Edited Transcript of CHEF.OQ earnings conference call or presentation 29-Jul-20 12:30pm GMT

Thank you, Alex, and thank you all for joining our second quarter 2020 earnings call. The second quarter was one of the most challenging quarters in our company’s history. Our team’s focus was centered on supporting our customers and supplier partners during the very fluid and gradual transition for limited service, takeout and curbside operations as well as developing and enhancing our direct-to-consumer Shop Like a Chef platform.

In addition, we took a number of important steps to strengthen our balance sheet and rightsize our cost structure to ensure Chefs will eventually get back on the path to growth and improving profitability that we were on prior to this period of volatility and uncertainty driven by the COVID-19 pandemic. During the quarter, we saw gradual improvement from April activity, averaging approximately 40% of prior year’s revenues to June averaging approximately 60% of prior year revenue. While reopenings and stages were different for each market, our largest markets in the Northeast, Mid-Atlantic and West Coast were delayed by a number of weeks due to the widespread social protest activity in early June. Later in June, delays in full opening in these key markets continued due to the observed resurgence of COVID cases in certain states.

During the quarter, organic net sales were 57.8% lower versus the prior year quarter. Specialty sales were down 68.2% organically over the prior year, which was driven by a reduction in unique customers of approximately 56.3% and lower placements of approximately 69.1%, a reduction in specialty cases by 68.3%. Organic pounds in center-of-the-plate were approximately 51.3% lower than the prior year quarter. Gross profit margins decreased approximately 222 basis points during the quarter. Gross margin in the specialty category decreased 641 basis points as compared to the second quarter of 2019, while gross margin in the center-of-the-plate category increased 212 basis points year-over-year. Excluding the impact of COVID-19 related inventory reserves, total gross profit margins increased approximately 52 basis points versus the prior year quarter. Jim will provide more detail to margins in a few moments.

Now we move on, on an update on recent business activity. Sales in July are trending at approximately 60% of prior year. While more customers open for outdoor dining, our largest markets continued to delay indoor dining or experienced seat capacity decreases due to recent surges in COVID-19 cases in certain markets. Throughout the quarter, our team focused on growing marketing and developing our direct-to-consumer businesses, comprised of our Allen Brothers Great American Steakhouse Steaks online store and our Shop Like a Chef home delivery platform. In addition, we continued to add to our specialty retail grocery portfolio and expect to grow this segment to complement our core restaurant and hospitality business lines going forward.

In terms of technology and operations, during the second quarter, we commenced the phased integration of Sid Wainer and Cambridge Meats with our specialty and center-of-the-plate operations in the Northeast. In July, we started the process of our Northeast sales team selling Sid Wainer produce from our Bronx facility, offering our New York metropolitan customers the high-quality Sid Wainer portfolio of products to complement our specialty and protein categories.

In addition, we started the planning process of moving Cambridge Meats into our Sid Wainer operations, which we expect to complete in the first half of 2021. With this move, we are excited to build on the growing cross-selling opportunities we have started to generate between these 2 great companies and brands in the New England markets.

Moving to the West Coast and Texas. We completed the consolidation of 3 Del Monte Meat processing facilities moving from 6 processing facilities to 3, while utilizing cross stocks in the near-term as we consolidate routes. Additionally, we are close to completing the consolidation of our Houston and San Antonio facilities into our Dallas hub. These moves contribute to rightsizing our cost structure in these regions and will facilitate improved efficiency and customer services going forward.

During the quarter, we signed a lease for a 150,000 square foot building in Miami-Dade county. This facility will incorporate specialty, meat and seafood processing as well as produce and is expected to be completed in the fourth quarter of 2021 with a planned moving during the first quarter of 2022. In addition to developing and deploying Shop Like a Chef direct-to-consumer early in the second quarter, our team continued the deployment of our ERP to our Philadelphia business, which we expect to go live during the third quarter. West Coast implementation is expected to begin in October with a first quarter of 2021 target completion.

Before I turn it over to Jim, I would like to thank the entire Chefs’ Warehouse team for their passion and energy and supporting our customers during their varied phases of opening, partnering with our suppliers during this trying time and executing new business activity over the past several months. The dedication to their craft and each other is what has allowed Chefs to become the premier specialty food provider to chef-driven restaurants and establishments during our 35 years of operation. With that, I’ll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity and cost-related actions. Jim?

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [4]

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Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended June 26, 2020, decreased approximately 51.3% to $200.5 million from $411.4 million in the second quarter of 2019. The decrease in net sales was a result of the decline in organic sales of approximately 57.8% as well as the contribution of sales from acquisitions, which added approximately 6.5% to sales growth for the quarter.

Net inflation was 3.1% in the second quarter, consisting of 0.2% inflation in our specialty category and inflation of 6.7% in our center-of-the-plate category versus the prior year quarter. Gross profit decreased 55.4% to $47.4 million for the second quarter of 2020 versus $106.5 million for the second quarter of 2019. Gross profit margins decreased approximately 222 basis points to 23.7%. Gross profit dollars and margin were significantly impacted by additional reserve adjustments for inventory valuation loss of approximately $5.5 million due to the expected extended impact of COVID-19 on certain markets and certain customer openings. Flat net specialty inflation was driven by above-average price increases in dairy and cheese categories, offset by significant deflation in bakery and produce categories.

Second quarter inflation in center-of-the-plate category was driven by broad-based higher pricing across beef categories as well as continued higher percentage of overall sales attributed to our prime and other premium cut sales in our Allen Brothers division. Total operating expense decreased approximately 19.9% to $72.8 million for the second quarter of 2020 from $90.9 million for the second quarter of 2019. Lower costs associated with compensation and benefits as well as distribution-related costs were the primary driver of the decrease in operating expense in the quarter.

On an adjusted basis, operating expenses decreased 24% year-over-year. As a percentage of net sales, adjusted operating expenses were 30.5% for the second quarter of 2020 compared to 19.6% for the second quarter of 2019. As Chris noted, volume and sales increased gradually through the quarter. As such, June operating expense on an adjusted basis declined approximately 33% year-over-year and represented approximately 25% of net sales for the month.

Operating loss for the second quarter of 2020 was $25.4 million compared to operating income of $15.5 million for the second quarter of 2019. The decrease in operating income was driven primarily by lower gross profit, offset in part by lower operating expenses. Income tax benefit was $10.8 million for the second quarter of 2020 compared to expense of $2.9 million for the second quarter of 2019. Our GAAP net loss was $20.3 million or $0.57 loss per diluted share for the second quarter of 2020 compared to net income of $7.7 million or $0.26 per diluted share for the second quarter of 2019.

On a non-GAAP basis, we had negative adjusted EBITDA of $13.7 million for the second quarter of 2020 compared to positive adjusted EBITDA of $26 million for the prior year second quarter. Adjusted net loss was $18.7 million or $0.52 per diluted share for the second quarter of 2020 compared to adjusted net income of $9.8 million or $0.33 per diluted share for the prior year second quarter.

Turning to the actions we took during the second quarter to strengthen our balance sheet and an update on our liquidity. On May 14, 2020, we issued approximately 5.8 million shares of our common stock with an option held by the underwriters to purchase an additional 865,000 shares. On June 2, 2020, the option was exercised and total proceeds from the entire offering, excluding fees, was approximately $86.3 million.

On June 8, 2020, we amended our $238 million Term B loan maturing in June of 2022, extending the maturity date of approximately 87% of the outstanding balance to June 2025. In addition, we prepaid approximately $35.7 million of principal of the amended and extended balance. Our outstanding debt related to this loan now exists in 2 tranches, $31.2 million maturing in June of 2022, unamended at LIBOR plus 3.5%; and $171.2 million maturing in June of 2025, amended at LIBOR plus 5.5%. During the quarter, we repaid $60 million of borrowings under our ABL facility. And as of July 24, 2020, we have approximately $40 million of outstanding borrowings under the facility. As of July 24, 2020, we had total liquidity of $241.8 million, comprised of approximately $210 million in cash and $31.8 million of availability under our ABL facility. As of July 24, 2020, net debt, inclusive of all cash and cash equivalents, was approximately $193.3 million.

At this time, due to the continued uncertainty regarding both the pace of broader economic recovery and the lifting of in-room dining restrictions across our key markets, we will not be providing guidance for 2020. We hope to provide more color as we gain more clarity on the length of the economic downturn and the pace of reopenings. Thank you. And at this point, we’ll open it up to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chris Mandeville with Jefferies.

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Christopher Mandeville, Jefferies LLC, Research Division – Equity Analyst [2]

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Chris, kind of start off just asking with respect to the exposures you guys have in the various COVID hotspots around the country. Maybe you could talk a little bit about the recent performance, how that’s looked relative to, say, New York City, where the pandemic is more or less well under control?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [3]

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If there’s any good news for Chefs really, it’s that where it’s getting — the hotspots right now is some of our smallest businesses, so Texas, Arizona, obviously, Florida, it’s off-season. So that hasn’t really been a tremendous headwind for us. Obviously, it affects the business, but it’s really getting New York inside dining going, California, Chicago has opened. So we were looking at our numbers today, Chris. And obviously, we had expected more, to be in a better place by now, even though we did budget kind of at the levels that we’re at. So it’s not a big surprise. So obviously, we were more optimistic. But today — besides the holiday week, today was actually like our best day since the pandemic. So we’re starting to see our numbers creeping up into the 60s compared to last year. So our goal was to get in the 70s. We said that we rightsized our overheads to be profitable again at 70-plus percent of last year. So we’re starting to inch closer to that goal. And if there’s any optimistic part of this, is that without New York really being open and California in-house dining being open, we can get back right now into the 60s, gives me a lot of optimism.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [4]

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I think I’ll just add, Chris, that I think a lot of the surveys you’ve seen out there showed negative same-store sales July versus June. I think that’s been pretty prevalent across the country, and we were able to maintain kind of a flat level as we saw more of our independent customers open. We saw a little bit of decline in some of the retail that we had been selling during the first months of the pandemic. But being able to maintain that 60%, while same-store sales across the country were lower, we saw as a positive.

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Christopher Mandeville, Jefferies LLC, Research Division – Equity Analyst [5]

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Okay. That’s actually very helpful. And then just, Chris, as we think about trying to accomplish reaching that 75% run rate goal by the end of the calendar year as you just kind of alluded to, you had expected to kind of be in a better place right now. But in light of certain states electing not to reopen indoor dining, how should we think about your ability to get to that 75% run rate by year-end? And really, I guess, I’m curious about the performance you’ve seen thus far, how influential has the growth of outdoor dining been to your business, be it that, I think a lot of folks within the investment community are concerned about how that might not necessarily be available for the industry as we move into the cooler season of fall and winter?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [6]

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Sure. Well, the good news is that we do a lot of business in warm states. So I think outdoor dining is going to be very prevalent out west and Florida as the season starts in some of the southern states, obviously. Again, I keep saying it, as a white paper that came out about the flexibility and innovation of independent restaurants, which is a big part of who we sell. And if you go through New York, Chicago, you’ll start to see streets being closed, whole outdoor gardens being planted outside of restaurants. They’re adding tables. Obviously, takeout is through the roof. So our customers are survivors, and they’re going to find ways, I think. Obviously, we’re watching the medical breakthroughs on therapeutics and the talks of vaccines.

But I really feel that management’s job right now is to protect the balance sheet. And this will pass. It’s not a matter of if, it’s just when. And that’s kind of why we strengthened our balance sheet, to get to the other side of this and take advantage of situations. Not everybody will make it. We know that. Not all our customers will make it. I think that’s why we took such a big reserve for bad debt and bad inventory. I think we were really conservative. And we’re starting to see the benefits of our balance sheet. We’ve been hiring people from — and when I say, we’re just not going out to hire, we’re getting people that have tremendous experience and reputation in the industry who want to join Chefs, who have sales, who want to bring their customers to Chefs. And that’s a tremendous positive on a platform that I’ve been building with this team for 35-plus years. We look at it as get to the other side, get through the winter, and sunshine will come out eventually. Restaurants, some will close. A lot will reopen. We’re already seeing — we’re having openings during the pandemic. People love restaurants. So at the end of the day, I think we’ll have a stronger team. We’ve learned how to be leaner. And we’ll just — we’ll go with the flow and then ride the tide as we get through this really difficult time. But really proud of what the team has been able to do. We’ve preserved our cash. We’ve got a strong balance sheet, and we have a stronger team than ever coming out of this thing.

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Christopher Mandeville, Jefferies LLC, Research Division – Equity Analyst [7]

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Okay. And then the final one for me before I hop into the queue here. Jim, you guys have made some very solid progress with respect to reduction in OpEx. I think you noted that June OpEx was down close to 33% versus down 20% for the full quarter. So maybe you can just peel back the onion a little bit and disclose kind of what were the primary drivers there to get you there? And how much more progress can be made in the coming quarter or 2? And to what extent you can offer up any color on what represents a variable opportunity versus a fixed opportunity, that would be helpful as well.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [8]

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Sure. Thanks for the question, Chris. So look, I think if you — we’re not adding back the COVID-related reserves which, in the first half of the year, total almost $25 million inventory and AR. So when you look at the first half of the year and then the cadence of Q2, first half of the year, very close to breakeven when you take adjusted EBITDA and you back out the, what we’re calling, the COVID-related reserves, which are truly related to COVID. Obviously, we have inventory reserves as a normal course of business like every distributor, but not at the exponential rate that that’s happening as well as on the AR. So in terms of Q2 cadence, once again, backing out the reserve that we talked about in our prepared remarks, it’s really the April loss, where we were at 40% of revenue. May, as we built volume, rightsized the cost structure. May and June, we moved more towards breakeven and then even to a slight profitable position on an adjusted basis, once again backing out the COVID-related reserves.

So we feel that we put the cost structure in a place where we’re striking the right balance between managing the short-term volatility, we are actually, as volume is building, gradually layering in volume-related variable cost and doing that in a very measured way to manage the business. And we haven’t had any cash burn since the 4.5 or 5 months that we’ve been in this. So that cost structure work by the team has greatly contributed to that. What we’re trying to balance is the short term, the medium term and, as Chris talked about, the long term. We feel that we have the liquidity and the cost structure to get us through this period of volatility. It’s not going to be completely even as we ramp up to that kind of 70% to 75% of pro forma prior year, that our goal is. That operating leverage will eventually come as we build that way. It won’t be completely even as we build routes and continue the high-touch service that Chefs is known for. But we will get the operating leverage as we build towards that.

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Operator [9]

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Your next question comes from the line of Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division – MD & Senior Restaurant Analyst [10]

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Great. Jim, I just want to get some clarity. I know you guys commented on the June operating expense and the cuts you guys have made there. Were you burning cash in June? Or was that kind of more of a breakeven type level on the cash side in June?

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [11]

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Well, we haven’t burned cash really any week since March 16. And really, that’s been a combination of, as I mentioned, ex the noncash reserves, essentially breakeven from a adjusted profitability perspective on a cash basis and then really some incredible working capital management by our teams. And that’s our collections teams, our sales teams, our procurement teams and really all of our people across the company. We’ve been collecting more on a weekly basis than we’ve been selling. And that’s — you can see from our balance sheet in our release, AR has come down 40% since the beginning of the year or the end of last year. Inventories come down 30%. And so we feel good about where we’ve put the risk adjustment from a reserve perspective. And we feel good about managing liquidity from here. As Chris mentioned, keep the balance sheet strong and really kind of get us through this, I think, what everybody views as a short to medium-term period of volatility.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division – MD & Senior Restaurant Analyst [12]

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Okay. Good to hear. Chris, can you just talk about the — maybe the customer churn? Have you seen — I know it still might be early, but have you seen many of your customers, restaurant partners permanently closing? Or do you guys have any sense of how many you may lose and how many you may pick up this year, given it’s kind of an off year for the industry?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [13]

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Sure. So what I could say is that we are picking up a very, very nice increase in new customers. I think that a lot of companies just were not prepared to have a service level like ours. So I was pleasantly surprised to see so many new customers coming on board. You always have to remember that we have a 10% to 14% natural attrition rate. So restaurants are always closing. So I think a lot of the restaurants that have closed that won’t open probably were going to close anyway. I think the last to come is in the big cities some of the restaurants that really depend on international travel, local offices being customers coming in on a daily basis. I think those will be the last to reopen. [Webon] hasn’t opened, say, or Midtown Manhattan. But what we’re seeing is our business is increasing in the suburbs, where people — a lot of people have second homes and are staying or stay vacations. We think that will continue.

We think that we’re seeing a lot of innovation and entrepreneurialism in the cities. We’re starting to see, like I said, it’s starting to look more like Paris, where you have big outdoor gardens and heat lamps. They’re putting infrared blue lights on their air conditioning systems to purify the air. So necessity is the mother of inventions, and restaurateurs are very innovative. They have to fight. They’ve always had slim margins. And we’re starting to see that more and more. And starting — looking at this week, even with all the bad news that keeps circulating in the media, everybody loves headlines, we’re starting to see more openings, and we’re starting to see the creeps start to go the positive way. I think, including myself, a lot of people are getting tired of cooking. So I think we’re starting to see that. There’s places where, we are in Connecticut and parts of New York, COVID is down. So I think people are — the fatigue is starting to set in and people are going out. They’re wearing masks. They’re going to their table, and they’re starting to feel more and more secure. So we think that — especially with modern medicine and therapeutics, I think the confidence will start to build. And it’s getting through to next year, as you know. And the way I’m running the business at this point is to make sure by next summer, we’re in an incredible position going into ’22, to have an incredible team to really leverage our strengths and all the investments and really get that tremendous uptick once this is past us.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [14]

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Peter, I would just add that one positive that we’ve noted, especially in July, is that we have certain regions that we’ve seen 70% to 75% of their, what we classify, as our independent restaurant customers or street customers opening. Really, the restrictions are restricting demand. So we know the demand is there. It’s restricted by the government regulations and restrictions, but it’s positive to see that, that level of openings kind of gradually getting there as we go through the summer.

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Operator [15]

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Our next question comes from the line of Nicole Miller with Piper Sandler.

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Nicole Miller Regan, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [16]

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Just a couple of quick ones. Chris, in the prepared commentary, you mentioned largest market. I’m assuming that’s New York City or perhaps you define it as the Northeast, but can you just help us understand how big is that in terms of sales mix?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [17]

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Yes. Nicole, I think we break it out. New York is Metro New York. So it includes half of Connecticut, a big part of New Jersey. Obviously, the five boroughs. So that is our largest business. So that was, obviously, in March and April was tremendously impacted. And I’m glad to see that starting to inch up and inch up every day. So it is our biggest market. I don’t think we’ve broken it out exactly. But I’m pleased to say that, that market is coming back today. I’m pleased to see how it is starting to rebound.

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Nicole Miller Regan, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [18]

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And then you had someone — in the prior question, it was just mentioned about 75% of stores being opened in these markets, that mobility is increasing and there’s clearly restrictions. But let me ask the question this way. How many of your core customer base are back online on your platform today?

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [19]

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It’s really different across every market. I mean, as you know, the regulations, the restrictions and the state of COVID surgence or resurgence, whatever you want to call it, is different across every market. So we’re not disclosing a level. But as I mentioned there, it was very positive to see certain key markets where the level of openings are higher than the demand that we’re seeing, and that’s really driven by the current environment as well as the restrictions.

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [20]

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Yes. I think what I can tell you, Nicole, is that there’s a huge amount of our customers that had still not opened for various reasons. They got PPP money, they’re riding it out. They want to wait. So to get into the 60s with so many of our core customers still not open and these restrictions, I’m kind of amazed sometimes. I mean, I thought we’d be favorites. I thought the states would have opened up more, the in-house dining would open up more, the 25% to 50% limit would have been better. But all that being said, I think it’s showing that the takeout demand is increasing. And people going — sitting outside and even sitting inside where they’re allowed, I think every day is getting better. So we’re taking it a day at a time, but I think all things considered in all the states, they still are pretty much shut down. To be in the 60s, I’m pretty pleased today.

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Nicole Miller Regan, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [21]

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And just the last one. What would you say about the payment terms? I’m sure there was some volatility in the middle part of the quarter, but perhaps you’re seeing a better trend in that way as well.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [22]

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Yes. Nicole, I think we mentioned on the last call, from a working capital perspective, we’ve been focused on really working with our — both our customer partners and our supplier partners on payment terms. And that’s really contributed to the 0 cash burn that we’ve had to date. And so we’re continuing to do that. I think what we’ve been surprised — pleasantly surprised with is the low number of actual bankruptcies that have actually happened among our customers. As Chris mentioned, there’s a lot of customers that are kind of waiting in the wings. And even customers that haven’t opened yet have been open to working with us on payment terms. Now payment terms going forward, for go-forward business, obviously, we’re very focused on working capital management and also on supporting our customers. So every case is unique. But we’ve been seeing our DSOs come down from the peak kind of in mid-quarter where they reached the peak. And we’re very pleased with the reduction in the AR balance and where we are right now.

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Operator [23]

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Our next question comes from the line of Kelly Bania with BMO Capital Markets.

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Kelly Ann Bania, BMO Capital Markets Equity Research – Director & Equity Analyst [24]

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I was just hoping — wondering if you could help us understand and unpack maybe the sales. Trying to just understand what your typical core independent customer sales are tracking at within the kind of down 40% in June and July, when you kind of unpack maybe what’s happening across DTC, grocery and some new customers and market share gains? Just trying to understand how — what’s happening there to your core customer? And how long do you think that they can continue at that kind of level?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [25]

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Yes. I think it’s all over the place, Kelly. I could tell you that there’s customers actually beating last year’s numbers because so many people are working from home, so they’re going out to eat in these neighborhoods. Our neighborhood would be a great example up here in Connecticut. There’s more people here this summer than ever before. And they’re getting the benefit between outdoor dining, we have indoor dining in Connecticut as well and takeout. Speaking to some of our top, top customers in the cities, they’re all operating with skeleton crews, and they’re waiting for indoor dining. I mean it’s unbelievable to think that New York City still has no indoor dining. And restaurants are open and they’re doing takeout, and they’re doing — like I said, they’re setting up beautiful gardens. I think actually there’s going to be a contest in New York of who has the most beautiful outdoor dining available and they’re hiring designers to do their outdoor dining areas and make it more cozy and invitable for people to sit. And especially as we’re going into the fall, they’re going to put all the outdoor heating available as well and covering it with tents. So they’re getting very creative.

So I think it’s all over the place. And I think the super high-end is going to be the last to go. It’s a smaller part of our business. Obviously, it’s a very prestigious part. And — but when you think about all the top, top chefs in the world, they have their top 2, 3 Star Michelin restaurants, and then they have usually all their more casual dining is where the volume is. So it’s really upscale. Upscale casual is our biggest business. And now it’s upscale casual takeout is becoming our big business. We could just see the volume. And it’s impressive of the support they’re getting from their loyal clientele and people really wanting to support them. So I think it’s all over the place at this point.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [26]

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Kelly, I would just add that, by far, the preponderance of our sales growth from the 40% in April to the 60% in June and July has been with our core independent customers. Obviously, hospitality is not back yet, the hotels, but country clubs and especially the suburban markets have been the growth engine of that. While B2C and retail have been good contributors during the crisis, it’s still a smaller part of our business.

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Kelly Ann Bania, BMO Capital Markets Equity Research – Director & Equity Analyst [27]

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Okay. That’s helpful. I guess, just anything that you can help us with just in terms of seasonality? Just you mentioned country clubs and outdoor dining and just how we could — should be thinking about that into the next quarter or 2? And how you’re planning inventory around those dynamics?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [28]

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Yes. I mean, I think inventory, I think the team now has figured out that every day is like a start-up. So we do sell a lot of nonperishables. Obviously, the perishables are the hardest parts. So customers are very understanding. So if you’re going out to eat or you’re doing takeout, you’ll start — you’re seeing more limited menus. You’re seeing them running out a product and substituting. So I think that’s become the new norm. They know to expect that there will be products that will be sold out. We’d rather sell-out than have products that are going bad or send customers stuff that’s not up to par. So I think that’s the new norm. And I think what you’ll see in the fall is you’ll see clubs continue with tents outside and heaters. That’s already, I think, baked in. We know that that’s going to exist. I always use Paris as the example because I’ve always been — that impression has been on me since I started the business, how many outdoor cafes, how many people sit outside when you go to Europe. And I think you’re starting to see that. I saw it in Florida before we were shut out visiting Florida really without quarantine. So Naples was the first place I saw streets shutdown and allowing tables and restaurants to serve in the streets. And I think you’re going to see that more and more in places like New York and L.A. and San Francisco and Chicago.

So I think that will be the new norm going into the fall time. And I think we’re going day by day with what we’re hearing from the medical community and therapeutics and following the trends today. We’re starting to see that the infections are going down in the hotspots. Obviously, New York, Connecticut, Massachusetts is doing really well. So we’re really glad to see that going into August. And I think, Kelly, we’re day by day and really, again, the focus is getting through this year. That’s why we strengthened the balance sheet and really getting ready as this thing starts to die down and one day normality comes back.

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [29]

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Kelly, I’ll just add that similar to the cost structure, the exponential COVID-related inventory reserves we’ve taken have really helped us rightsize inventory from a go-forward basis. So as I mentioned earlier, every distribution company has inventory adjustments and reserves as a normal course of business. They’re usually a very small percentage of our gross profit margin. I mean, we’ve been pretty consistent in the 25% to 26% range for the last few years. Excluding the reserves, we’re actually in the higher end of that this year. So I think our team has done a good job of rightsizing that and really managing inventory to demand right now. And so that’s how we’re thinking about it going forward.

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Kelly Ann Bania, BMO Capital Markets Equity Research – Director & Equity Analyst [30]

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Okay. That’s helpful. And maybe just one other one here. Just curious if you’ve surveyed your customers, your core customers and have an understanding of how many of them took PPP loans? How they’re feeling about that program? And how important it is if there’s an additional extension or new program for independent restaurants there?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [31]

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Yes. I think most of them took PPP. And I’m hopeful that this next round has another round of PPP for them. We work really closely. I’m on the Board of IFDA and some other organization, independent restaurants that are really lobbying. And I think Washington hears loud and clear. Again, I think it’s over 15 million jobs, okay, in hospitality. And they know that they cannot lose those jobs. So I think that — I think the White House and Washington knows that they have to do everything possible to keep restaurants and business and get them to the other side of this. So I’m hopeful that another round is coming, but I rarely have spoken to a customer who has not taken the PPP money.

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Operator [32]

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Our next question comes from the line of Todd Brooks with CL King.

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Todd Morrison Brooks, CL King & Associates, Inc., Research Division – Senior VP & Senior Research Analyst [33]

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I hope you both are well. Following up on Kelly’s question, specifically, and I know it’s an acronym, but that the Restaurant Relief Bill that’s making its way through Congress. Chris, I didn’t know if you had any knowledge of how it’s progressing and maybe with its specific targeting towards independent restaurants, your thoughts on how meaningful it could be for the Chef customer base?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [34]

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I think anything right now, Todd, is helpful. I’m hopeful, having been on many of the calls and speaking to the coalition that’s driving it. If the — and our lobbyists have really been pushing hard, and we’re getting optimistic. A lot of senators are getting behind with their signatures that part of it should be to make sure that suppliers are getting paid. So we’re really happy to see that and hopeful that, that is part of it. I think public companies like ourselves, especially smaller public companies, we’re basically on our own. Thank God, we have the ability to raise capital. But I think that they know that we are a very important part of this. I mean, obviously, if there’s no supplies, restaurants don’t get products. So they’re realizing that we’re a very important part of that whole food chain. And I think there’s a concerted effort to make sure that, that money starts to flow back to us.

I think as Jim said earlier, that I’m really — I’m not surprised, but it’s moving to see that our customers have made such a concerted effort to make sure that the money keeps flowing to us. I think that shows that there’s a lot of respect to the supply side. They know they’re going to need us on the other side. We are their banks, right? We give credit. So a lot of our customers, we are their banking system. So as they start to do more and more business and get back to normal, they’re going to need healthy suppliers to be able to supply them and give them credit. So I think from my seat today, I’m really pleased to see that the money is coming in. The bankruptcies have — there have been some bankruptcies, but not nearly as many as I think the media was expecting. And our customers are fighters. I think they’re finding ways to renegotiate their leases and run skeleton crews and get to the other side because this is what they do for a living. They’re not going to become analysts, and they’re not going to become bankers, and they’re not going to become lawyers. This is what they do. They run restaurants, and they’re going to fight.

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Todd Morrison Brooks, CL King & Associates, Inc., Research Division – Senior VP & Senior Research Analyst [35]

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Okay. Great. And then just following up. When you look to your supplier partners, kind of health of the supply chain, financial health of kind of key suppliers and what are you seeing there, are you having to second source any key products because of any sort of stress on the supply chain side?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [36]

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Yes. I think there was — there might have been some blips. Especially in the beginning, the demand at retail was so tremendous. So some things like flavor, I would hear that we were selling out of. And obviously, some of the cleaning supplies. But I’m not hearing a lot of noise right now. Again, I think what I was most proud of, of building this business was that our supply sources were over 45 countries, over 2,000 suppliers. So we kind of had redundancies in just about everything. And our customers are, right now, very understanding. If you’re going to run out of, say, a Tuscan olive oil, they’ll take one from pool here, they’ll take one from California.

I think the fresh was the most challenged. A lot of farmers, a lot of what they produce was mainly for foodservice. So I think there was a lot of damage and people got hurt, and I think they’ve gotten some aid, so I’m glad to hear that. So it’s really from the fresh side. I’m not hearing tremendous issues right now. So I’m pleased to give you that information. But the good thing about fresh is it comes in daily. So you’re constantly restocking. You’re not taking 2, 3 months of inventory like we do on a lot of our dry goods. And products like dairy, your milk and cream and product like that is constantly coming in every day, so you can kind of control that. And then other things like most of our cheeses, our Parmesan and products that age, they have plenty of life on them. So I think we’re in a pretty good spot.

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Todd Morrison Brooks, CL King & Associates, Inc., Research Division – Senior VP & Senior Research Analyst [37]

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Okay. Great. And then just final question for me. Jim, the working capital performance really has been very impressive, especially considering the environment. If you look at the receivable base now, I guess, how healthy is the aging relative to where we were maybe 4, 6 weeks ago? And if you look at reserves that were taken, what do you think is the right window to judge if you’re going to fully use reserves taken for bad debt? Is that more towards the end of the year as we work through some PPP funding? Or what are the thoughts there?

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James F. Leddy, The Chefs’ Warehouse, Inc. – CFO & Assistant Secretary [38]

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Well, thanks for the question, Todd. I think — look, I think given the size of the reserve that we took in the first quarter and how we look at the aging now and the number of flexible payment plans that we’ve been able to work out with hundreds of our customers, we feel good about the aging balance. Obviously, it has a little bit of an impact on our capacity on our revolver, but we paid down $60 million of that. And so we have created additional capacity there. So there’s no impact there.

No, I think we feel good about the reserve, given the level of collections and the current low level of bankruptcies that we’ve seen and the conversations that we’re having with our customers as they open up and we support them. We feel good about — I mean, especially the — net of reserves, the 40% decline since the end of last year in our AR balance, similar to the inventory decline, makes us feel good about where we are from an AR and an inventory, both of those, perspective.

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Operator [39]

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Our next question comes from the line of Ben Klieve with National Securities Corporation.

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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [40]

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All right. Just one quick one from me here, kind of is a piggyback to a lot of the conversation on inventory levels. One of the kind of trends that we’ve seen is that restaurants are really kind of simplifying their menus to reduce their inventory level. Can you comment on, first of all, if this kind of menu simplification is a trend that you’re seeing in kind of a large scale? And if so, do you anticipate that this kind of meaningfully lowers the revenue or profit per customer? Or is this going to really just kind of shift spend and profit to a more concentrated SKU count?

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Christopher Pappas, The Chefs’ Warehouse, Inc. – Founder, Chairman, CEO & President [41]

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Yes. I think, Ben, again, restaurants right now, they just want to get to the other side of this. So they’re very creative. The inventory that I see moving shifts every day depending on the price of the product. So if you get a real big spike in a lot of the beef products, you’re going to see a lot more seafood and chicken on the menu. You’re seeing a lot of — I mean, a lot of healthy products being sold. People are gorging on produce now in the summertime and legumes and grains. And at the same time, our protein business is doing remarkably well. So there’s a lot of, I guess, that the barbecues, the comfort food, the hamburgers, steaks, chicken breast, pork chops. So it’s all over the place. I think they are limiting. I think they have to keep it interesting. So I could just see from my own habits. I’m ordering from 4, 5 different restaurants constantly during the week, and there’s always specials. So I think that the menus look more limited, and I think there’s more specials. So they’re taking advantage of where products do take dips, they’ll buy and they’ll create specials. And that’s really the great part about independent restaurants, is their flexibility where the menu is semi-fixed, but it does change on a daily basis.

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Operator [42]

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We have reached the end of the question-and-answer session, and with that, the conclusion of today’s call. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.