Ladies and gentlemen, greetings, and welcome to the Chefs' Warehouse First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I'd now like to turn our conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir.

Good afternoon, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and Jim Leddy, our CFO. By now, you should have access to our first quarter 2020 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance. And therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our first quarter results in detail. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our first quarter 2020 earnings call. First, let me begin by saying that all of us at The Chefs' Warehouse hope that everyone on this call and the entire investor community remains safe and healthy during this time. As a company, our primary focus is the health and safety of our team members, customers and supplier partners. Our thoughts and prayers are with those impacted by this unprecedented health and economic crisis. This is a tough time for our industry, but I am confident we will get through this together. First quarter started off with strong organic revenue and gross profit growth in both January and February. In addition to solid growth from Sid Wainer and Cambridge Packing, both acquired in the period. The COVID-19 pandemic started to impact our business slightly in late February and early March. The most material impact began in the final two weeks of March following the government shutdown of dining restaurant bars, cafes and events. During the quarter, organic net sales were 6.6% lower versus the prior year quarter. Specialty sales were down 7% organically over the prior year, which was driven by a reduction in unique customers of approximately 1.9%, lower placements of approximately 9.6% and specialty cases lower by 5%. Organic pounds in center-of-the-plate was approximately 10% lower than the prior year quarter. Although we do not typically disclose monthly metrics, we feel it's important to communicate the path the company was on prior to the impact of COVID-19. Year-over-year volume metrics were particularly strong during the first two months of 2020 as specialty cases grew 10.8% organically versus the same period in 2019. March specifically, cases declined 28.4% versus March of 2019. Center-of-the-plate pounds were down slightly at 0.07 and in January…

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended March 27, 2020, increased approximately 5.2% to $375.4 million from $357 million in the first quarter of 2019. The increase in net sales was a result of a decline in organic sales of approximately 6.6% as well as the contribution of sales from acquisitions, which added approximately 11.8% to sales growth for the quarter. Net inflation was 0.2% in the first quarter, consisting of 2.1% deflation in our specialty category and inflation of 3.1% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 0.8% to $90.9 million for the first quarter of 2020 and versus $90.2 million for the first quarter of 2019. Gross profit margins decreased approximately 105 basis points to 24.2%. Specialty deflation was driven by above-average decreases in dairy and specialty ingredient categories, partially offset by inflation in the cheese category. First quarter inflation in center-of-the-plate category was primarily driven by a higher percentage of overall sales attributed to our prime and other premium cut sales in our Allen Brothers division. Gross profit dollar growth and margin was significantly impacted by a onetime reserve for inventory obsolescence of approximately $3.3 million due to the estimated impact of the forced shutdown due to COVID-19. Total operating expense increased approximately 28.4% to $107.9 million for the first quarter of 2020 from $84 million in the first quarter of 2019. An increase in reserves related to bad debt of approximately $15.8 million due to the COVID-19 shutdown was the primary driver of operating expenses in the quarter. On an adjusted basis and as a percentage of net sales, operating expenses were 27.9% for the first quarter of 2020 compared to 21.6% for the first quarter of 2019. Excluding the estimated impact of the…

[Operator Instructions]. We'll take our first question from Chris Mandeville from Jefferies.

I appreciate the color on the maneuvers made to reduce costs in the near-term and near to intermediate term, for that matter. But maybe can we just step back and try and review your cost structure, maybe give us a better sense of really your split between fixed versus variable? And one of the last comments you just made about how you feel comfortable with your liquidity over an extended period of time. I guess, I'm just curious if you could put a finer point on that in regards to what you're really expecting from what is an extended period of time really translate into. I'll start there.

Sure. So Chris, the first part of your question, I think similar to what you've heard and seen from the other distributors that are public, we have a similar cost structure, basically 2/3 variable and 1/3 fixed. So not materially different from other people, our competitors, et cetera. In terms of the near-term cost actions, we have considerably ramped down the variable cost structure to the extent that 60% reduction in our variable cost, which translates to about a 40% reduction in our overall operating spend. Now the way we look at the rest of the year, we don't, obviously, we don't know, but we would expect to layer in additional variable costs that are volume-related as the business environment starts to open up. But once again, we're not predicting anything. That's just how we're modeling it. In terms of liquidity, you can see from our prepared remarks and the release, between cash on the balance sheet, the remaining availability on our ABL, we're at about 40% of prior year revenue, which I think is a fairly strong liquidity position. And we expect to be able to manage through this crisis. We've noted in our 10-Q that we expect to be able to manage the business for the 12-month period, kind of our standard disclosure. And so we're staying with that disclosure. I think we can manage beyond that. And that's based on a number of different models that we've run. So I'll leave it there.

Okay. That's helpful. And then I guess, just in terms of that pulling back of your variable costs. And I think you said that equates something about a 40% reduction to OpEx. I mean, how much of that was actually captured within Q1 versus what we should be anticipating in Q2? And then I guess just thinking about generally trying to find ourselves a bottom here. Are you expecting based on what you're seeing today that Q2 is the most severe in terms of sales and EBITDA declines?

Yes. Virtually none of it was captured in Q1. The ramp down in costs, we probably had a little bit in terms of volume-based hours in the operations. But the significant actions that we took primarily started to impact in April. So I wouldn't put too much of that in Q1 at all. And then I think, look, we can't obviously predict the future, but we've seen incremental increases in volume and weekly revenue on a weekly basis. So I think you could extrapolate as things start to open up, that we would expect Q2 to be the low point.

Okay. Just the last one for me, and I'll hop back in the queue. Just in terms of having found that maybe most severe of sales bottoms in the latter portion of March. Can you just help size that up for us on really where you guys drop relative to where we might be sitting today in early May?

Yes. Well, obviously, when everything is shut down, Chris, there really was no business. It hit us like a nuclear bomb. So every week gets better. I think if I have to -- I have to see a -- I'm looking for the sunshine at this point, we're a business that we specialize in independent restaurants and in the major cities, California, New York, Chicago. Everybody was ordered to shelter home. And here we are with our clients really -- nobody is serving, it's just takeout, and we made a tremendous pivot to create a business that I've always wanted to create really. I was, although we said that Chef Warehouse is not your typical distributor, we're more of a food marketing company that always distributes. We represent almost 2,000 of these incredible artisan producers from around the world. And I've always wanted to create more of a hybrid model. We're so much different than your typical large broadliners, everything from size of our trucks to how do we go to the market to our chefs as salespeople. And it was a really unbelievable opportunity to kind of launch Shop Like a Chef. So incredible how our IT department and our leadership team was able to pivot really within a week, and we went out and we created a whole new business during this pandemic that continues to grow, and we're getting better at it every day, and we're really optimistic for the future of that business of being a sister business to CW. I mean, this week, we've actually had a day of 50% of last year's volume, which when you think about it, I find that incredible with our customers basically all closed, our just incredibly talented team was able to go out and create new business and creating business and helping our customers do take out, have it get up to 50% days. So obviously, we're all anxious to get our regular business up and going. And hopefully, our incredible medical society comes up with a cure, but we're starting to see cities open. We're starting to, waiting for Southern Florida to start to get going at least 25%. Obviously, New York is closed. California still closed. Chicago is still closed. So we can't help to be optimistic about how much more business we can do even in an environment that's going to be challenging.

Okay. So maybe I could take one last one in there based on the comment there and how we are reopening the country on a state-by-state basis. Can you just remind us a little bit in terms of what your sales exposure is by region or just give us kind of the top 2 or 3 markets and give us some perspective on diversification today versus what we saw back in '08 and '09 time frame?

Yes. Well, back in '08, '09. Obviously, New York was a much larger part of our business. And today, it's still our biggest business, but we're much more diversified throughout New England, throughout the whole West Coast, throughout the middle of the country. So it's a much more balanced portfolio of customers and business volume.

Our next question comes from Joshua Long from Piper Sandler.

Great. I wanted to think you might be able to first provide some context or, around what we're hearing in terms of the potential disruption here on the protein side. I mean, you guys having your own house brands there. I think you have a unique perspective on that. And I wanted to see if that was something that is starting to work its way through to your system now, given that you're at the higher end and a lot of the commentary has been focused maybe on more of the lower end on the beef protein in particular. And then expanding more globally as we think about all of those goods that you bring into your warehouses and connect with your chef partners from around the world, what kind of disruption do you expect as we start to open things up and admittedly were on the front end of this reopening cycle? Should we start thinking about or having that conversation around potential disruptions in all of those products and items you're sourcing from artisan partners around the world going forward?

Sure. Well, amazingly, our producers overall, all state opened. So we import, obviously, a lot from Italy and France. And the, our category management team, the daily call I have said, basically, they're all producing and they have products. So I think it's more logistically, I think, there's been some disruption maybe with, obviously, air freight got very expensive. The good news is that we didn't really need a lot of that product during this pandemic. The bad news is that the freight got expensive. And obviously, that will keep coming down as there's more and more flights and more and more ships that are coming in. But that hasn't really been something that's been a real issue for us. I mean, on the protein side, I know it's been in the papers a lot. I know that the pork side, which is not a huge part of our business, is really disrupted. Our team did a great job getting ahead on the beef side. So we went into the shortage really well prepared, I think, better than most. A lot of products, as you said, our high-end cuts, are prime and our real premium beef cuts, we were pretty prepared with a good amount of inventory. So I give the credit to our talented protein team for really getting ahead of it. And I don't have a crystal ball, but I don't think it's going to be a disruption for a very, very long time. So I think we're fine with it. I know that you hear Wendy's has no hamburger and there's a shortage on the shelves in the supermarkets. But I think we did a great job to, for the current outlook, we're well positioned for that.

Great. And I wanted to also then dig into some of the integration work that had been going on with the recent acquisitions. And clearly, the, I think it's probably no understatement that the integration process during a crisis like this has got to be even more challenging. But as you think about what you've been able to accomplish and then just the high-quality brands and teams that you've now got as part of your family, how do you expect that integration process to go forward? Just looking out over the next quarter or 2, obviously, it will help as things start to reopen. But just from a back of house piece that we don't typically get to see, was this period particularly disruptive? Or was a lot of the work behind the scenes more or less slowing as expected?

Yes. Well, again, we've all been working. Most people remotely continuing to work on upgrading the systems and getting them prepared for the reopening of the country. So I think it's something that was not on the top of the list right now as far as what certain deadlines we're going to meet for integrating. The companies are operating fine. So doing more of the integration has been nice to have, but I think more of a focus during the pandemic was getting up our B2C business, which the team was really focused on and did an incredible job. And actually, we created a new business during the most horrendous time I've ever experienced in my business career and even tragedy. So I think we're starting now to get back to focusing on the reopening and back on scheduling of getting the company integrated. And I think we'll get back to a certain time line. But that -- I would not put that on the top of our list right now as the most important things that we have to get done. We have to, obviously, get reopened and get our customers reopened and get people back to work. And really, that's -- the focus was on protecting our people, protecting our balance sheet and making sure that we were ready when the light switch gets turned on, hopefully, in a very short period of time.

Great. Thank you for that. And maybe pivoting a little bit to the last piece where we're getting to the reopening and having things come back online, a common theme that we've been talking about and hearing is just the kind of accelerated adoption of digital or technological tool sets. Obviously, you've been able to build out a very fun, interesting and meaningful piece here on the B2C side, but curious on how you think about technology going forward and maybe just a recap of where it was heading into the current period. And if there's an opportunity to lean into that as businesses turn back on.

Sure. So I think what we've learned during this time is we've learned a lot more about online and I think The Chefs' Warehouse customer base and the relationships we have with our customers is pretty unique. If you're going to put us into the group of the other broadliners, we call us up a specialty broadliner. I think our customer base overall is different because we do sell to so many smaller independent restaurants as well as obviously the best restaurants in the world and hotels. But I think we're going to make big strides in our ability to improve our online order systems. I think our go-to-market strategy has always been we kind of have a team sell. So we have very, very talented people that are experts in categories because we cover so many in seafood, meat, specialty and groceries and dairy. So I think everything's pushed. I think the amount of time it would have taken us to focus just like more and more restaurants we're doing then to do take out anyway. They've already started. I think that's accelerated. I don't think that's going to go away. And I think it's going to accelerate our ability to do more business online, be able to take orders from customers. It was happening anyway. But I think this pandemic has also made me realize that we are still in the people business. And even though, yes, we do need the technology, and we're scanning in the warehouses, and we're hoping for better robotics and freeing up our sales staff, which we really -- really we have because we have a really different model than most of the larger broadliners, where we have an incredible customer service team, which is more part of the sales team. And they do free up our sales team to go out and see customers more and present new products. And I think that's why we have such a rate of cross-selling. And on numbers, the first two months, we have about 10% organic growth, okay, in our specialty sales. It's, we were firing on all pistons. So we were seeing all the, we were reaping the rewards of all our investments in people and processes, and we hope to get back to that soon as the life gets turned on. And it will be a combination of continuing to invest in technology, increasing our customers that do order online. At the same time, it's expanding our category sales to our customers because at the end of the day, it's all about the GP dollars, and that's what you take to the bank.

Our next question comes from Kelly Bania of BMO Capital.

Kelly Bania here. Wanted to just ask a couple of questions about your customer base and just how they're managing through this. And if you have any anecdotal or metrics to share about what percent are kind of operating and doing takeout or delivery of some sort? And then also as these states open back up, so, obviously, Texas, I think, capacity restrictions of the 25%, I guess we'll see what happens in New York and California, but, and other parts. But what are you hearing from your customers? Are they going to be opening up as soon as they can? Do they feel like they need to wait until they can operate at full capacity? Just what are you hearing from your customer base?

Yes. Kelly, I think it's a tale of many cities. So what we're hearing in California, who obviously, they're blessed with much better weather than we have on the East Coast this past month or two, it's different than what we're starting to see from places that the weather is still cold. So some customers will open up at 25%. What always impresses me and not that this is a typical storm, obviously, we've lived through 9/11 and financial crashes and hurricanes and you name it, is the, our customer base is unbelievable entrepreneurial. And people say, well, a lot of restaurants are going to close, a lot of restaurants always close. And a lot of restaurants open, that's what restaurant always do. I mean, not everyone is going to become a financial analyst and an investment banker. This is what these people do. So when I look at what happened after the crash is rents went down, restaurants went out of business, and new restaurants opened with more inexpensive cost structure. And I think the people that have a, I think everybody is negotiating their leases right now. And the ones that have a cost structure that allows them to make money at 25% I think will open. Plus, I think it's prepping to open up at 100%. So I think what was great about takeout was it allowed a lot of restaurants initially, they were all closed. And then as they started to open as takeout, meet your dinner outside left, it's really incredible the way they were able to do it safely, okay, noncontact. And I think it got them going to open. So I think a lot of those restaurants, those will probably open first for the 25% and then go to 50% and then hopefully…

Okay. That's really helpful. And I guess on the direct-to-consumer initiative, can you help us think about how that's going? What you're seeing? And it sounds like this is more not only just a temporary strategy but could be a longer-term part of the company. And so as we think about that, like, what are you thinking could be the EBITDA margin profile of that business longer term?

Yes. I think that's a little early to give such a forecast because right now, we're seeing, I mean, number one, it really was able to allow us to keep a lot of people on the payroll. And get the creative juices going in the leadership team and the entrepreneurship and ideas that will help the B2B. But the response that we've received has been overwhelming. And I've been wanting to do this forever. Not that I want a tragic pandemic to launch it. But when we named the company, Chefs' Warehouse, we always had Shop Like a Chef and knew it would be some sort of consumer business, whether we were going to open up Shop Like a Chef outlets, which is probably still a good possibility in the long term. But the intricacies of delivering to people's houses, we're still in the process of figuring out, and that's why trying to predict an EBITDA. We've learned from a lot of the businesses have gone ahead of us who deliver to people's homes. You have to give people a time slot and all the things to packaging. So right now, I think we're in the raw stage. So even though we're having tremendous success, the model is going to have to evolve, our packaging will be evolved. But what I always, intrinsically, I think knew just from being in the business for 35-plus years was a lot of our customers, customers would always ask how can we shop all these incredible products, and there's really good value because it is bulk. We don't want to compete with a Walmart or a supermarket or Costco. What really, I always thought, we could leverage was our -- what was our advantage or what was our already platform, which is a talented…

And you mentioned just I think just alternative revenue streams in general. I mean can you help us think about grocery and the opportunity there? And is there anything else that you're thinking about?

Well, right now, we're really thinking that we like our 40,000 customers to reopen. I still find it amazing that this week, we hit a 50% compared to last year's volume day with our customers basically closed. So it just shows you that the creativity of our team, our sales team, our leadership to be able to go find business. I think we were the first to actually -- and I'll give our customers credit. We -- our customers say, there's lines out the door, can you turn us into a Chefs' Warehouse outlet. And I think our first store went on and sold almost 5000 boxes, I think it was about $200,000 worth of product to their customer base because obviously, you see the lines that were going at supermarkets and the lines that go into Costco. So I think we found all different outlets of -- I think a lot of people have copied it since then. They call them grocerets and stuff. And a lot of that will go away, but I think that what will not go away will be restaurants know that they need other avenues of income. And I think that if I had a crystal ball and I had to say, business is not going to be great for a while, tourism is going to be down. What I do think is going to happen is restaurants are getting volume. They're not going to do what they were doing before until, obviously, there's a different world out there, but I think they're going to do a lot of takeout, which is going to make up a lot of what they are losing in sit down. Not everybody, obviously, not everyone who's maybe in the theater district, and it's not a residential neighborhood or…

And when we think about the expense reductions that you've made so far in this quarter, I guess, obviously, a lot will just depend on where volume goes from here, but how do we think about as that, as things do open up and ramp back up, how to think about what kind of expenses will need to be added back in that ramp? And any help you can in kind of thinking through how to model that would be helpful.

Yes. Kelly, obviously, it's going to depend on the pace and level of ramp. But as volume increases, as our routes increase, we'll layer in the volume-driven variable costs ratably with, and then things like commissions will increase. So it will pick more of a natural kind of cadence as depending on the cadence of business, which we don't have a whole lot of visibility into right now.

Yes. Yes. I think you've heard it from the other calls we've all gotten down into the business at a deeper level. It was a chance to really understand as much as we understand our business, it really gave us insights on where we could be more efficient and what costs we really don't need to add back. And I think, again, you look for silver lining in such a nightmare. And I think Kelly, that's really, another part of the silver lining is that we'll be able to actually come back and operate leaner, smarter and be able to obviously club our way back to where we were in a more efficient fashion, understanding where our inefficiencies might have existed before. And obviously, business was growing 7% to 10%, and obviously, you always want to be as profitable as possible, but I think you always learn something when you're loaded to ground and you're in a situation where you got to squeeze every penny. And I think as business comes on, I think we'll be smarter in how we add that cost.

Our next question comes from Ben Klieve of National Securities.

Just a couple of quick ones here. First, wondering if we can get a bit of granularity on the weekly improvements that you have described over the past few weeks. To what degree do you see the improved performance being attributable to your emerging Shop Like a Chef initiative versus improvement from your legacy business as restaurants begin to increasingly be able to take, to go and deliver the orders, things of that nature?

So Ben, thanks for the question. So just in terms of the cadence, the March 16 when everything fell off a cliff, we saw volume decrease as much as 60% to 70%. And then through April, you saw a gradual build to kind of a mid-30 to kind of 40%. And then as Chris mentioned, in the last couple of, in the last week or so, we've had days where we were in the high 40s or even a day or 2 at 50%. So that's been kind of the cadence that we've seen since March 16. And I'm sorry, what was the second part of your question?

Really, kind of, what is driving that? Is that the Shop Like a Chef initiative that's beginning to materialize? Or is that, is it largely attributable to your legacy customers that are ramping back up?

Yes. It was really materially driven by, as our customers, as Chris mentioned, started to open up for takeout and delivery and curbside service. Obviously, our Shop Like a Chef and our Allen Brothers steak retail business really grew, but was not the preponderance of that growth.

Got it. Perfect. And then last one for me, and I'll get back in queue. But I'm wondering if you can talk a bit about the growth initiatives in Texas and L.A. How the COVID-19 area is impacting those? And then your just kind of overall thoughts on CapEx for -- on a full year basis, if you can provide any either quantitative or at least directional insight to the CapEx number?

Yes. So we had originally guided in the kind of $40 million range with the bulk of that being in the second half of the year. We expected to build out the LA facility that we've invested in. Given the COVID-19 situation, we have temporarily delayed that. So we brought our guidance down. I think you'll see in our 10-Q to the kind of $10 million to $12 million range right now and that's mainly it and maintenance CapEx and some, and about $3 million of CapEx that we actually had in the first quarter. So right now, we still plan to expand in L.A., but given the situation, it's temporarily on hold.

And that does conclude our question-and-answer session.

Well, thanks, everybody, for joining.

Ladies and gentlemen, that does conclude our call today. We do appreciate your participation. Have a great night. And at this time, you may disconnect. Thank you.