Performance Food Group Company (PFGC) CEO George Holm on Q3 2020 Results - Earnings Call Transcript

Performance Food Group Company (NYSE:PFGC) Q3 2020 Earnings Conference Call May 4, 2020 9:00 AM ET

Company Participants

Bill Marshall - VP, IR

George Holm - CEO

Jim Hope - CFO

Conference Call Participants

John Heinbockel - Guggenheim Securities

Edward Kelly - Wells Fargo

Chris Mandeville - Jefferies

Jeffrey Bernstein - Barclays

Judah Frommer - Credit Suisse

Kelly Bania - BMO Capital

Karru Martinson - Jefferies

William Reuter - Bank of America Securities

Operator

Good day and welcome to PFG's Fiscal Year Q3 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

Bill Marshall

Thank you, Brandy and good morning. We're here this morning with George Holm, PFG's CEO; and Jim Hope, PFG's CFO.

We issued a press release regarding our 2020 fiscal third quarter and nine months results this morning. The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items. The 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 website at pfgc.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 to differ materially from our forward-looking statements and projections.

Now, I'd like to turn the call over to George.

George Holm

Thanks Bill. Good morning, everyone and thank you for joining our call today. As the world continues to grapple with the COVID-19 pandemic, we've been working hard to protect PFG's associates and business.

Before I discuss our business results and actions we have taken over the past several months, I would like to offer a heartfelt thank you to all our associates in the PFG organization who 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 has not gone unnoticed. Like many other organizations across the world, we have 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 or pivot to takeout and delivery. PFG stands side by side with our customers, and we'll do whatever we can to help them weather the storm.

We have 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 our inventory of products directly to the grocery channel, adding business that was not part of the PFG platform just a few weeks ago.

The effort to sort through the logistics and the challenges 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 in the grocery industry.

Through this effort, we have signed agreements with 25 retail partners and shipped groceries to approximately 1,275 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, we feel confident that we will come through this period stronger in many ways. I'm also proud that our sales force continued to add new accounts through this period of time.

Our integration of Reinhart, despite the external challenges also continues to be on track. The 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 Reinhart synergy activities we had originally planned. We're also proud of the work being done at Vistar. We anticipate the challenges in the theater and concessions business to continue for the foreseeable future.

Theater, an important channel to both Vistar and to PFG, represents about 15% of total Vistar sales excluding Eby-Brown or 6% of Vistar and Eby-Brown combined. Theater was just 2% of PFG's total sales through the first nine months of the year. With that said, we are pleased with several other channels that have proven resilient; in particular the convenience store channel resulting from the Eby-Brown acquisition continues to pay dividends for PFG as a relative bright spot in our portfolio.

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

We recognize that our third quarter results will only provide a partial view of our industry and business trends, and what that suggests for the weeks, months, and even quarters ahead. We like nearly every company are 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 or our fiscal week 39, calendar week 13, our performance in the restaurant channel has improved sequentially each week as we've moved through April.

Directionally, the larger quick-service chains have outperformed with those that are set up for delivery and takeout in the best position. Full service restaurants continue to be the hardest hit during this period.

We have 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're 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 on our financial activities in a moment.

Each quarter during these calls, we like to highlight one associate who 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 how our entire team has embraced PFG's role in keeping our country's food supply chain strong. Thanks to our talented sales associates who have continued to be engaged with their customers.

I want to especially thank our hard working 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 those shelves stocked. Thanks for your willingness to work while others were sheltered safely in place.

Thanks to the generous spirit of our associates and operating companies, we are proudly helping those in need by using our resources to get food to families in hard hit areas like New York and support those on 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 showmetheeats.com 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. I'm grateful for the care, concern, and creativity our team is delivering. Right now, PFG’s associates are more than helping hands. They're 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 position.

Jim Hope

Thank you, George and good morning everyone. As George mentioned, PFG has taken decisive steps to fortify our financial position, adjust our business to the realities of the current environment, and utilize our assets to weather 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 COVID-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 a downturn that persists longer than any of us would like.

To that end, we took a pass that included a mix of equity and debt instruments to maximize our capital structure. We did this in four 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 under-writer discounts and fees. Third, we issued $275 million of new debt structured as five-year bonds at a rate of 6.875%.

And finally, we agreed to a 364-day term loan with several lending institutions raising an additional $110 million. We have also managed our working capital closely to align with our business with the market environment, and 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 Eby-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 is primarily attributable to Eby-Brown and Reinhart as well as sales growth in Vistar, particularly in the corrections, retail, and hospitality channels.

The acquisition of Eby-Brown contributed approximately $1.2 billion to net sales for the quarter, including $257 million related to tobacco excise taxes. Reinhart 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 to a lesser extent, produce and meats.

Gross profit for the third quarter of 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 $0.25 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 Eby-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 and 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 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 to $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 of fiscal 2019. The diluted loss per share was $0.35 in the third quarter compared to diluted EPS of $0.31 in the prior year period. Adjusted diluted EPS increased 38.1% to $0.58 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 periods to $2 billion. This increase was driven by the acquisition of Eby-Brown and strong sales growth in the corrections, hospitality, and retail channel.

Third quarter EBITDA for Vistar increased 10% to $14.7 million versus the prior year period. Gross profit growth of 43% in the quarter was fueled by the acquisition of Eby-Brown.

Our Foodservice segment generated fiscal third quarter net sales growth of 30.4% to $4.9 billion driven by the acquisition of Reinhart. Foodservice even decreased 7.7% in the third quarter.

Turning to our cash flow. In the first nine months of fiscal 2020, PFG generated $17.6 million in cash flow from operating activities. Operating cash flow would have been $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 low operating income and investments and working capital.

For the first nine months of fiscal 2020, PFG invested $101.1 million in capital expenditures, an increase of $8 million versus the prior year period. Excluding the impact of the outstanding checks, free cash flow would have been $130.2 million in the first nine months of fiscal 2020.

As you know, we withdrew our fiscal 2020 guidance in late March as the COVID-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 trends 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 the 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 actions 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?

Question-and-Answer Session

Operator

I'm sorry. Yes. [Operator Instructions]

Your first question comes from the line of John Heinbockel of Guggenheim Securities.

John Heinbockel

Hey George let me start with -- maybe talk about, I know it's very disruptive out there, but the pace of incoming inquiries from potential new customers, and I think I think you've picked up some chain business pretty recently. Is the pace of that new business pick up -- is that accelerating here in the short-term? And I know you have capacity to deal with it.

George Holm

Yes, we have some business coming in. They're actually in all three cases; they're public companies, so we don't like to announce news for them. I would call the pace of activity as high as I've ever seen. There's a lot of opportunity in spite of what's going on now, and we're just doing our best to sort through that and kind of figure out what the best route for us to go is.

I think it was prudent to pick up that business. I don't think any of us knows what business is going to be like when everything comes back. But there seems to be an opinion out there that the chains are probably going to do better than the independents, 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.

John Heinbockel

And then maybe as a follow-up to that, if you think about going back to capacity, right, how much capacity do you have in the customized facilities? Because I assume you're not going to run chain business through -- or maybe you will through the independent facilities? And then maybe more broadly, how do you think about using the entire network?

George Holm

Well, the business we have coming on, two of the three chains will be handled through our broad line and one will be handled through customized. If you look at our customized pre-coronavirus, I would say we maybe have the capacity for an account. During coronavirus, we’ve got all kinds of capacity, right? So, what we need to figure out is, kind of, what the new normal will be as things come back and then we can make better decisions from there.

John Heinbockel

Okay. Then just one last thing, your commentary about sequential improvement. It sounds like it's -- maybe it's just too variable week to week, but it sounds like it's relatively -- we've kind of hit a bottom and bounced a little bit off it, but it doesn't sound like it's huge improvement week over week or is that wrong?

George Holm

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 right now to look more sequentially than at last year since it doesn't matter much. There were really two things that took place, one was that I think our customers got better and better at doing takeout. 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 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.

John Heinbockel

Okay. Thank you.

Operator

Your next question comes from the line of Edward Kelly of Wells Fargo.

Edward Kelly

Hi. Good morning, guys. Hey, George, just to start as a follow-up to John's question, can you give us a sense as to what run rate is looking like currently? I know you're saying sales have each week. If you troughed it down, call it 50, how are you running now, sort of like pro forma year-over-year?

George Holm

Yes. We're really hesitant 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 light 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 as the other comes up. Are we going to see that stick and that's just going to be incremental business. We're just real hesitant to throw numbers out there that we don't have good confidence around.

Edward Kelly

Okay. And George, you've raised a lot of cash and there's obviously a defensive component to this, right. But then there's an offensive component. There's been a lot of focus on the defense, right? So can you talk about the offensive component, sort of like what you mean by that? And then in what form does this play out? I assume you're not just talking about going out and just buying business, right?

What does the timing of the share gains look like? I mean, obviously, you're talking about picking up a few change, what does the pricing of that look like? Any color on how you're playing offense, the benefit and the timing?

George Holm

Well, for right now, it's to grow our customer base. I think that's really important. I think that when we get through this, when we have a good sense of what things are going to look like, that's when we really have to address, where we're gone with our capital structure more long-term.

Certainly, want to get through this potential second wave, if there is such a thing. We're certainly not experts on that. So, we want to make sure that we have capital structures that’s going to last us all the way through this. We certainly don't discount, being acquisitive. I think it's very hard to figure out what an 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. Eby-Brown has continued as part of us to do better than they had as an independent company. And Reinhart, we had excellent January and February where they had been flat in sales and EBITDA going into the period, and they had nice growth in both. We just feel so good about where we're at with that acquisition. So, we certainly want to be acquisitive, but it just probably isn't the right time.

Edward Kelly

Maybe just lastly for you George. You know, it's sort of like a follow-up. You obviously have a ton of industry experience. And obviously, what we're going through today is clearly unprecedented, but I think it'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 to independent units?

How much consolidation and damage will there be amongst your private competitors? How confident are you in what the earnings power of the business looks like when the dust settles? I know there's a lot of questions out there. But you know better than most of us, obviously. So I'm just kind of curious, how you're thinking about it?

George Holm

Yes, I'm -- barely don't have a good feel for how many restaurants are going to come back. And I've been saying for a few years there's 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 -- what the new world looks like and then go from there. We dialed this business down and we needed to do that, maybe we could have done it a little bit quicker. But I liked 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 there's a lot of restaurants that aren't open and have not been open through this.

And opening a restaurant is a very, very difficult call. 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.

Edward Kelly

All right. Thank you.

George Holm

I would add too. I would add too that we -- March is kind of a tough month to judge, because it does have two full weeks and really another half a week of COVID-19 impact. But when we looked at the NPD [ph] report that came out for March, we built more shares 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 the restaurants going to be as we come out. I'm an eternal optimist about that because I could go sit in the restaurant alone right now feel great. I can't wait to get in one. But I think a lot of people feel that way.

Edward Kelly

Thanks, George.

Operator

Your next question comes from the line of Chris Mandeville of Jeffries.

Chris Mandeville

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 maybe some within the market were fearing. So is there any way to speak to the independent organic trough and then the rate of week-on-week improvement relative to overall performance…

Edward Kelly

You know, I really have a minus 2.7 that's -- yes, we have a minus 2.7. That was minus because of those last two-and-a-half weeks. But we've always aspired to be above that 6% number in independent taste growth. And we slipped below that for a couple quarters and we were doing better than that going into that period of time. So, we feel good with it. But to comment on the improvement, we just aren't comfortable with that from the trough week till now because we -- there's just too many variables. And we would rather get through this and then I think we can get a pretty good idea of if we think we're affecting normal or what normal is.

Chris Mandeville

Okay. Can you maybe speak to just the resiliency that you saw, possibly within the pizza Italian business, how that overall influence the numbers? And then Jim, in thinking about the market having some concerns surrounding independent closures longer term. If we were just kind of look at the PFS performance in the quarter itself, is there any way to reference the year-on-year gross margin deployment?

Edward Kelly

I'll start with the pizza. The pizza has outperformed the other parts of our business as far as independent. And sequentially, it's improved, similar to the other business that just started out with a much lesser decline. And then Jim, there's a question for you too.

Jim Hope

Yes, Chris. I think if you're asking about a number of store closures, very difficult to determine that. And it certainly, is difficult to predict it. 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.

We're reducing inventory levels at the same time, which tends to generate cash though. Yes, there's certainly a risk with store closures, and a risk with receivables and we're paying very close attention to that one.

Chris Mandeville

Okay. Yes. Now, I guess, I was -- I was looking more so along the lines of -- or focused more so on the gross margin rate of decline in the Foodservice side of the business, just in light of how independence performed?

Jim Hope

Yes, look, overall, it's no doubt independent provide good margin improvement on the top line, and helpful in the bottom line as well. If you know Eby-Brown, has come in with a large amount of tobacco sales, which improve the overall profit margin. So I get it. That's probably a tough one to dissect. But I don't have any more color to add there.

Chris Mandeville

Okay. And then maybe just my last question. Just looking at the cash flow on balance sheet, it doesn't appear to us that you necessarily saw much of a benefit on cash from working capital improvements in Q3. Is that a fair statement? And then I guess, is there any way of really sizing that up as they move forward? And on the CapEx front, also, the rate of reduction that we saw in fiscal 2020 is that -- that really a true reflection of your flexibility? Or could you, in fact be a little bit more drastic going forward?

George Holm

Yes. Look, I think things happened quickly at the end of March. At the same time, we're working through an inventory build. And so both of those things, cause the results that you're calculating there, in your analysis, that's not a true picture of the cash flow profile going forward. And typically, and now, as we would reduce inventory will generate bash. And we know that, we have a good deal of flexibility and elasticity and working capital we're managing through all three components of those.

Jim Hope

Yes, I think it's important, Chris, that you don't look at the end of the quarter as the point in time. We had single digit increases in accounts receivable and accounts payable at the end of the quarter, but 33% increase in inventory. And that's normal. If you would call anything right now normal, but I mean, if you have a sudden drop in sales like that, you know, you're not going to see a sudden drop in inventory. But our working capitalists come in line since then, and I think in that are receiving something good.

Chris Mandeville

Okay. That's what I was looking for. Thanks, guys.

Operator

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Jeffrey Bernstein

Great. Thank you very much. Three questions one, just wanted to follow-up on George, your earlier comments about, the independent restaurant look seems 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 the 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 be 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?

George Holm

Yes, I don't think we know this was so sudden that it's just very hard to tell. And we're -- our salespeople are keeping constant contact with those customers as best they can. And we're not hearing them say that, there's going to be a huge amount of closings or not reopening. I don't think we know and what happened during that great recession, I think these are two totally different events.

Jeffrey Bernstein

Yes. And then in terms of your comment about the grocery store distribution, I think you mentioned 25 or so partners and a little over 1,000 grocery units that you're now distributing to. And obviously, right now, it's extremely small, but could you just talk about the vision you might have or what it could be, or maybe why you hadn't pursued that business in the past, is it?

Presumably, a lower margin business, kind of like the chain before wasn't the target customer but now seems more attractive? Or how do you see that business playing out over the next few years?

George Holm

We've always done some of that business, particularly, you know, where they're preparing food. A lot of the sales that we had into that channel are perishable inventory that, you know, we wanted to get out of the system. We'll see kind of when this is all 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 as long term or has the potential to be long-term business.

So I wouldn't say that, we've given it a huge effort. We thought it was important to help where we could. So, we did supply in many warehouse people in many drivers. We just have to see from here, but we certainly will, hang on to as much as that business as we can.

Jeffrey Bernstein

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, But you've got the proceeds to hold on. Well, I'm just wondering, you know, seeing 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 well for color in terms of -- if sales had stabilized down 50? Well, presumably they're now down less than 50. But, how you think about your burn rate relative to that billion plus in cash in terms of weekly or monthly at any kind of sales level? Any help there would be great.

Jim Hope

Yes. No, I'm sorry. Look, I respect the question, 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 pump 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.

Jeffrey Bernstein

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?

Jim Hope

Correct.

Jeffrey Bernstein

Very helpful. Thank you guys very much.

Jim Hope

Thanks.

Operator

Your next question comes from the line of Judah Frommer of Credit Suisse.

Judah Frommer

Yes. Hi, guys. Thanks for taking the question. So 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 week to week and we understand that, but is there any color you can give on, kind of the progress versus trough for independents versus chain? And which one of those have recovered better?

I mean, obviously, chain never got as bad as independent did, but kind of curious which of those has actually seen better growth in recent weeks? And then any color from states where you've seen some restaurant openings in the last couple weeks?

George Holm

Yes. The from -- the trough to today, they're about the same, the independent and chain very similar. We're getting some feedback on -- on how restaurants are doing. First of all, it appears as if I mean, obviously 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're getting ready to -- to manage to what that state is allowing to have happen.

But I did get messages from people over the weekend that had very full restaurants from the standpoint that, if 50% was the guideline, they were 50% full and they were managing to that 50% full. So, 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, then maybe the general press. But I think it's encouraging. I think there's a lot of kind of cabin fever and pent up demand.

Judah Frommer

Okay, that's helpful. And then just as we think about kind of the new accounts coming online, specifically, the change and you mentioned, you'll probably similar to the last recession, it makes sense to have incremental exposure to change and maybe survive a bit better.

How do you think about balancing, you know, Foodservice margins? If it is the independents going away and kind of chain business kind of becoming an outsize piece of the pie? Do you think about offsetting that at some point and getting back to your mix of both higher independent proportion of total sales?

George Holm

Well, yes, and you know, we're struggling 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, you know, acceptable, margins I think that, if we come back with a higher mix of business in chain, 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 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.

Judah Frommer

Okay. That makes sense. And then maybe lastly, just Jim help with kind of food inflation, obviously meat was a bit inflationary, but that situation has changed in the last few weeks with facility closures. Just kind of thoughts on meat inflation the impacts to the business and maybe remind us how that flows through both independent and contracted cases?

Jim Hope

Yes. So inflation came in around 3% for the second quarter, it's almost impossible to predict where it's going to go going forward. We saw some serious inflation in a handful of categories and some balance in others as to be expected. How it flows through is I would describe that as very fair and expedient, it simply flows through cost of goods straight into the customers pricing and we do our best to manage that from a reasonability standpoint, our systems are very adept at passing on inflation through the supply chain as our suppliers.

Judah Frommer

Okay. Thank you.

Operator

Your next question comes from the line of Kelly Bania of BMO Capital.

Kelly Bania

Hi. Good morning. Thanks for taking the questions. I really -- 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 your customers, I guess?

George Holm

Yes. Kelly, we're not being to -- we're not trying to be evasive. We just want to make sure that everybody understands. It's very uncertain.

We've spent a lot of time around the -- and I'm sure everybody in the industry has around what type of things we need for a different world for masks, sanitizer to those types of things. So we spent a lot of time to make sure that we’ve got plenty of that for our own use and for our customers use and 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 have an opportunity here to make sure once again, that we're sized to the mix of business that we have from an expense standpoint, and we're sized to the amount of business that we have with the intent of getting as many people back here to work as we as we possibly can.

Kelly Bania

Okay. That's helpful. I guess, just in terms of your independent customer base, in terms of the PPP and what are you hearing about how that's going for them or how that's helping them and just managing kind of the resources around working through those programs?

George Holm

Yes. Well, we've had these web access for our customers and I'm 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 is 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 people are just very happy to get that money and some people that just don't want to touch it.

In our business, so I think that a lot of times people, they just -- they find a way to figure it out. And I've just seen such improvement in takeout and delivery, I think that they'll find ways. So the good operators are going to find ways to be successful in this environment.

Kelly Bania

That's helpful. And I guess, maybe this will be in the queue, but we've had a lot of questions just 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?

George Holm

Yes. Look, we recorded 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.

Operator

Your next question comes from the line of Karru Martinson of Jefferies.

Karru Martinson

Good morning. With the, I guess, call it shut down and furlough, when you look at the Reinhart integration, is it easier to speed up that process as things are shut down? Or do you feel that it's going to be dragged out over the process now?

George Holm

No. It was easier. We had more time. We kept everybody engaged. We had more time from our IT people who were able to get the systems and processes in place that would have taken us longer if we had the day-to-day challenges of full 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 it's been helpful for us to have that time.

Jim Hope

I agree with George. I think it's been really helpful. And we've certainly taken advantage of it to find the synergies. But I'd also say, as we looked at the Reinhart acquisition, that business and those folks were exceptional. That was a great acquisition for us. And no time more than ever has it shown that that group is just a really good fit in our organization.

George Holm

If you think about it, by the end of this week, they would have been in coronavirus 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 forced daily contact and I just feel like these people been around for a whole lot more than in one quarter.

Karru Martinson

Necessarily. 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 COVID-19 coming back in the fall? And how do you look at your liquidity against that?

George Holm

Well, first the potential of it come back in the fall, we leave that to the scientists and the doctors and folks that they really understand it better than us. But we certainly are tuned in to every piece of news that you can possibly get. And we know that that is a scenario that has been given merit and attention.

We're to come back. As we said earlier, we took a very conservative approach and strong approach to raising liquidity. We were very, very successful in 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.

Karru Martinson

Thanks very much, guys. Appreciate it.

Operator

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

William Reuter

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 you to keep your goods stored safely for extended periods of time? And is this something that's a risk?

George Holm

Well, we need to work on the perishable product that we had very quick. We didn't want to not accept inbound orders that we had placed in good faith. So we had a lot of perishable product that we had to deal with. We went to retailers for some of it. Some of that we donated. Some of it we froze, and some of it that we froze, we've been able to move out sometimes at a discount. That's one of the things that affected margins there at the end of the quarter, because we moved quick to get that done. And we're past it. We don't have perishable issues now. These are just things that we had to move quicker.

One thing, I've told several people is that, I sat with Jim in early March at lunch and we were in the process of having another record week and he said to me, you don't seem to be real happy about it. And now I'm like, well, we're just a couple 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 a couple of weeks, we were worried what we're going to do with all this produce and fresh meat, so things changed. I'm just saying that this seems to have best things changed and when things change that fast, it's tough to get on a call like this and say this is where we're going to be three weeks from now or a month from now because we've just been through such incredibly quick change.

So at this point, I think we're through with any issues to deal with perishable product. But if you also think about perishable product, we're ordering it now in anticipation of more business and we don't really know what's happening. So we have a second wave, so there'll be a second wave of perishable product issues, I don't think so, but we're going to have that product available.

William Reuter

Yes. That's I'm sure it's incredibly tough. And then, in terms of you've mentioned, you have an $18 million bad debt expense, which in the context of all your receivables is really not that big of a deal. I guess, does 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 and getting paid for those or is it just the information you would have received as of March 30th?

Jim Hope

If we've seen significant change in information since the time we close, yes, we would be required to post a subsequent event and we did not.

William Reuter

Okay. And then just lastly for me, I think you had furloughed, a little more than 10% of your workforce. Do you feel that's a sufficient amount at this point based upon where you are?

Jim Hope

Yes, what we did is we managed resources and payroll with the demand we were 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 we'll just continue to watch everything closely.

William Reuter

All very helpful. Thanks so much.

Operator

[Operator Instructions] Your next question is from Edward Kelly of Wells Fargo.

Edward Kelly

Hi, guys again. Jim, just I wanted to follow-up on variable costs. We had some discussion around variable costs and it 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 costs component within the P&L's as we're taking on adjusting cases on a go forward basis?

Jim Hope

Yes, I think the best way is to go back and look at, for instance Q1 or Q2 and think about it is the cost structure is between 60% and 70% personnel. Excuse me, typically, mostly that's from truck drivers, warehouse workers in the salesforce and we've adjusted our workforce since then, including lending new employees for the grocery channel, the furloughs, eliminating positions to adjust to the volume reality of the day and we've taken other steps to reduce other expenses where possible.

So, if you calibrate back to that point and know what we've done with expenses, including almost eliminating P&E and additionally piled on rerouting trucks, which gave us quite a bit of efficiency you can model back from there.

Edward Kelly

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 and what I mean by that is, has any of this change we're thinking about the consolidation opportunity on the operational side?

Jim Hope

Yes, we've 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, but there was also some operational and headcount synergies to be add.

What we've done is made sure that we took advantage and manage the headcount resource synergies, but 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 in the moment, we don't expect to change our three year target.

Edward Kelly

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

Jim Hope

That's right. Thanks, Ed. It's a good question. So, normally, we don't carry cash on the balance sheet. The normally checks outstanding would be carried in trade payables, but because we drew down on our ABL and carried cash. We were required to net checks outstanding against cash on the balance sheet.

For that change in accounting mechanics moves, checks outstanding to cash flow from 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.

Edward Kelly

Okay, great. And George, can I just ask you one more question?

George Holm

Sure.

Edward Kelly

On the new business that you've picked up the new chain business, any color on why the business moved is it just like normal business that was happened to be up for bid or is it the environment? I am just kind of curious as to how your -- like how all this is changing the way your customers are of thinking about it at this point?

George Holm

Well, those accounts are chain accounts that we do business with in other 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 were the last trip I did, before this happened. So it was something that was in process, so I wouldn't relate it to this COVID-19 at all.

Edward Kelly

Okay, great. Thanks, guys.

George Holm

Yes, and the last thing I wanted to add but before we sign-off here is just thanks for understanding that it's difficult right now to give any color on what we see coming up and I thought the questions were great and I hope that you understand that we weren't being evasive. We're just given the best information that's available to us now and thank you.

Operator

Thank you. That is the conclusion of the Q&A session. Now, I'll turn the call back over to George Holm for including additional comments.

George Holm

Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations. Thank you.