The Chefs' Warehouse, Inc. (CHEF) Earnings Call Transcript

Good evening, everyone. This is Chris Mandeville, the Staples Retail & Distribution analyst at Jefferies. I really appreciate you all joining us today. It's a pleasure for us to host the folks at Chefs' Warehouse. Representing them being President and CEO, Chris Pappas; as well as CFO, Jim Leddy. Gentlemen, really appreciate you joining us for the next 25 minutes.

Glad to be here, Chris.

Thank you.

Yes. Obviously, it's not ideal not being in Nantucket, but nonetheless, we'll make for a good conversation.

We have a painting up of the Nantucket Harbor, and we ordered some oysters just to add some ambience to the meeting.

There you go. And maybe later on, you can drop ship us some flying lobsters at some point.

Absolutely. They're all socially distanced.

Yes. But, Chris, I suppose -- I was hoping maybe we could start just with regards to a quick review of how Q1 unfolded for you guys from a sales cadence perspective. And then if you had a willingness maybe to potentially update us with regards to what type of sequential progression you've been seeing quarter-to-date.

Sure. So I think we said in the last earnings call, January and February actually was our best out-of-the-gate first quarter we've had in a long time. We had 10% organic growth and all the investments we had made in people, operations, it's all coming together, cross-selling. So obviously, March was difficult when the government shutdown the whole country. It was not in our playbook. So the first few weeks were really bad, and then we pivoted. Obviously, we had to make some really hard decisions. We had to lay-off people. We had to furlough a lot of people and rightsize the overhead to what we thought the business would be, which is not so easy, especially when they told us it would be 30 days to slow the curve and really, there was no guidebook to what was coming. So we utilized that time to start a new business. We always had a B2C business out of Chicago, but we started a home delivery business. We started to our Meet the Truck. We leaned on our retail connections, and we started to have great success selling to retailers. We always had some high-end retail in our portfolio, but our sales staff got on the phones and really filled in the parts of that supply system that was broken from just the over-demand. So coming into April and May, I made the mistake and said, it can't get worse than what it was in the beginning of March, and then, of course, we had all the unrest and the riots. But a very entrepreneurial management team, we've managed every day to get better and better. I think we said on the last call that we were starting to see get over 50% days and that would continue to over 60% days. And really, today, from what we're looking at, obviously, there's going to be bumps and some spikes. But we really think we can get to what we're managing to, which is a 75% level. So we're not really counting on this year of getting back the cruise ship business and getting back hotel business or tourists. But what we are seeing, Chris, is our suburban business, our country club business, all -- even in L.A., anyone that has outdoor seating, and now they have indoor seating, we're starting to see really large spikes of business coming back, a lot of pent-up demand. Here in our office, we're surrounded by restaurants that have opened that are doing outdoor/indoor, and some are doing better numbers than they did last year. I think they're benefiting from people not traveling, so it's stay vacations or stay summers. So lots of tents, lots of seating outside, lots of distancing inside. So our favorite restaurant is booked till August. So it's kind of A Tale of Two Cities. Manhattan starting to open up. Chicago is starting to open up. Miami, I was just down there, just started to open. So we're optimistic that we're on the climb towards that 75%, and we made plenty of money when we were 25% smaller as a company. And really, that's the way we're managing it. We're managing the overhead to kind of match that 75% model, and we could be profitable and ride this thing out till, hopefully, there's a vaccine or we get that normality in 2021 and really managing towards 2022 and '23 with a lot of the moves that we're making. We're being very careful to protect our balance sheet. I think Jim has done a great job adding the equity raise and adding even more capital to the balance sheet was really prophylactic, a kind of a "Just in case things go all wrong, we'll be fine." And it's also given us the ability to really play a little offense. So we've been able to start acquiring some talent from companies that don't have our balance sheet, some that have closed. And so we're really adding some talent we never would have been able to get. So that's a little upside. And really getting a double-downing on our strong businesses where we could start to add categories and extra business to kind of fill that pipeline, a business that we'll be missing for the time being, and trying to negotiate, really, acquisitions that were in the pipeline. Today, they look more like, "We're not going to cut a check on pre-COVID numbers, but you could join us, and we can grow together out of this and limit our overhead, have better bottom lines. And when you get to a pre-COVID number, we can cut a check." So it's almost like a very long-term earn-out. So I think we're finding ways to be creative, improving IT, improving operations and really building towards 2022 and 2023 when I think we can really leverage everything that we're doing now in the, I call it, the COVID period.

Great. Really appreciate all that and a lot to continue to dig into a little bit in the next 20 minutes or so. But specific to that reference of getting back to about 75% normalized levels there, Chris, is that a goal by year-end? And then thinking about that in your statements about driving profitability even with such suppressed volumes, I mean, can we take that as essentially expecting you being able to exit 2020 at, call it, a 5% to 6% EBITDA margin?

Well, I think the run rate -- the goal is to have a run rate back to those kind of numbers. And I only have so much of a crystal ball, but all the trends we're seeing, obviously, there's going to be bumps, but when you're getting up to days where you can do 60% when we had all our major cities closed, you can only be optimistic that as we start to go into the fourth quarter and have New York City open, San Francisco open, L.A. open, Chicago open and all of Florida open and on, on and on, that we can get to those numbers. I mean it's not a reach. I mean we're starting to see that we are getting within reach, and we're managing towards that. So we're not going to do anything crazy just to be able to hit a quarter. We're going to protect our best employees. We're going to carry some, if we have to, on the sales staff, that maybe they've been really impacted because of their territories. So I think we're doing it in a very thoughtful way, where we can be profitable, as you said, going into, coming out of the third quarter. Right now, we're blessed. The weather is good. People are really -- there's a big pent-up demand. So I think every week, it'll get better and better, maybe with a few bumps. So as we are going into the fourth quarter, it's really realistic that we are going to be profitable and really setting ourselves up for taking advantage of the opportunities that we see coming towards us.

Hey, Chris, I would just add that while we've modeled that, and that is our goal, it's not an official forecast or guidance at this point. The pace of the recovery will most just likely dictate that. I think just given the fact that we've flexed down the cost structure, and now actually, with volume gradually building back every week, we're actually bringing some people back slowly and adding routes and hiring back some drivers and warehouse workers, et cetera. So it gives us the ability as the pace of the recovery develops that we can meter the layering in of costs such that we can get to that goal that Chris mentioned.

Got it. It's helpful. And I appreciate you mentioning the comments earlier about civil unrest. Wasn't necessarily thinking about that, but I would imagine that's created some volatility here and there in some of your major metros. So maybe unlike some of your larger broadline peers, you've yet to see this dynamic unfold. But as you also referenced, there's still a great number of major metros and I think predominantly northeast, just probably because where the majority of us are situated. With the reopenings now just on the cusp of taking place or Phase 2 or Phase 3 for that matter, is the expectation to see it accelerate -- or meaningfully greater acceleration in the rate of sequential improvement?

Yes. Again, when your aspirations are only to get to 10% to 15% more from most of your major markets closed, I think you can't help but be optimistic. In our own, again, like Jim says, it's not a forecast, it's almost impossible that we're not building in our cruise ship, which is a healthy business coming back; we're not building in tourism and hotels coming back; we're not building in offices being full coming back. It's -- people have to eat. And I think what's really driving the volume for us is a tremendous takeout business. I think people are -- really, really want to support their local restaurants. Perfect example is obviously -- one of my favorite place, I'm out every night, and somebody leaves an envelope with $5,000 in it for the staff. So it's -- I think people are going out of their way to support their local restaurants, and it's starting to show. So every market is a little different. But I was in Columbus, Ohio. I was in Miami. I've been to Houston. Obviously, all over the Metro East Coast, I'm about to go west. And I'm starting to see the trends kind of repeat themselves. Obviously, with some bumps, but a lot of outdoor dining, indoor dining starting to pick up. Takeout is here to stay. Even off-premise catering for less than $25, starting to see small celebrations. So lots of resort areas. There's just a lot of pent-up demand. So I think as people learn to deal with the new norm, wearing a mask until you sit down, decent social distancing. Obviously, we've seen "not so social distancing," with a lot of the young bar areas. I think that's where a lot of the criticism coming is, there's pent-up demand for young people. They want to get back to their lives. So I think that's where they're trying to be a little careful. But obviously, that's great because young people, thank God, are not the most vulnerable. So we're just seeing country clubs are really doing well as they're opening. They're moving -- most of the dining is outdoors. You really want to be in the tent business this year. Everywhere I go, I see tents. So it's very entrepreneurial. The great thing about, I think, our position right now, is that we have a very flexible model. I think customers are appreciating that. So we're not the biggest, and we're not the smallest in our industry. So we're big enough to have -- be able to leverage is what we're trying to do, leverage our infrastructure and trying to capitalize on adding more products to our trucks of categories and buying Sid Wainer in January and adding all the protein and seafood. More and more customers are really excited to consolidate their orders, makes it easier for them and obviously, much more profitable for us. So I think that's one of the ways that we're winning. And so the outdoor dining for the summer, I think, is going to be extremely strong. There is a lot of pent-up demand. People are really tired of cooking. So I think that getting to that number is within a real, I hope, a short-term reach. And we're really looking forward to just getting through the fourth quarter and back to some normality at some point.

Got it. On the flip side, Chris, maybe it's a little too early to tell, and you might not necessarily have the greatest exposure to some of these states. But in some of the areas where we're hearing an increase in cases, for example, like Texas, have you seen any particular slowdown in the rate of recovery thus far?