of permanent closures today at this point is still in the low single digits.
And so.
That's the consumer that's the a little bit on the independence in the third part of your question Ed remind me it was on P.P.P. and another round alright that as to your cost yeah.
Yeah. So clearly you know so PPP the first time around was.
It's a little bit and perfectly design, but still a benefit to the industry and we try to get a sense of what percent of where customers have benefited from ppm, PPP and the new flexible version its pretty high.
And obviously, it's a it's a benefit and there's an added benefit that provide you know stimulus to the economy, which drives spending so I think to the degree that there is some form of.
Stimulus whether directly aimed at small business or restaurants or to the consumer I think that will help us get through the the.
Next few months as we await for either to get better control of the virus is as a country or vaccine, which is I think when things really be turned back to pre koby levels.
Okay can I just squeeze one more in for dark because.
Just sort of a little bit whether somebody from a cost perspective, and you guys did an amazing job of getting getting cost down now you said something on the call around I think cost sort of as a percentage of sales and maybe may and June or flattish, if I heard that correctly, but just kind of surprising I guess right in your business given the variable cost component.
So maybe just help us understand that a little bit more and that there how do we think about SGN a.
And maybe I guess year over year growth is the best way to do it in Q3 versus Q you know the 20% decline we saw in Q2.
Sure. Good morning, Ed you know I think that I'm. So excited you you did hear correct.
May and June with being in line with the prior year and I think that you know for US. It was it was important but in all areas of the business. We went after smartly aligning cost with volume not making.
Irrational decisions.
And you know it's as I commented that in May and June we actually saw improved productivity across the supply chain as the team whether it's you know a less lets people on roads kind of more effective ways of us operating within that the distribution centers et cetera. So.
For us that's that's not going to stop were to continue to focus on that as we as we move ahead I think the.
You know and then SGN a so we're going to continue similar actions I think that when we think ahead.
You may not be quite a cold, though the level of ER positive year over year as you saw in second quarter, but we do expect it to be you know again meaningfully lower and trying to align our SG in a much more to again lower volumes then.
Trying to also be continued to be flexible as we see a volumes up and down with you know what are what our structure needs to be in order to support that so this is that this is a big focus for us really across the all the areas of variable and fixed.
Great. Thank you and a nice shopping a tough environment guys.
Thank you it.
Next question comes from the line and Kelly Bania from BMO Capital. Your line is now open. Please ask your question.
Hi, good morning, Thank for taking your question.
I wanted to see if you can just help us out a understanding what what kind of EBITDA margin.
You mentioned EBITDA was a margin was positive in June just maybe help us understand kind of what level that is that and I.
I guess, if the sales kind of remain at this level for a while what what just whats a realistic EBITDA margin.
Into Q3 in Q4 at the current run rate.
Sure Good morning, Kelly this the Dirk.
You know when we think a as I said it going from a negative EBITDA to improvement in May that further in June.
We're pleased with the performance on that and at this point I'm Gonna stay away from a number or margin and it's not to be cuter base of interest I think we all know that the environment continues to change almost day by day, but I will say, though is if the environment stays at current levels, we would expect meaningful EBITDA in the back half of.
The year so.
The thing I just wanted to be clear is meaning not just a scraping by with positive and we're going to continue to focus on the levers in the actions that we do around.
Servicing our customers and then really optimizing our gross margin our opex as we go to the back half of the year.
Perfect and in terms of you know I think market share I think people are trying to.
Get a sense of how market share is within your various customer segments. So just curious if you could talk a little bit about drop size by customer and just to kind of really think about how much is happening at the unit level versus kind of the aggregate level I don't know if there's any color you can add there.
Yes, the Kelly or sure I'm not sure. There's a lot of color, we can add and you can probably draw some of your own conclusions right. So.
Sales are a little bit behind you know where they were last year. It varies by geography no surprise.
Customer accounts are.
In line with where we were last year, we continue to push for.
New business, because obviously, if if customers are operating at a lower level of business, which you know they are today than and obviously you know, bringing on new customers helps make up for that and as Stuart said you know, we've really worked well in terms of.
Our distribution costs to ensure that those have come down in line so weather.
Optimizing the routing or the delivery for.
Current turned to today's current reality is also helping you know maintain profitability were it is.
Okay. Thank you very much.
Next question comes from the line as John Heinbockel from Guggenheim Partners lines now open. Please ask your question.
So appealing for two things, albeit the cost control front.
If you don't anything that might be more strategic you know either in the warehouses or in the in the routing approach.
Right that that's not just tweaking budget can you took this opportunity to do something more substantial.
But then lives on a after a recovery like that makes the whole network a lot more productive and [noise].
No cost than it had been before those are the only examples of that.
Yes, I would say a you know there is there was an effort underway and the company that will Pauline we imagine which is really ensuring that both a our value proposition to customers continues to evolve could be relevant and and be where there are opportunities too.
Become more operationally effective and efficient we're looking at those.
I'd say, it's it's.
So while there have been some benefits as Dirk described as the environment.
Some of the benefits have come from you know we engineering, how we do some of the work and we have a whole pipeline of.
Of.
I would call my idea of projects underway to do that some are in line with the supply chain roadmap. We've shared in the past some are a new and they think honestly John it would be premature to to discuss these on on the public form at this point.
Well one of them as a follow up to that when you. When you think about along with what you think about longer term.
Oh and recovery complete told at levels.
Sales versus profitability.
And you might actually say sales have to get to a pre told that level before <unk> profit margins do.
Yeah, I, just think about those two versus each other and or are we thinking about you know we to your process or much longer than that but in terms of duration. When you kind of put your prognosticating out on.
So I think in terms of prognosis.
On the sale side, it's it's very hard to say I mean, we continually.
We continue to be surprised by.
Increases and decreases and the number of cases, and that's obviously impacting what consumers do I think in terms of the the cost side of things look we've learned I will say, we've learned a lot about how to operate in this environment I think we can emerge from this.
Being so there's some obvious.
There's some obvious.
Cost benefits from lower volume that we moved on quickly so you're not recruiting as much you don't need as many recruiters.
We talked earlier about some of the permanent reductions we made in the Salesforce as a result.
You know potentially being fewer customers to b to b.
For us to serve.
We've looked out or a more efficient model to serving chain customers that we adopted from or food group something they were.
Further the head on us and we've now rolled that out to the company suite. We you know last few months you really have been about the and I would call the more obvious opportunities and we will continue to look at other opportunities to operate in a more in a leaner and more agile fashion as.
We've learned to do so.
<unk>.
Okay. Thank you.
Yeah.
Next question comes from the line as Jeffrey Bernstein from Barclays. Your line is now open. Please ask your question.
Great. Thank you very much a two questions just one.
As we think about the.
Well that the new business you talked about.
You know, presumably I would assume that taking share from smaller distributors. I know you mentioned that you didn't necessarily when the business on price, but you want it more on scale operating model. So just wanted to clarify first and foremost I guess, you're talking about I guess, taking share from smaller independent distributors.
Assumably would otherwise want to retain this business.
And just to clarify it does sound like it's again more quick service chain business, and therefore white and reduce the margin meaningfully. This is at a lower margin then presumably youre more desired independent business and then how to follow.
Yes, that's correct so.
In terms of the the first part of your question the business that we've acquired has been from a smaller more regional sometimes local but I would characterize more as regional distributors and yeah. The margins are for that chain business, whether its QSR or you know, which which is it.
Opponent of chain.
Hi, Ken can be lower than the independent business. You know, we're still very focused on the independent business. It's it's one where we have an advantage where we can make a difference.
And we can get back to growth overtime, but all we're doing is taking advantage in being opportunistic them opportunities that may not have.
I've been around a year ago, and ER and putting a little bit of additional focus and emphasis in resources on that business, which again are from a rate perspective may not look as attractive, but you know, we're adding EBITDA dollars to bottom line and it's it's attractive enough on the rate perspective that it can withstand the consistently.
Gotcha and then other question there was.
Comment earlier about a you know EBITDA margins going forward and very encouraging to hear you talk about meaningfully but on the second half that it wasn't just necessarily.
Just stating by so just wondering obviously with the uncertainty large we don't expect formal guidance, but can you share anything about maybe what the.
On a factual basis, what the margin percentage was in June and July since it sounds like we're talking about a sales remained at those levels you know you'd have meaningfully but on the back half any color on June and July.
[noise] 'cause Dirk I'll take that I I think unfortunately, not a lot more to share a and again I think it's led to a it was kelly that asset it's less about being a base of in more just what the environment continuing to change I think you know as we get through the third quarter and see if the if the environment stays you know.
Stable are improving and that'll allow us to have a little more insight as to the go forward, but at this point.
And just continue to come back with the you know the focus and actions we have around both gross profit in Opex in order to really manage the environment ran in order to really optimize the EBITDA. The best we can an environment we're in.
Gotcha and just my last question there was mention.
Last quarterly calls from all the big distributor is talking about maybe some grocery store distribution opportunities.
You know that those relationships you are starting to build during the depth to the crisis and maybe that could lead to more.
Sustained long term new account servicing a food retail I'm just wondering how that's progressing if at all and if it is kind of a big part of the future kind of where those potential sales and margins like thank you.
Right.
So this is country again, so that the the Greenline on page five which shows the big jump in sales from retail that comes from.
Very small number of a large grocery retailers and that's more traditional grocery and as I said, we were opportunistic about that and provide some good baseline volume.
For our facilities its its margin accretive but it is at.
The lower and the opportunity we talked about.
In more detail and pre cold, but it was around the home meal replacement.
Part of the grocery store part of the grocery store that looks more like a restaurant deli the sit down part of some of some grocery stores.
That's where we see a big opportunity that's in our sweet spot and particular opportunity. We believe it's more with smaller regional players who don't have the scale to deal with some of the larger players do its little bit like restaurants, right, though that the opportunity is more with the smaller independents in terms of.
Making different and driving accretive margins. So it's no different on the grocery side that will take some time you know it's a it's it's a series of.
ER business development efforts, a we have a couple of markets where we've done.
Extremely well serving regional grocers in the home meal replacement part of the store and what we're doing is scaling that playbook across other markets to to make some inroads into into that business.
Understood. Thank you very much.
Yep.
Next question comes from the line of Karru Martinson from Jefferies. Your line is Nelson. Please ask your question.
Good morning, just when we look up the strengthen independence and the spike.
And demand yeah, how much of that is being driven by the expansion of outdoor dining and how should we think about that as we go into the fall in the winter.
Sure. So some of it for sure is driven by off premise, whether its outdoor dining or take out or delivery all of those are contributing.
And that's how it has made up some but not all of the you know the restrictions on indoor dying in terms of you know the impact of weather, obviously does not impact.
Take out or delivery, but again, if you look at different parts of the country. You know July in Florida, and Arizona, there's not a lot of outdoor dining worn off right. So some parts you know, it's it's a bit of a portfolio across the country, but look I think the other thing I would say is independent restaurant.
To proved just very creative and very resilient in their ability to take advantage of new opportunities and so I think as we move forward into the winter.
Barring a nationwide locked down which again I don't expect with no one really knows for sure I would expect for some of that a lot of that volumes to continue as we go forward.
And then just lastly, you know you saw a larger regional who filed chapter 11 and going through restructuring what does the health of those smaller.
Independents out there are there acquisition opportunities or do you feel that this is just a case of putting the sales resources behind it to take that share from them.
I think it's more of the ladder of.
Taking advantage of those opportunities I think as I said earlier as well some of the.
A smaller regionals are independent, but some are decent size you know.
Some overtime have you know carried too much leverage and everyone's more stressed others have run more conservative.
So really it's really about taking advantage of the opportunities with no terms of serving those customers were uncertainty exists.
Thank you very much guys appreciate it.
<unk>.
<unk>.
Next question comes from the line as Peter So I'm from BTI GE myself and please ask your question.
Great. Thanks for taking my question I, just want to ask about menu simplification optimization. If you guys are seeing something.
Now what we're seeing a lot of that among the larger cancer, where there [noise].
Cut in much of their menu and focusing more on center or the plate are you seeing something similar to that I didn't independent restaurants, and how does not impact your product mix at least in the near term.
That's the we're seeing it I take the larger chains did move more quickly, but I think some of the independents are following suit now based on what I hear talking to the field thing in terms of US look it's a good in a time of uncertainty where you're not sure when you'll be forced to go back.
In terms of restrictions are going forward.
It's it's smart way for the restaurants run their business.
And it allows us to be more responsive I mean, all distributors Kerry you know thousands of of skews in their buildings and you know that tail, it's harder to serve so to the agree that restaurants simplify their menus. It's it's good for them in terms of reducing waste and that's good for us in terms of.
Reducing some supply chain waste in the system.
Great and then I think you guys alluded to so I mean, your regional disparities or just some weaknesses as some of the case volumes.
Picked up can you guys give us a little bit more color on maybe what you're seeing more recently.
Some of the larger states this case volumes kind of pick up.
Yes, So I think what I was referring to is the chart on page four were some states opened earlier.
We saw we saw more of a recovery I think it's as simple as the fact as those states had one or two weeks longer to recover you know if you look at those those three lines on page four they all have a fairly similar pattern. It's just some states started earlier and got to got you closer.
Prior year levels.
And that's across the country when I look at the market for each of those cohorts that happens across the country.
I think by way of a general theme.
Some of the larger or been markets.
Has taken longer to to reopen right in New York, Chicago L.A.O. Smith, those big markets have take after taking longer and we're seeing that in our numbers and those are big markets for us.
I think I'd mentioned on the last call and we think we're still seeing this some of the more rural or suburban markets have recovered more quickly.
I think you know back to my first point it really is.
Essentially just a matter of time be before all markets kind of returned to close to two two pretty cold at levels.
Thank you very much.
Next question comes from the line of Rebecca action and mine from Morningstar Your lifestyle thing.
Hi, Good morning. Thank you. So you know you talk about how with some of these small independent distributors, you know I'm being stressed that you've been able to.
When about 500 million and new business and you can business there.
Is there opportunity is that these account you know to win some independent business or are these stress distributors primarily focused on chains.
No absolutely there's often so they so they vary some some distributors. So did you typically have a broad range of business.
Relative size me may vary.
Absolutely, we what we've done as we equipped.
Through our CRM.
Platform, which you know to me Thats directly with will our sales force on the Street. We go after them, where we think the opportunities are.
It's just a little harder to say at this point the kind of success. We've had you know because it's one distributor who serves a portion of the market and a customer may come on more slowly where's the larger customers tend to come on and Lumpier fashion. So I think it's just too early to say, but absolutely opportunities are across independents and larger teams.
Okay, great. Thanks, and also so as we look at permanent restaurant closures. You know, we're kind of thinking that those will be concentrated more in the independent area.
Do you think that there could possibly be kind of a permanent industry shift towards more chain business or how do you see that playing out.
Look it you're seeing that a little bit today, right and I think as I mentioned in my comment.
Yeah.
Segments or customer types that more equipped for off premise dining like fast casual and QSR.
Recover more quickly because that's where consumers felt.
So safer in this environment, but eventually you know post vaccine, it's hard to say I don't know that there's any reason why there's a permanent shift too.
More of a larger you know chain concept. The you know something a lot you know a lot of the you've seen the news right along in a lot of these larger cheese have close and they're not immune from from the pressures of this environment and like I said you know the independents are fairly resilient bunch to make calls, but then they reopen it.
Different location under the for me, it's I think post vaccine I think I'd be hesitant to say that there's a permanent shift.
Okay, great. Thank my my last question, if I could and maybe a bit earlier, but I was wondering if you have a sense as to a if you look at your education segment like what percentage of those clients have students returning in the fall.
Yes. It education segment has really been a tricky one.
The good news for US is it's a it's a minority.
Yes, you caisson business falls in the all other when we've talked all other and it's the smallest portion of the all other so the impact is a small for us.
And then you have to distinguish between.
College, and University and K through 12 College University I believe about half of colleges are bringing students back in half or not with K through 12, I think Oh parents on on this call. No. You know a lot of those decisions are being made literally as as we speak if it's too early to call. What we are doing again the impact on volume.
In margins is less material for us. The thing we are very focused on his inventory and making sure that were in close contact with those those customers to make sure that Oh, we have an ability to serve them without without taking on do inventory risk.
Okay, great. Thank you.
Next question comes from the line of Bryan Hunt from Wells Fargo Your lifestyle thing.
[music].
Oh, great just two questions one when I look at cash flow is there anyway, you can give us an idea of when you go to make collections. The the dollar amount or the number of accounts there just aren't responding as well as how fast do you think ATP a will normalize on a days basis.
Sure.
So it's.
Twofold, one I think when you look at the they take the second one that the normalization, we would expect to largely happened over the third quarter I.
I think it's so that's kind of shorter in term and then.
When you think of the.
Can you repeat your first part again please.
Yeah. When you look at the first part you know you your collection a bad debts you all made a big obviously reserve in Q1 reverse part of that in Q2 based on the success.
You know recouping, some of that reserves and and receivables from customers. When you go to make collections on a on receivables you know of that remaining roughly 100 million dollar amount I think it's 95 to be exactly how many a that 95, just aren't responding or have permanently closed.
Thank you, it's actually a relatively small number so our.
Credit team and our sales team have works just incredibly closely together for some some really good success and even some of those customers that whether they close temporarily or operating limited basis that they're having a very good communication openings. So it's actually a pretty small so the the bulk of even what's left there has has cuts.
And you to engage with us and in each week, we continued to see that pre cobot balanced go down and also those teams are working closely with customers. It's even for the post cobot balances to make sure we're managing credits as well as we go forward.
And then my last question you talked about excluding hospitality in schools in on Grand a July is not a big school a month, but your case volume was down about 13% in them up the July how about when you include hospitality in schools, what's the kind of your your change in tempo and that's it for me.
Just thought thank you.
Well I think if you look you know kind of the.
The the June timing that you would see in there we've been running at that down 20% to 25% range. Overall is it's been pretty consistent in more recent weeks as we ended up the quarter.
Thank you very much on and again best of luck stay healthy.
Thank you.
Next question comes from the line of Chewed up Palmer from Credit Suisse. Your line open. Please ask your question.
Hi, guys. Thanks for squeezing me in just wanted to follow up quickly on kind of EBITDA recovery comments.
We do you see in the slides that you're talking about you know returned to pre covert levels I didn't think I heard a couple of times in the comments you know that we'd get close to pre covert levels is that just kind of a timing mismatch you know until Patriot you mentioned the vaccine maybe you know we're near covert levels, but then after that were.
At pretty cold with levels, and then kind of you know beyond that as things really do normalized maybe again post vaccine.
Can you remind us of drivers of EBITDA margin improvement, obviously, the smart foodservice business is a higher margin business you have synergies in the food group acquisitions, where anything to think of just longer term.
To show is that we shouldn't be capping your your pre covert margins.
Sure.
Maybe I'll start there. So generally what we've tried to say is longer term the prospects for the industry, which were an important part in four years foods are positive and I've characterized that as close to pre comac, whether it's exactly prequaled little how close because it's really hard to say at this point, but when you look at the three driver.
Where's the volume recovery, we've seen in parts of the country underpinned the earliest than our success in some segments with favorable tailwinds.
Or Billy and maintain margins when you when you normalize for these onetime hits in terms of spoilage and donations and our ability to manage our cost again, all that together, we think kept US you know pretty close to.
Pre cobot exactly how close it it's really hard to say at this point, there's there's too much. That's that's a unknown, but really what we're trying to convey as is our confidence that there's a there's a good path to.
To getting to a profit levels close to people, who called <unk> <unk> over the eventual long term and what about its probably determined by my vaccine.
Okay, and then the only thing I would add on top of that to get back to your point on the the drivers is you know as we think about coming from all the areas of the piano like we've talked about in the past really you know overtime.
You still do have a lot of up taste preference for the variability in that a independents offer and to the point of whether the timing of vaccine and when that recovers, but still believe that's up out of those trends will will revert also really dry continuing to drive gross profit gains through the.
Ah things like private brands continued sourcing games things like that that we have been sat on the opex side came to drive efficiencies and better ways of operating across both the SGN a in our supply chain. So we don't I don't think at all that it's necessarily where we were pre cobot as the cap the matter.
You know whatever the external environment takes in order to get back to their or we're going to continue to do is operate the business to continue to grow EBITDA dollars at EBITDA margin just like we have historically and then finally does the point that you made that did add onto bolt the dollars that EBITDA margin. The most frequent recent acquisition of smart foodservice.
Just for that AD dollars, and then expansion opportunity we have there where we expect a weekend more than doubled the stores and the fact that it's a more profitable than.
The broad line businesses as we continue to grow that and then the added benefit we get from a further market share from those customers as we grow it so all in still significant opportunity on the recovery for dollars end margin.
Thanks, and good luck.
[music].
Next question comes from the line of William Reuter from Bank of America, and myself and please ask your question.
Thanks for taking the question I just have to the first is a you mentioned that SGN and the next quarter will be down but not as much as we saw in this quarter.
But it sounds like most of the costs that you reduce you said were temporary so I guess is there something where you can help us understand what percentage of your SGN, a we should be thinking about as being fixed versus variable in the back half the year.
Well I think the you know that's come back to that we expect to continue to focus on quite a bit on on our cost as we have I think I'll just use maybe an example of it or something like some of the temporary I pay reductions that we put in place we have to the second quarter and are not continuing for associates during the third quarter. So.
It's a matter of again continuing to be to be smart, but at the same time, but to make sure that we're treating our our associates fairly as that go through this but also continuing go it gets instead of looking at other as the business, where we can drive efficiency and effectiveness that are temporary and more permanent so think of that and not knowing exactly how the marketplace plays out.
So which can impact cost is again, while I'm not trying to be a vague versus just the.
The fact of just articulated but though the positive trajectory. We expect to continue its just its hard to estimate the exact levels of the dollars, but positive momentum.
Okay, and then in terms of the education business can you provide which what percent is colleges versus K through 12 just in.
Big broad brush strokes.
So we're pretty well.
We have a split across the spectrum or would you look there so even talk about specific numbers, but it's it's up pretty meaningfully across each of the areas from a K through 12 and college and University.
Okay. Thanks very much.
Next question comes from the line of Carla Casella from JP Morgan. Your line is helping please ask your question.
Hi, I'm you commented in your prepared remarks that the <unk> your reopened customers, you're seeing sales down only about 10%.
Do you get a sense is that the true sell through is there some sort of the pantry loading going on there as well.
So it was just to clarify what's customers that had been reopened the longest the greatest number of weeks.
Right that Green line and.
It's hard to tell or how much there's always a little bit of kinda restocking. Once you close but I think you could see enough of the trend.
HM.
In terms of year on year closing the gap that.
I think you know in terms of the spirit of your question.
A lot of the.
Performance were city relative to prior year was truly sustainable sales more than just pantry loading recurring one week.
Okay, great. Thank you so much.
No no further questions. Please continue.
Okay. So maybe I'll say a few words in closing I want to thank all of you for participating today and for all your questions.
I hope to call K leaves you with the three takeaways I started with first the outlook for industry remains positive close call that second our scale and differentiation present genuine opportunity gain market share and third the second quarter results, both our ability to stay relevant to our customers into manage our cost in this.
Challenging environment.
Oh this I want to thank our associates, who work tirelessly since the beginning of this crisis.
Thank you for tuning in today have a good day and please do things.
Yeah.
This concludes todays conference call. Thank you for participating in May now disconnect.
[noise].
[music].