Thank you for staying by, and welcome to the US Foods First Quarter Earnings Review Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star one on your telephone. Please be advised today's conference is being recorded. If you require any further assistance, please press star zero. I'd now like to hand the conference over to your speaker today, Melissa Napier, SVP, Treasurer, and Investor Relations. Thank you. Please go ahead.
Thank you. Good morning, everyone. Welcome to our first quarter fiscal 2020 earnings call. Joining me on today's call are Pietro Satriano, our CEO, and Dirk Locascio, our CFO. Since mid-March of 2020, towards the end of our first quarter, the business operations of our restaurant, hospitality, and education customers were significantly disrupted by the spread of the COVID-19 virus. On today's earnings call, we will focus our commentary on trends seen in the business for both a pre-COVID and post-COVID timeframe, extending through the week ended May 2, 2020. We'll also be discussing the actions recently taken to strengthen our liquidity and provide an acquisition update for both Food Group and Smart Foodservice.
Today's presentation slides, which include volume trend information for the first few weeks of Q2, as well as the Q1 slides that we typically prepare, can be accessed on the investor relations page of our website, along with our Q1 earnings release issued earlier this morning. We'll take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. During today's call, unless otherwise stated, we're comparing our quarter and full year fiscal results to the same period in fiscal year 2019. Also, during today's call, references to organic financial results exclude contributions from the food group, which we acquired in September of 2019. In addition to historical information, certain statements made during today's call are considered forward-looking statements.
Please review the risk factors in our 2019 Form 10-K and our Form 8-K, filed with the SEC on April 23rd, 2020, for further information on these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. During today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release, as well as in the appendices to the presentation slides posted on our website. I'll now turn the call over to Pietro.
Thank you, Melissa. Good morning, everyone. Welcome to our first quarter earnings call and our first call since COVID-19 has had such a dramatic impact on our country and our industry. As Melissa said, we'll spend most of the time reviewing the impact of COVID-19 on our business and our response to this unprecedented challenge. Before I do so, I would like to take a moment to say thanks. First, thank you to all the healthcare workers who are on the front lines fighting the COVID-19 outbreak every day. Thank you to our associates, who every day play a vital role in maintaining the food supply of our country. Thank you to our customers and their staff, many of whom have suffered devastating losses during this period.
In this time of need, we have tried to do our part to provide meals to those less fortunate. We encourage all who can to do the same. Slide three provides an outline of the agenda for our discussion today. As Melissa mentioned, our focus will be on recent trend and our response to COVID-19. We have provided the standard quarterly slides at the end of our presentation for your review. Since the outbreak, our response has been informed by three guiding principles: keeping our associates safe, helping our customers, and conserving cash and generating additional liquidity. Ultimately, these three guiding principles are what will ensure the long-term health and success of our company. Let's go to slide four for a very brief overview of the first quarter.
January and February case growth and EBITDA performance was in line with our expectations for the quarter prior to the COVID-19 outbreak in March. Volumes rapidly began to decline starting the second week of March, as many states enacted stay-at-home orders. Case volumes stabilized at just over minus 50% and now have begun to recover in the last few weeks. Our gross margin rate was negatively impacted as a result of the change in customer and product mix, which we do expect to recover as volumes return. Lastly, at the end of the first quarter, we implemented a number of actions to bring our costs more in line with our reduced volumes, but the time of these actions resulted in less impact to the Q1 results.
In the first quarter, we also booked an incremental $170 million reserve from collectible accounts based on the expectation that COVID-19 would impact our ability to collect outstanding balances from customers. Moving to page five, I would now like to talk about volume trends by customer type from the middle of March to the end of April. The yellow line shows volume for restaurants, which includes both independents and chains. After falling close to 60%, volume for restaurants has improved in recent weeks. We attribute this to a number of factors, including restaurants reopening, and part as a result of SBA loans under the CARES Act, stimulus payments hitting consumers' bank accounts, and both restaurants and consumers taking greater advantage of curbside pickup and delivery.
Looking forward, we do see opportunities to gain share with this customer type, as we see prospects and customers, some of them approaching us and expressing a concern with the viability of some smaller distributors in our sector. Our healthcare volume, shown in orange, has been less impacted than other areas of the business. The decline in case volumes is a result of the postponement of elective and preventative procedures across most of the country's hospitals. We do expect this volume to recover more quickly as hospitals have begun to reinstate these procedures. Not surprisingly, hospitality, the blue line, has been one of the hardest hit customer types, as travel and large gatherings have come to a virtual standstill. We expect that it will take longer for this particular customer type to recover.
Lastly, I am pleased with the progress we have made, signing over 30 partnership agreements with grocery retailers, providing some baseline volume and additional opportunities for growth in the restaurant section of our, of these grocery stores, which is right in our wheelhouse. These trends across the various customer types are roughly in line with what we've observed in the industry, as reported by third-party data. Moving to slide 6. While no one knows exactly when or how our industry returns to normal, we can point to some promising signs about the resilience and the ultimate recovery of our industry. According to consumer research conducted by Technomic, consumers do long to get back to eating out, with 49% of consumers saying dining out is the activity they look forward to the most after social distancing restrictions are lifted.
Another promising sign is the growth in spending in the last two weeks, estimated close to 30%, and this coming mostly from takeout and delivery. While a recovery is likely to be gradual and potentially bumpy, our trends, those of the industry, and consumer attitudes do point to an eventual recovery for our sector. Helping our customers remains one of our guiding principles. On slide 7, we illustrate how we have pivoted our team-based selling and value-added services to help our customers make it through this challenging period. We've conducted numerous webinars on various topics, including helping customers navigate the CARES Act, activating social media, implementing takeout, and reopening their businesses in the constraints of social distancing, including helping them create opening orders and checklists to successfully reopen. In addition, our chefs and our restaurant operations consultants have been available for one-on-one consults with customers.
To date, over 10,000 customers have taken advantage of these services and have provided overwhelmingly positive feedback. We believe this natural extension of our differentiation strategy not only helps customers with their current challenges, it also creates a tremendous future engagement and loyalty towards the US Foods brand. Until the virus is no longer a threat, keeping our associates safe is our first guiding principle. In our facilities, we put in place measures early on to ensure the health and wellbeing of our associates. These measures included conducting associate wellness checks before entering our facilities, practicing social distancing, including assigning associates to specific work zones within warehouses, enhancing cleaning procedures, and instituting new protocols for deliveries. These measures have resulted in a very low number of COVID cases and minimal risk to business interruption.
Nonetheless, early on, we also put business continuity plans in place to ensure we could continue to serve our customers, prioritizing healthcare from any node in our network of over 70 distribution centers. Lastly, given the dramatically reduced volumes, we quickly put measures in place to bring both fixed and variable costs in line with reduced volumes, so as to conserve cash, our third guiding principle. In distribution, which accounts for the majority of our operating expenses, we quickly accomplished the right-sizing of our cost structure through a combination of furloughs and temporarily contracting some of our drivers and selectors to retailers who had experienced a surge in demand. This latter measure has the added benefit of helping us retain this experienced workforce for an eventual recovery.
I will now turn it over to Dirk, who will begin by discussing the other measures we have taken to align our costs to current volume and the measures we have taken to strengthen our balance sheet. Dirk?
Thank you, Pietro. Good morning. You heard Pietro talk about the steps we've taken to manage our variable distribution costs. We've also taken a number of actions on our selling and admin costs and other activity in managing our CapEx and working capital as well. Within our selling organization, we furloughed some sales support associates and reduced the size of our sales force to match the lower case volume we are likely to experience over the coming months. Our team-based selling model and technology position us to continue to support our customers in the way that we have before, which is important in this challenging environment. We will continue to actively monitor the pace of the potential recovery and believe we are well positioned to take advantage of the future growth opportunities.
On the admin or more fixed cost side of the business, we've also taken actions to address our cost structure, including enacted furloughs for corporate and field admin associates, implemented hiring freezes and deferring annual merit increases, taking temporary salary reductions put in place for associates at the manager level and above, and board compensation temporarily reduced. Finally, we've also significantly reduced discretionary spend and costs, such as travel, marketing, and consulting. All of these actions are designed to preserve cash as we navigate the current unprecedented situation. More broadly, in cash management, we've also paused non-critical CapEx spend and are actively managing all areas of working capital. To date, we've had good success collecting outstanding accounts receivable balances, with approximately 80% of our pre-COVID balances collected.
While this is a good start, it is too soon to know the full extent of customer losses and the resulting impact on our working capital. As previously mentioned, we recorded the $170 million uncollectible account reserve as an early estimate of future receivables of total losses expected, and are actively working to lower this reserve amount through our collection efforts. We're also managing down our inventory levels to reflect the lower volume and have temporarily extended our accounts payable terms. As volume returns, we would expect accordingly to reinvest, to increase inventory and expect to resume to our normal payables cadence. On slide 10, specific to acquisitions, the food group business has seen case volume declines that are very similar to those Pietro discussed for the US Foods legacy business.
As a result of social distancing restrictions, we've paused integration activities until travel resumes and restaurants reopen. As a result of this pause, we do expect a delay in achieving synergy targets that is in line with the delay for integration activities. Once it is safe to resume, we're prepared to quickly restart our integration activities. On April 24th, we closed the Smart Foodservice acquisition. As a reminder, Smart Foodservice is a network of 70 small format cash and carry stores that generated $85 million in 2019 adjusted EBITDA at a 7%-8% margin rate. One of the reasons this business is attractive to us is that its leading position in the $17 billion cash and carry channel, which has higher growth rates and better margin than our delivered business.
Our existing CHEF'STORE stores have shown us that cash and carry also results in greater share of wallet with delivered customers. The sales growth opportunity, combined with Smart Foodservice's attractive EBITDA margins, make the future growth opportunities that much more attractive. In addition, the cash and carry business typically performs well during economic downturns. April case volumes were down 5%-10% from a year ago, versus down roughly 50% for our delivered business. In economic downturns, more customers appreciate the value offering the cash and carry and our Smart Foodservice and CHEF'STORE stores locations provide. Moving to slide 11. The financing actions we've recently completed position us well to re- regardless of the length or depth of the economic recovery. Securing this additional liquidity was important, given the uncertainty surrounding the impact from COVID.
We believe our available liquidity positions us to emerge as a strong competitor post-COVID and grow at above market rates. We've spent quite a bit of time understanding potential impacts to the business, depending on duration and severity of COVID. We've modeled various recovery scenarios and believe two are the more likely. A quicker recovery, which would entail a gradual and phased recovery across the country beginning in 2020 and continuing into 2021, or a slower recovery, which entails more choppy case volumes through 2020 and a more fulsome recovery beginning in 2021. This includes the possibility of a second downturn. In both of these situations, we have ample liquidity. Furthermore, we've also modeled a stress test or downside scenario.
Our modeling indicates that even under the stress test scenario, with no recovery until the second half of 2021, and only a gradual recovery even after that in the second half, as well as a significant slowdown in customer receivable collections, we have sufficient liquidity to weather this type of extended downturn. Moving to 12. On slide 12, you can see the number of transactions we completed recently and that I've referenced. We thought it would be helpful to provide an estimated view into net debt and liquidity as of the end of April 20th, post to these transactions. The April view here is our pro forma estimate of net debt and liquidity as of the end of the month.
To summarize, we completed a $500 million preferred equity offering that will fund tomorrow, a $1 billion senior secured notes offering, and a $300 million term loan. Before completing the KKR transaction, we evaluated different forms and sources of capital raise, including public common equity, and ultimately determined that preferred equity investment from KKR was the best option, in part due to the fact that it is expected to be less dilutive over time for existing shareholders. The proceeds from these offerings were used to fund the Smart Foodservice Warehouse Stores acquisition and to strengthen our overall liquidity position. On the left side of the page, you can see the change in our debt structure and liquidity as a result of these transactions. We completed one other change to our capital structure as it relates to our revolving credit facilities.
We closed and paid off the ABS facility and are moving the receivables that back that facility to our ABL facility. The ABL facility will now be approximately $2 billion. The covenants under the ABL facility are more flexible, and moving our receivables to this facility better preserves our liquidity during this downturn. As of the end of April, we had an estimated $1.6 billion of pro forma cash on hand, which gives us flexibility and allows us to operate the business from a position of strength. The net effect of the recent financing actions results in approximately $800 million of additional liquidity, giving us total estimated liquidity amount of $2.4 billion as of the end of April.
Over time, liquidity amount will likely decline some as our receivable balance declines, until such time the case volume rebounds in a more meaningful way and as we return to our normal payables cadence. As I previously mentioned, we believe this is more than enough liquidity to weather this crisis, regardless of the duration and even the stress test or down scenario that I spoke of previously. Moving on to slide 13. On March 23rd, we withdrew our fiscal 2020 fiscal guidance, and due to the uncertainty surrounding COVID-19, we're unable to provide an update on fiscal 2020 guidance at this time. We do expect COVID-19 to have a significant impact on our Q2, 2020 results, with some form of recovery coming after the second quarter. At the present time, it's too early to tell what this recovery looks like.
We do look forward to providing more details on our next earnings call. Regardless of what the recovery looks like, the new recent financing activities that we've completed are expected to allow us to operate from a position of strength when COVID-19 passes. While the future is uncertain, we operate in a large, resilient industry and are well positioned to serve customers' needs as this recovery occurs. With that, operator, we can now open the call for questions. Thank you.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then one on your telephone keypad. Again, that's star one to ask a question. We ask for just a moment to compile the Q&A roster. Your first question comes from Judah Frommer with Credit Suisse. Your line is open.
Hey, good morning, guys. Thanks for taking the question and, and for all the color. You know, maybe if we could just start out, you know, what are you seeing, you know, between your, your independent customers versus your chain customers? You know, not only in terms of recovery off of the bottom, but as we see the independents kind of continue to struggle with volumes in their store, are you seeing any accelerated level of closures from those independents that could potentially offset the faster recovery from chains?
Thanks, Judah. During the most of the last six weeks, there was minimal difference between chains and independent restaurants in terms of the volume declines and the speed with which those volumes declined. There was a little bit more resilience from the QSR sector, but generally, both were very much in line with each other. It's premature to say, you know, we do expect some closures. I think the NRA has called for closures on the order of 10% or 15%. I don't know that anyone knows exactly where closures will be, there'll be closures on both the corporate side, the corporate chain side, and on the independent side.
We, we believe that ultimately, you know, both, as, as this sector recovers, I think both, both chains and both independents have an ability to, to, to thrive.
Okay. I, I thought I heard Dirk say that, that the sales force was rationalized to some extent. You know, I, I think your, your public competitors have kind of talked about leveraging the size of their sales force as others kind of pull back and, you know, don't necessarily have salespeople selling into existing and new accounts right now. Can you just remind us of the approach, you know, between the team-based selling approach and, and maybe some technology on top that's allowing you to make sure you continue to kind of build market share while others may be pulling back through all this?
Yep. You're right, Judah. The combination of team-based selling, our strong e-commerce platform, and our value-added services, we believe is a better way to grow profitably and with both with existing customers and to acquire new customers. That model continues. We did make some small adjustments to the size of the direct sales force, so not the support side of things, not the team behind the team-based selling, but the direct sales force. That's because, again, as we expect a lower, smaller number of customers due to some closures, we wanted to rightsize the sales force and ensure we put our best talent forward as the sector recovers.
Okay. Thanks, and good luck.
Thank you.
Your next question comes from a participant whose information is unable to be gathered. Caller, please state your name and company name. Your line is open. Again, if you're queued for a question, your line is open. Please state your name and company name.
William Reuter, Bank of America.
Good morning, William.
Go ahead, William.
Oh, hi. Sorry about that. A little bit of a tech difficulty there. I was just wondering if you could talk a little bit about if you've experienced any challenges with regard to perishables, and those becoming stale, and I guess if there could be future write-downs of that inventory in the subsequent quarters? Thanks.
Good morning. This is Dirk. Yes, we've had some limited losses to date, and really, as we've quite actively managed through that across each of the perishable categories. I'd say is, you know, not a sort of meaningful driver of the overall results and now are quite actively managing that from week to week as we go forward with the volumes where they are. Have done a combination of things of, you know, moving things around in our distribution centers and finding a partnership with various retail and others in order to minimize the losses that we incur in that space.
Great. Then just one follow-up for me. Can you talk about maybe quantifying any headcount reductions that you have thus far implemented, and if you expect that there could be further reductions that are gonna be required if demand remains at lower levels? That's it. Thank you.
Thank you. So far, we haven't talked about a specific amount, but what we've done is, Pietro talked about some of the, the actions we've taken on the sales organization and on the rest of the organization from admin. We've taken a number of steps where we've, we've handled it to date, primarily through temporary furloughs and, you know, meaningful portions to reflect the environment we were in and really handling those on an ongoing basis. As the environment continues to evolve, we'll continue to specifically manage through that from short term or more permanent, permanent actions as far as managing that, just being really smart with our ongoing admin costs and the environment we're in.
Great. Thanks so much, and sorry for my technological challenges.
No problem. Thank you.
The next question comes from a participant whose information is unavailable to be gathered. Caller, please state your name and company name. Your line is open. Again, to queue for a question, please state your name and company name. Your line is open.
This is Jeffrey Bernstein from Barclays. Can you hear me?
Yes. Good morning.
Good morning. Thank you. Two questions. Just one, looking at slide five, appreciate the granularity. Specific to the, presumably the yellow line for the restaurant industry, I'm just wondering, or one, maybe you can provide the data points, but it looks like the trough is down more than 60% the week of March 28th. It seems like you saw a modest improvement from there, but maybe it's kind of flattened out or stalled out at down what looks like 45%. I'm just wondering whether you'd anticipate meaningful further gains from here or the timeframe for that, and whether you're surprised by the lack of further upside of late. Just wondering maybe what sales assumption you have in your models for coming months for that restaurant line. I had 1 follow-up.
I wouldn't put too much emphasis on just one week, which I think is what you see in the flattening. I think we, we continue to see a steady increase in business with restaurants, both chains and independents. As I mentioned, that business is, that, that incremental business is coming from takeout and delivery as both restaurants and consumers become more interested and more adept at participating in that channel. Then as more and more restaurants continue to open over the coming weeks, as the shelter-in-place orders get lifted. We know from our conversation with the field that our salespeople are having with customers, that, you know, they're all, over the coming weeks, they're all planning to, to reopen, and I think you'll see that, that yellow line continue to trend steadily upwards.
Great. Then I believe you made comments in your prepared remarks about potential market share opportunities from perhaps some of your smaller distributor competitors. Just wondering if you have any qualitative commentary into, in terms of the challenges they're facing, and, in terms of the opportunity to take accounts from those smaller competitors, what you've seen in the past in periods of challenge or whatnot, in terms of the survival rate of those independents and the opportunity you have to take share?
I think it's ... You know, what we are going through is, is really unlike anything we've seen in the past, it's hard to really use, use the past as a, as a predictor. As you can imagine, you know, given our scale and the strength of our balance sheet, you would, you would expect for us to have the ability to profitably gain share. As I mentioned, you know, there are some, some customers out there, for example, regional customers with whom we're having conversations, who are concerned that their, their existing smaller regional players or smaller, more local players, you know, are being significantly stressed by, by this crisis.
Because of the liquidity we have from an inventory perspective, we have the ability to respond quickly, to anticipate the needs of our customers, something that perhaps a competitor who's not as well capitalized might not be able to do. I think there are a number of reasons why you would expect the larger, more well-capitalized scale players to, to come out of this stronger than perhaps some of the other players in the industry.
Understood. Lastly, just to clarify, I think, Dirk, you mentioned, you know, on your liquidity slide, roughly $2.4 billion currently, and I know you mentioned that you're very confident with that amount going through the middle of 2021 or even through the end of 2021. It seems like you got a, you know, year and a half or so where you feel very comfortable. That would seem to imply a, you know, a cash burn rate of north of $100 million a month. I'm just wondering, if that's a fair assumption, assuming sales at these current levels with no presumed recovery. Just trying to get a ballpark on that cash burn rate by week or month or however you look at it.
Sure. I'll just reiterate my comments about the confidence over that timeframe. As you point out that it's, you know, a very stress test scenario of no improvement through the middle of next year and even modest after that. Then there's also working capital, which is just as important from a cash impact, and the uncertainty in exactly what that recovery looks like makes working capital a little less predictable. That's why we're really not sharing a specific burn number for these reasons. As I commented earlier, I feel very good about our liquidity and that we are managing cash quite prudently across the operations of working capital during this downturn period.
Great. Thank you very much.
Thank you.
Your next question comes from Carla Casella with JP Morgan. Your line is open.
Hi. I'm wondering if you've added a lot of retail customers, grocery type. After COVID, do you see the overall mix shifting, longer term, and where do you think that could go?
This is Pietro. I think there's two opportunities with the retail business that we've been able to, that we've been able to take advantage of or anticipate. The first one is, we've provided, you know, additional capacity, called surge capacity. While those retailers were stressed, additional access to perishable inventory that wasn't necessarily available at the time. And that, that business has been good for us because, as I said, it provided some additional baseline volume and helps keep our workforce, experienced workforce in place.
I don't expect all of that business to be in place over the long term, but some of it will for sure, stay in place, and we'll be judicious about the right profile of that business where there's a good fit. Having said that, like, we've talked in the past about that section of the grocery store, which looks and feels more like a restaurant, the grocerant, and that is right up our wheelhouse in terms of the types of products we serve, the margin profile associated with that business.
That's where we anticipate that these, some of these new relationships that we have formed will allow us to accelerate our ability to penetrate that part of the grocery store, which we see as an extension of food away from home.
Do you, do you have a sense for how big that business can be? I'm just wondering if the business that you're bidding on for that is continuing to grow and, and how saturated that market is.
You're talking about that, that second part, the, the grocerant type business, how big that is?
Exactly. Yeah.
Yeah. It's, it's hard to say. There's no real good estimates at this point, but we do see an opportunity to kind of accelerate our position in that, in that sector. Exactly how big the size of the prize is, I think it's a little bit early to say.
Okay. Is the competitive set dramatically different when you're looking at that part of the business?
It is a little bit. I think you've heard some of our other competitors also be interested in, in that space, and they, they also serve by a different mix of competitors. I think what, what the recent crisis has done is just allowed new relationships to be formed, right? It's, it's shaken things up a little bit, which provides an opportunity for us.
Great. Thank you.
Your next question comes from John Heinbockel with Guggenheim. Your line is open.
Hey, can you hear me?
Good morning, John.
Hey, Pietro. Can you Have you yet seen, or is it too early to see a significant pickup in incoming inquiries from some of your scale-challenged competitors? Are at this point, are you pretty channel agnostic, meaning independent chain, you know, you'll pretty much take, you know, because you have a lot of capacity, take business where you can get it?
You said inquiries from competitors. Do you mean competitors or customers, John?
No, inquiries from customers who want to leave.
Yes.
scale-challenged competitors.
Yes. That's what I thought. Yes, we have. I thought I, I thought I actually made that point in the, in, in my prior remarks. We have seen some, and, you know, they've, they've just expressed concerns about some of the competitors or distributors who, who serve them. Hard to say whether some of those concerns are well-founded or not, but I think it's what you would imagine. We, we have, and, and, we believe when we look at our, our pipeline for the second quarter, we believe there will be some customers we're able to bring on because again, of some of the concern about the viability of some of the smaller, smaller scale competitors.
The, the, the idea of being agnostic as to. Right, I mean, you obviously run a, a, warehouse network that supplies both independents and chains, so it kind of works for you, but, fairly agnostic at this point. We're channel agnostic?
Sorry, I didn't answer that second part. Thanks for the reminder. Look, as the landscape evolves between, you know, independents and chains, obviously we'll continue to be flexible and opportunistic. I know there's a lot of concern out there about independents, independents are, you know, a very resilient bunch, and I think from a consumer mindset perspective, there's always going to be, for many, a preference for the independents. You just look at how they've gone into the curbside business. I mean, it's the fact that they have recovered as quickly as some of the chains, I think, is telling. I would say we definitely, you know, the margin profile with independents, you know, continues to be, we expect to continue to be more favorable.
We do see, from the, from the chain side of things, you know, especially if capacity in the industry shrinks a little bit as a result of, of this crisis, then I think that potentially narrows the gap between the independents and the chains, which makes the chains, you know, relatively more attractive to us. As well, you know, we've always said we're, we're very opportunistic and selective about the kind of business we bring on. We're kind of done with some of the pruning that we did in the last few years. In fact, in the second quarter, we have a number of regional chains that we are bringing on board that will help that business.
Just lastly, right, if you look at your, your average, existing customer, I, I know there's probably no good average, but.
Mm-hmm.
Look, yeah, at your market share, at share of wallet, right? Is that kind of in the mid-30s? Where can that go, right, in an environment it would seem it's much easier, right, for someone to just consolidate more business with you than to leave, leave somebody else entirely. That would be a bigger opportunity, or no?
Yes. I mean, our, I think we, we said at our investor day that our share of wallet, and you're right, it's an average which has a big distribution around it, is around 30%. I do think that there will be an opportunity to increase our share of wallet. You know, if demand is, is, is lower for some period of time, I think that presents an opportunity for the restaurants to consolidate the number of distributors they have, to make it economic for them and for us. Again, I think we are well positioned from an inventory perspective. You know, I'll give you an example. We have this exclusive relationship with ChowNow, which puts customers in the takeout business.
The economics of it are, are very favorable compared to Grubhub or DoorDash, the way those economics traditionally were positioned. The percent of the customers who stayed open, who were on ChowNow versus those who were not, was significantly higher. The amount of interest we've had has been, you know, really through the roof. Again, our offering that perhaps customers didn't think they needed, I think position us well to, to, to make those kinds of share of wallet gains that you're referring to.
Thank you.
Your next question comes from Edward Kelly with Wells Fargo. Your line is open.
Yeah. Hi, guys. Good morning. First question I have for you is just on the uncollectible accounts, right down to $170 million. It's, it's more than what we've seen at, at peers. I'm just kind of curious if there's something different about your account base, you know, how it's calculated, and then how you would assess any risk from here?
Sure. Good morning, Ed. Dirk, I'll take that. As you noted, we increased our reserve for bad debt, $170 million, specifically related to pre-COVID AR, and that's our best estimate of total expected losses. We were, you know, a little more conservative in order to reflect that estimate of full losses. Our current collections so far are actually trending favorably, as we have our sales and credit teams working quite closely together along with our customers. We've got about 80% of our pre-COVID balances collected already to date. We would hope that the end collections exceed our original estimates and would be able to reduce the reserve in future quarters if collections do come in better than our initial estimates.
Ultimately are monitoring that pre- and post-COVID balances and really not seeing any deterioration in our post-COVID compared to what we saw in our historical AR. Think of it as full expectation of losses and working to overachieve that.
Okay, good. Then, just over the next few quarters, and I know, you know, it's, it's, it's very difficult to give any kind of guidance at this point, but over the next, you know, few quarters, as we start to think about, you know, a Q2 trough and then sort of, you know, reopening after that, how do we think about the cost structure of the business? You know, like what you've been able to take out in Q2, to offset the lower volumes. Then as things reopen, how, how does cost come back and that variable component change, given the drop sizes will be larger, things like that, sorry, smaller, that you've got to deal with?
Ed, on that, if I, if I start with the variable costs, we've really managed quite actively to try to take a high percentage of our variable costs out. You know, call it, relative to the early 50% reductions in volumes, taking, you know, roughly 30% of variable costs out. There is a portion in there that you're not gonna fully take out. It's really managing and putting good processes in place as volume declined, and then we would expect to manage effectively on the way back up. It's, it's adding costs back smartly aligned with that. I think that, that positions us quite well as volume comes back with those variable costs across the distribution, selling and the like.
I think on the admin side, what we tried to do is just, we've tried to be really smart in the way we've done the furloughs and the reductions is really so that we're not taking people away from those, those business critical functions. Again, we'll reinvest back in those areas of bringing those folks back as volume recovers. What I would expect is, I would expect the results to continue to get better. Trying to really minimize the noise as we're seeing volume increase back up. Also we wanna make sure as that volume is increasing back up, that we're doing our best to really serve our customers effectively, both from an inventory deliveries, et cetera.
Okay. Then just a last question, Pietro, for you, probably. Can you maybe just help us understand, you know, the mindset of a privately run distributor, you know, who is over half of this industry? I would assume today they're trying to work down inventories, just generate cash. What does recovery look like, you know, for this group? If you had to, and I know this is hard, but if you had to take a guess, you know, sort of as we think about the other side of this, how much of that competitive set is actually gonna remain? I think that's the one thing that, you know, obviously, there's a lot of unknowns right now, but it's obviously a large opportunity, but difficult to size, figure out the timing, right?
What it could actually mean for you guys. I, I don't know if you have any thoughts there whatsoever.
Yeah, no, it's a good question. As you said, Ed, it's, it's one that's hard to answer. I think it depends. Depends on where that distributor is on a number of dimensions. You know, one, kind of succession, generational planning. You know, some of them have good succession plans in place, others do not. We know that from just our, you know, just M&A activity over the last few years. The other one is just how well capitalized they are. Some have been, you know, very, very conservative in terms of how they've managed their balance sheets, and others have been less so, you know, which is what you'd expect. We've heard there, you know, there's, there's a set of players whose names keeps popping up in terms of having potential stress.
It's hard, it's hard to quantify the mix of the two, and the timing of, of decisions being made. You know, from our perspective, what we're ensuring we do is, is, you know, from a market share gains perspective and ability to respond to those customer needs, that we are, we are there, you know, front and center and seen as, as, you know, the best alternative for, for those customers.
Great. Thanks, guys. Good luck.
Thanks.
Your next question comes from Kelly Bania with BMO Capital. Your line is open.
Hi, good morning. Thanks for taking my questions and for all the, all the color. Wanted to just ask a little bit more on, on independents. Any, any help on just how many of your independents, or what %, are operational right now? Just any color on how PPP has been for that sector, what % of your independent customers were able to secure some assistance there, what the feedback has been? Just as we think about the opening process, across the country, what, what these capacity restrictions, you know, how that could impact these independents, whether it's 25 or 50, or whatever is happening in each state. Just what, what kind of feedback you're hearing from customers on how, how they're kind of managing that restriction on, on the dining-in portion? Lots of questions there, but.
Yeah, a lot of questions. I think, you know, I think the, the, the general headline would say is, you know, we're still learning, they're still learning. That's why these, these seminars we do and these one-on-one consultations we do with, with those customers are, are helpful to us in terms of being agile and nimble in, in terms of what the kind of help we provide for them, and they're also helpful for them. On the PPP, some definitely have received. We've definitely heard of, of customers receiving the funding, and some have used that to, to be open. As you know, the PPP is directed towards payroll, and a certain % has to be towards payroll to be forgivable.
It's, it's created, in, in some places, kind of odd incentives for, for, for customers to perhaps bring back more workers or workers at higher wages than they otherwise might. But it's definitely had an impact in terms of, of, of reopening. I don't know that we know what % of customers have, have actually received PPP. The second 1, in terms of the opening and closures, look, there's more restaurants reopening every week. That's what we hear from, from our field leaders that we talk to every week.
Going to your third part of the question about the restrictions, I think, some are planning to reopen, but are, we've actually surveyed our customers and in terms of how quickly they plan to reopen, and it's in the neighborhood of, you know, what you would imagine, the next one to four weeks. Some are waiting to see, or to, for the restrictions to be a little less strict than they are. 25% capacity seems hard to manage, and they're waiting for the 50% threshold. Others are opening right away because just they wanna get back in business. It really is, is a mixed bag, and I think the... I don't know that what we see today or next week or the week after is ultimately representative of how the industry recovers.
I think we want to be there to help our customers every step of the way, but I think we have to look out a few months when we get something that is not, not pre-COVID, but closer to a level of normalcy, that provides, you know, relatively good traffic for customers and relatively good business for us.
Okay, thank you. That's, that's helpful.
Then the other thing I would add.
Sure.
Kelly, sorry, is, is that was in part, you know, what motivated our desire to, you know, strengthen our balance sheet and, and, and get the additional liquidity. I know we've had some questions around that, and, you know, we said to ourselves, look, no one really knows. There's a range of broad outcomes that are possible, and, and no one really knows, you know, which of those outcomes is most likely. It depends on public health decisions. It, it depends on how the virus develops, depends, depends on the consumer mindset. You know, what our posture has been to, to have the utmost flexibility and utmost agility to respond to the situation as it unfolds.
That's, that's helpful. I guess in terms of, of, you know, potential market share gains, as this unfolds, do you see more opportunity on the chain side or the independent side? Because I, I guess I would think that some of those smaller, regional, distributors may be over-indexed to the independents, but maybe just help us think about, what that looks like and, and what in, in your markets that could potentially look like over the next couple years.
Yeah. I think the opportunity is both. I mean, you'd, you'd be surprised that some of these larger national concepts, you know, they've, you know, they typically take the country and break up into a number... Not always, but they often take the country and break up into and allocate it to a number of smaller regional distributors. I mean, we have, we have some customers, they share their business with 12 other distributors across the country. So in there lies the opportunity because it, we, you know, we believe and, and others believe that some of those will be stressed. So I think the opportunity for market share gains is, I think, at this point, equal in both some of the chain business and some of the possible chain business and some of the independent business.
Thank you.
Your next question comes from John Ivankoe with JP Morgan. Your line is open.
Hi, thank you very much. Hope everyone is well. Just a couple for me. Firstly, both you and Sysco talk about 30% market share per customer. I mean, can you remind us, like, what, if there's any, you know, type of commonality of the 70% of share you don't have, you know, kind of coming through this crisis, whether there's an opportunity, you know, to kind of add into that 70% you're currently not serving? Is the first question. Secondly, I mean, you haven't, you've, you know, talked much about, you know, acquiring some of the regional or local distributors, you know, that are financially stressed for a number of different reasons.
I mean, are, are you in a position, you know, just in terms of overall integration and balance sheet, to where, you know, if certain businesses were offered to you at a very low price, I mean, a very low price is something better than zero, if that operator thought, you know, zero was going to be, be the eventuality, whether you could actually start to actually buy, you know, companies at this point, as opposed to just, you having their customers come through attrition? Thank you.
Okay. I'll talk about the, the, the, the share of wallet question, and, and the answer there is, you know, I think we've talked in the past how, you know, you get two, two types of customers. It's interesting that, that our large competitor also estimates their, their share of wallet at, at comparable to, to ours. You have, you know, within the independents, you have some who tend to have a more exclusive type relationship with their distributors. We have, we have some of those, and I think those are the, the ones that, that we prefer because they, they provide certainty and provide a, you know, a better cost to serve.
For the others, I think as I've said in the past, they typically, you know, either are hedging their bets in terms of pricing or supply, or they prefer some of the local fresh distributors from a reputational perspective. I think opportunities in those two segments of distributors, the local and regional, I think will, will occur. Like I said, some, some are well-run and well-capitalized and, and others are not. You know, you don't need too many of them to, to be stressed, to, to provide some good market share opportunities. That's where our focus will be. We'll really be in terms of gaining share from, from those competitors. Dirk?
Sure. I think, good morning, John. I think the, from an integration and such, our immediate focus is around really continuing to integrate Food Group and now Smart Foodservice, which is a much less effort to integrate, and really doing that well along with getting our core business going. I think it's, you know, kind of TBD as some of these other, mid to smaller sized distributors, if they struggle more, you know, what that may or may not entail from whether it was a transaction or just focused on taking the business via those opportunities. Again, our top priority remains really around getting those other two really integrated quite well and continuing to strengthen our core business and those two opportunities that we're excited to have completed.
Thank you.
Your next question comes from Christopher Mandeville with Jefferies. Your line is open.
Hey, good morning, guys. Dirk, I guess as you continue to engage with your customers, throughout this timeframe and as they kind of come back online, doing their best to reduce costs, while they're realizing limited capacity or just capacity constraints in general, I'm just wondering if you could touch on private label penetration today. saw on the slide deck it's up 80 basis points as of Q1, but where is that in terms of overall penetration? Really, could that be somewhat of a silver lining with respect to the current environment, where you might be able to notably bridge your gap between yourselves and, and your peers in terms of that penetration rate?
Sure. That's a good question. I think that to your point, it's, it's up and so, you know, similar overall percentages to where we've been running. This is, just as we've talked about, I think in the past, from time to time, and, and even just typical downturns, you tend to see more operators who have, have opportunities to do this conversion. It helps them from a cost. Our, our sellers are gonna continue to focus on those penetration opportunities. That is, I think, the... I think silver lining is a, is a good term to use, an opportunity for us to continue, because it really is, a, a great way for us to help those operators see value, along with increasing our, our, penetration rates.
Is there any way to really just articulate where you are today on penetration versus your peers?
Well, when we, you know, they don't all unnecessarily distribute, the one compared to our larger competitor, we've looked at historically is that we've been a few hundred basis points below where they are and have continued to focus in recent years about growing by that, you know, 80 to 100 basis points per year and getting our penetration up. We think over time, there is no reason that our penetration can't be at that level. The question about why can't we go faster, it really comes back to just because operators tend to want to try new products, et cetera, as they do conversions. We see lots of runway ahead of us still for growing here.
Okay. Just on the inflation front, so you realized some modest inflation in the quarter itself, but in light of some severe declines in dairy and really where the proteins complex is in great flux right now, I mean, any way to, to square up or frame up how we're looking today or what the expectations are for calendar Q2?
You know, it really is, to your point, saw some modest inflation in Q1. It was a little bit lower than where we've been, and I think just because of some of the potential volatility in some of the center of the plate, it's gonna be hard to predict exactly. What we are doing is really managing through that, trying to do it effectively. As we talk a lot of times in the center of the plate, it's really a benefit of most of our businesses. It tends to be passed through, and it's just a matter of, you know, contract being a set duration or through reps of passing that through.
In this scenario, as you see that, it's also gonna be about reps working with our customers, so that if you have inflation in a particular category, helping those individuals with whether it's portion sizes or alternative solutions, alternative protein sources, et cetera, as we work through. The actual level by itself is a little harder to predict at this point.
Okay, I'll leave it there. Thanks, guys.
Thank you.
The next question comes from Rebecca Scheuneman with Morningstar. Your line is open.
Good morning, thanks for squeezing me in. You know, I know it's early, but do you have a sense of how willing consumers have been to go back into restaurants in the regions that have reopened their dining rooms? You know, are, are your field leaders out there doing any kind of checks? Thank you.
I mean, I think what was remarkable about this crisis is that volume fell or declined very quickly in every part of the country, whether there was a shelter in place or not. Just consumers seemed to respond very quickly to what, you know, was being proposed in terms of flattening the curve. I think, since then, what we've seen is rural areas recover a little bit more quickly than some urban areas. I think the research shows that younger consumers are probably more willing to get out more quickly than perhaps some of the older populations. Again, those are trends or that, you know, may impact what happens in the next few weeks and months.
I, you know, in terms of the ultimate health of the industry longer term, I wouldn't-- I would be hesitant to put too much weight on some of that.
Okay. Thank you very much.
Our last question comes from Karru Martinson with Jefferies. Your line is open.
Good afternoon. When we look at the mix of the business a-as you guys talked to it, in my old notes, I had you guys as 1/3, chains, 1/3 independents, and 1/3, you know, hospitality and, healthcare and other. You know, how do we look at that mix today, where you guys are seeing that, that change?
Sure. Good afternoon. What, what we haven't specifically talked about that we focused more on, is that approximately 2/3 of our business is across independent healthcare and hospitality, and the remaining 1/3 has been across chain, education, government, et cetera. What I'd say is our, our focus there in more, you know, recent times is again, about profitably growing those target segments. As Pietro alluded to earlier, for the chain, it's about really smartly adding those customers where it makes sense for us from a capacity and profitably. That's where even some of the new business prospects that he's talked about that we expect to onboard in the coming months, that our chain business is about really making sure that they, that they are the right fit.
In these cases, we're looking forward to bringing them on board.
Thank you very much, guys. Appreciate it.
Okay.
Yeah, I think that's the end with questions, so I'll just make a couple of closing comments, and then we'll, we'll, we'll end the call. I want to again close by thanking our associates who've been just, just terrific and, and who continue to play a vital role in ensuring the food supply of this country. You know, while our industry has clearly been dramatically impacted by the crisis, we do believe that our industry will ultimately recover, and that the combination of our differentiation strategy, our ability to become a, a leaner and more agile company, and the ample liquidity that we have in place, leave us in a position of strength to emerge from this crisis. We appreciate all of you tuning in today, and please be safe. Have a good day. Thank you.
This concludes today's conference call. You may now disconnect.