Q2 2020 Chefs' Warehouse Inc Earnings Call
[music].
Greetings and welcome to the chefs warehouse second quarter 2020 earnings Conference call.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host colleagues. All this general Counsel corporate Secretary and Chief Government Relations Officer. Please go ahead Sir.
Thank you operator, good afternoon, everyone with me on today's call or Krish stoppage.
<unk>, chairman and CEO on getting money or Seattle, and now you should hold back into our second quarter 2020 earnings press release. It can also be something or don't need it won't be delta you don't chefs warehouse dot com under the Investor Relations section.
This conference call, we will be presenting non-GAAP financial measures, including among others historical an estimate.
And adjusted EBITDA as long as both historical and estimated adjusted net income and adjusted earnings per share. These major named Jim I calculated in accordance with gap and may be calculated differently in cement movie titles non-GAAP financial measures used by other companies.
Stated reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures apparently they express for books.
We began a 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.
These statements are subject to numerous risks and uncertainties that could cause actual results could differ materially from what we expect.
These risks are mentioned in today's release others are discussing our annual report on form 10-K in quarterly reports on form 10-Q, which are available on the FCC website.
Today, we are going to providing business update and go over our second quarter results in detail and we will come at the call for questions with that I will turn the call over to Chris Pappas Chris.
Good day fuel for drilling they were a second quarter 2020 early fall.
The second quarter with low lives challenging quarter than our company's history.
10 spoke as the centered on supporting Orca Murden supplier partners during the very fluid and gradual transition limited service.
They've gotten curbside operation as well as developing or enhancing are a direct to consumer shop like a ship platform.
In addition, we took a number of important to strengthen our balance sheet and rightsize our cost structure to ensure schuff 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 covert 19 endemic.
During the quarter result, gradual improvement from April activity, averaging approximately 40% prior years revenue June averaging approximately 60% of prior year revenue, while we opened a they do with different for each market our largest markets in the northeast mid Atlantic or with those.
Were delayed by a number of weak due to the wider spreads social protest activity in early June.
Later in June delays and pull opening in these markets continue to do the observed resurgence of overcame within certain states.
During the quarter organic net sales were 57.8% lower over the prior year quarter.
Specialty sales were down 68.2% organically over the prior year, which was driven by reductions in oneq customer.
Definitely 56.3% and lower place approximately 59.1%.
A reduction in specialty cases by 68.3%.
Organic pounds, though play were approximately 51.3% lower than the prior year quarter.
Gross profit margin decreased approximately 222 basis points during the quarter.
Gross margin of specialty category decreased 641 basis point 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 Cobot 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 to move on on an update on recent business activity sales in July are trending at approximately 60% of prior year.
While more customers opened for outdoor dining our largest markets continue to delay indoor dining or experience seek capacity decreases due to recent surges in covert 19 cases in certain markets.
Throughout the quarter, our team focused on growing marketing and developing our direct to consumer businesses.
Rise of our Allen brothers, Great American Steak House, Dave online store, and our shop like a chef home delivery platform.
In addition, we continues 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've commenced the phase integration of Sid winner in Cambridge meets with our specialty in some of the played operations in the northeast.
In July we started the process of our northeast sale theme selling situator produce more Bronx facility offering or New York Metropolitan customers. The high quality said waner portfolio products to complement our specialty in protein categories.
In addition, we started planning process of moving Cambridge Meech into our third winner operations, which we expect to complete the first half of 2021.
With this move we're excited to build on the growing cross selling opportunities. We have started to generate between the two great companies and brands and the newer markets.
Moving to the West Coast in Texas, We completed the consolidation of Threed Omani me processing facilities six processing facility the three.
While utilizing cross dock 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.
These moves contribute the rightsizing our cost structure news region.
Facilitate improved efficiency and customer service is going forward.
During the quarter, we signed lease for 150000 square foot building in Miami Dade County.
This facility will incorporate specialty meat and seafood processing as well as proton center is expected to be completed in the fourth quarter of 2021 with a plan move in 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 deployment of our ERP to our Philadelphia business, which we expect to go live during the third quarter.
West Coast implementations expected to begin in October with the first quarter of 2021 target completion.
Before I turn it over to Jim I'd like thank the entire chef warehouse team for their passion and energy and supporting our customers during their very phases of opening partnering with our suppliers. During this trying time and executing new business activity over the past several months.
The dedication to the aircraft and each other.
As one of the lab chefs to become the Premier specialty food purveyors chef driven restaurants and establishment during a 35 years of operation.
With that I'll turn it over to Jim discussed more detailed financial information for the quarter at an updated on our liquidity and costs related actions Jim.
Thank you Chris.
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 29 chain.
The decrease in net sales as 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% second quarter, consisting of 0.2% inflation in our specialty category and inflation of 6.7% center 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 in margin were significantly impacted by additional reserve adjustments for inventory revaluation loss of approximately 5.5 million due to the expected extended impact of Colby 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 and bakery and produce categories second quarter inflation in center of the plate category was driven by broad based higher pricing across Pete categories as well as continued higher percent.
And your 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 2019 or.
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 2020, compared to 19.6% for the second quarter 2019.
As Chris noted.
All human sales increased gradually here 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 mall.
Operating loss for the second quarter of 2020 was 25.4 million compared to operating income up 15.5 million for the second quarter 2019.
The decrease in operating income was driven primarily by lower gross profit offset in part by lowering lower operating expenses.
Income tax benefit was 10.8 billion for the second quarter 2020, compared to expense of $2.9 million for the second quarter 2019.
Our GAAP net loss was 20.3 million or 57 cents loss per diluted share for the second quarter 2020, compared to net income of 7.7 billion or 26 cents per diluted share for the second quarter of 2019.
On a non-GAAP basis, we had negative adjusted EBITDA up 13.7 million for the second quarter 2020, compared to positive adjusted EBITDA of 26 million for the prior year second quarter.
Adjusted net loss was 18.7 million or 52 cents per diluted share for the second quarter 2020, compared to adjusted net income of $9.8 million or 33 cents per diluted share for the prior year second quarter.
Turning to the actions we took during the second quarter, two stringent strengthen our balance sheet and an update on their 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 865000 shares on June 2nd 2020. The option was exercised in total proceeds from the entire offering excluding fees was approximately 86.3 million.
On June 820, 20, 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.
In addition, we prepaid approximately 35.7 million of principle of the amended and extended balance.
Outstanding debt related to this loan now exists into Traunches 31.2 million maturing in June of 2022.
And amended 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 in certain 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 economic downturn and the pace of Reopenings.
Thank you and at this point, we'll open it up to questions operator.
Thank you we will now be conducting a question answer session.
If you would like to ask your question. Please press star one on your telephone keypad, Hey, confirmation John will indicate your line is my question Q You May Press Star too if you would like to remove your question from the Q.
Call participants do you think speaker equipment, it may be necessary to pick up your hands up before personal jockeys.
One moment, please while we pull for questions.
Thank you. Our first question comes from the line of Chris Mandeville at Jefferies. Please proceed with your question.
Good morning, guys.
Chris the kind of start off just asking.
With respect to exposure you guys have in the various covert hot spots around the country.
And you could talk a little bit about the recent performance how that looks relative to say, New York City, where the pandemic is more or less well under control.
You know if there's any good news for.
For chef really it's that whereas getting the hot spots right now is some of our smallest businesses So Texas.
Arizona, obviously, Florida, it's off season so.
It hasn't really been.
Tremendous headwind for us obviously, it affects the business but.
It's really getting New York and.
Inside dining going California.
Chicago's open.
So we were looking at our numbers today, Chris and obviously, we had expected more to be in a better place by now you know, even though we did budget kind of at the levels that were 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 sixties.
Compared to last year. So our goal is to get to in the seventies.
We said that we rightside is right sized our overhead to be profitable again.
You know at 70 plus percent of last year. So.
We're starting to inch closer to closer to that goal and if there's any optimistic part of this is that.
Without New York really being open.
In California, and house dining being open we can get back right now into the sixties.
Gives me a lot of optimism I.
I think I'd just add Chris that you know I think a lot of the surveys you've seen out there showed negative same store sales July versus June.
I think thats 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 until a little bit of decline in some of the retail that we had been selling during the.
The first one for the of the pandemic.
But being able to maintain that 60% while same store sales across the country were lower.
We saw as a positive.
Okay, that's actually very helpful.
And then this Chris as we think about trying to accomplish reaching that 75% run rate goal by the end of the calendar year and you just kind of alluded to you had expected to kind of being 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.
And really I guess I'm curious about the performance you've seen thus far how influential has the growth of outdoor dining Ben can your business be at 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.
Fall and winter.
Sure well.
The good news is that we do a lot of business.
In warm state so I think I'll turn it down I think.
It's going to be very prevalent.
You know out west.
And.
You know, Florida as the season starts and some of the Southern States. Obviously, you know again, I keep saying as a white paper that came out about the flexibility and innovation of independent restaurants, CNO, which is a big part of who we sell and if you. If you go through New York, Chicago, you'll start to see.
Streets being closed.
A whole outdoor gardens be implanted outside of restaurants, they are adding tables, obviously takeout is through the roof. So.
Our customers are survivors send their they're going to find ways I think obviously, where we're watching the medical breakthroughs on therapeutics and.
Talks of vaccines, but I really feel that.
Management's job right now is to protect the balance sheet.
And.
This will pass its not its not a matter of but if it's just when and Thats 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 you know not all our customers will make it I think thats why we took such a big reserved for bad debt embedded inventory I think we were really conservative and.
We are starting to see the benefits of our balance sheet, we've been a hiring people from and when I say, we're just not going out the higher we're getting people that have tremendous.
Experience a reputation as an industry, who want to join shop.
Who have sales who want to bring their customers to shop and that's a tremendous positive you know on a platform that I've been building with his team for 35 plus years.
We look at as you get to the other side get through the winter.
And Sunshine will come out eventually.
Restaurant somewhat close a lot of will reopen we're already seeing you know we were having opened ins during the pandemic people of restaurants. So at the end of the day I think we'll have a stronger team we've learned how to be leaner and so we'll just we'll go with the flow and then ride the tied as a.
We get through this.
Really difficult time, but really proud of what the team has been able to do we preserved our cash.
We've got a strong balance sheet and that we have a stronger team than ever.
Coming out of this thing.
Okay and then the final one from me for happens and it came here.
Can you guys and I made some very solid progress with respect reduction Opex. I think you noted that June opexa down close to 33% or is it down 20% for the full quarter. So maybe you can just.
[noise] came back down a little bit.
Disclosed kind of what were the primary driver there to get you there and how much more progress can be made in the coming quarter, two and and to what extent you can offer up any color on what represents a variable opportunity versus the fixed opportunity that'd be helpful as well.
Sure. Thanks for the question Chris So.
Look I think.
If you know, we're not adding back the the cobiz related reserves, which in the first half of the year total almost 25 million inventory and and.
Hey are.
So when you look at the first half of the year and then the cadence with Q2, you know first half of your very close to breakeven.
When you take adjusted EBITDA and you back out the what were what we're calling.
Calling the kobin related reserves, which are truly related to coated.
Obviously, we have inventory reserves as a normal course of business like every distributor, but not at the exponential rate debt.
Thats happening as well as on on the are so in terms of Q2 cadence a once again backing out the reserves 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 right size the cost structure may in June we moved more towards breakeven and then even to a slight profitable position on adjusted basis once again backing out.
Backing out the Kobin related reserve so.
We feel that we put the cost structure and 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 in doing that in a very measured way.
To manage the business and we haven't had any cash burn since the fallout four and a half for five months that we've been in this so that 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 on 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.
You know build routes and.
We continue to the high touch service that chefs is known for but we will get the operating leverage.
As we build towards that.
Okay. Thanks, guys.
Thank you.
Our next question comes the line of Peterson way with BTG. Please proceed with your question.
Great. Thanks for taking my question, Jim I, just want to get clarity I know you guys commented on the cash operating expenses.
You guys have made there.
Oh.
Cash in June or was that kind of more of a.
Breakeven type level on the cash side again.
Well, we haven't burn cash really any weeks since.
March 16th 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 Thats, what you can see from our balance sheet in our release.
As far as 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 on 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.
Thanks, Good to hear up Chris could you just talk about the maybe that customer churn I've seen.
I know still might be early but have you have you seen.
My name here.
Our restaurant partners permanently closing are you guys have any sense of how many you may lose how many me you may pick up this year, you know given that's kind of an IDE and off here for the industry.
Sure.
So what I could say is that we are picking up a or a very very nice a increase in new customers I think that a lot of companies. Just we're not prepared to have a service level like ours. So I was.
Tries to see so many new customers coming on board.
You know you always have to remember that so we havent tend to 14%.
Natural attrition rate. So you know restaurants are always closing so I think a lot of the restaurants that have closed that won't open probably we're going to close anyway.
I think the last to come is a you know in the big cities some of the restaurants that really depend on international travel.
Local offices being a you know.
The customers coming in on a daily basis, I think those will be the last to reopen you know a weapon has an open.
Say said Midtown Manhattan, but you know what we're seeing is our business is increasing in the suburbs where people you know a lot of people have a second homes that are staying or a stable locations.
We think that will continue.
We think that we've seen a lot of innovation and entrepreneurial is them into cities were starting to see like I said, you know I'm starting to look more like Paris, where do you have big outdoor gardens and.
Heat lamps, they're putting infra red blue lights.
On their air conditioning systems to purify the air. So you know necessity is the mother of inventions and restaurant towards the very innovative depth 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 you know everybody loves headlines.
We're starting to see more openings and we're starting to see the creep start to go the positive way I think including myself a lot of people are getting tired of cooking.
So I think we're stuck to that you know theres a in places where we are in Connecticut and parts of New York You know cobot is down. So I think people are your other fatigue is starting to set in and.
People are going out you know, they're wearing masks, they're going to their table and they're starting to feel more and more secure so we think that you know, especially with a modern medicine therapeutics I think the confidence we'll start to build and.
It's getting through to next year as you know and the way we're I'm running the business. At this point is you know to make sure about next summer where in a incredibly well positioned going into a 22 to have an incredible team to really leverage our strengths and all the investments.
And really get that a tremendous uptick once oh. This is passed us Peter I would just said that one positive that we've noted, especially in July is that we have certain regions that.
We've seen 70% to 75% of of there you know 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 deceived at that level of openings kind of gradually getting there as we go through the summer.
Very helpful. Thank you very much.
Our next question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question.
Thank you good morning, I'm, just a couple of quick ones Kristina prepared commentary you mentioned your largest market I'm, assuming that's new York city, or perhaps you defined as the northeast but.
He just help us understand how big is that in terms of sales.
Yeah, I'm going to call. It think we break it out you know New York is Metro New York. So it includes a half of Connecticut.
A big part of New Jersey, obviously, the five boroughs. So you know that is our largest business.
So you know that was obviously in March and April was tremendously impacted and.
Glad to see that's starting to in shop in shop.
Every day so it is our biggest market I.
I don't think we've we've broken it out exactly but I'm I'm pleased to say that that market is a you know coming back today I'm pleased to see how it is starting to rebound.
And then.
You had somebody in the than the prior question and just mentioned about 75% of stores being opened in these markets side.
Well I'm almost mobility is increasing and clearly restrictions. So let me ask the question. This way how many of your core customer base, our back online and your platform for long.
It it's really different across every market I mean as you know.
The the regulations the restrictions and the state of coal good surgeons are 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.
Our higher than the demand that we're seeing and that's really driven by the current environment as well as as well as the restrictions yeah. I think what I can tell you Nicole is that there's a huge amount of our customers that has still not open.
For various reasons, they got a PPP money.
They're writing it out they want to wait so are you know to get into the sixties with so many of our core customers still not open.
And these restrictions I'm I'm kind of amazed, sometimes I mean, I thought we'd be further type thought the.
The states would have opened up more of the in house dining would open up more of the you know 25% to 50% limit.
Would've been better, but all that being said I.
I think it's showing that a takeout demand is.
Increasing.
And people going to you know you sitting outside and even sitting inside where they're allowed I think every day is getting better. So you know we're taking it a data time, but I think all things considered an all the states that still are pretty much shut down.
To be in the sixties I'm pretty pleased today.
Thank you and just the last one what would you say about the payment time I'm sure I'm sure there was some.
Volatility and you know the middle part of the quarter, but perhaps you're seeing a better trends.
Hey, Matt.
That way as well.
Yes.
Nicole I think we mentioned.
On the last call.
You know from working capital perspective, we've been.
We've been focused on really working with our both our customer partners and our supplier partners on on payment terms and Thats really contributed to you know the zero 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 that have actually happen.
Among our customers as Chris mentioned, there's a lot of customers that are kind of waiting in the wings.
And even customers that have been opened yet had 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.
What we've been seeing our dsos come down from the peak.
And you know in kind of in mid quarter, where they reached the peak and we're very pleased with a with the reduction in the a our balance of where we are right now.
Thank you very much.
Thanks.
Our next question comes from the line of Kelly Bania with BMO capital markets. Please proceed with your question.
Hi, good morning, Thanks for taking your questions.
Well, let's just hoping if I'm wondering if you could help us understand and unpack maybe the sale I'm trying to just.
I understand what your typical core inder independent customer sales.
Tracking at within the kind of down 40 in June and July when you kind of unpack, maybe whats happening across DTC grocery and some new customers in 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.
Yeah, I think it's all over the place Kelly I could tell you that theres customers actually beating last years numbers because.
So many people are working from home, so they're going out to eat and these neighborhoods or you know our neighborhood would be a great example, up here in Connecticut.
Has there is more people here this summer than ever before and they're getting the benefit between outdoor dining we have endured dining in Connecticut, as well and takeout.
You know speaking to some of our top top customers a in the city's you know, they're all operating with skeleton crews and ER.
They're waiting for indoor dining I mean, you know, it's unbelievable to think that New York City still has no indoor diningin and restaurants are open and they're doing takeout and they're doing a like I said, they're setting up.
Beautiful gardens, I think actually says is going to be a contest and New York of a who has the most beautiful outdoor.
Dining available in their hiring designers to us to do their outdoor dining areas and make it more cozying and vitamin for people to sit and especially as we're going into the fall a they're going to put them all the outdoor heating available as well and covering it with 10, 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 very prestigious part and but when you think about all the top top chefs in the world. They have their top you know two three star Michelin restaurants, and then they have usually all they're more cash.
Well, our dining is where the volume is so you know it's really upscale upscale casual is a is our biggest business and how its upscale casual takeout is becoming our our big business. You know we could just see the volume and it's impressive of you know the.
Support they're getting from a their loyal clientele and people really wanting to support them. So I think it's all over the place at this point kill the I was just said that the.
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 the country clubs and especially the suburban markets.
Has been the growth engine of that well be to see and retail have been good contributors during the crisis.
It's still a smaller part of our business.
[noise]. Okay. That's 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 should.
Should be thinking about.
Into the next quarter or too you know and how you're planning inventory around around those dynamics.
Yeah, I mean, I think inventory I think the team now has has figured out that every day is like a startup. So you know we do sell a lot of non perishables. Obviously, the perishables are all the hardest parts. So customers are very understanding so if you're going out theater, you're doing takeout, you'll start seeing more limited menus.
You're seeing them running out a product can substituting so I think thats become the new norm. They they know to expect that.
There will be products that will be sold out you know, we'd rather sell out and have products that are going bad or send customers. You know stuff, that's not up to par. So I think thats the new norm.
And I think what you'll see in the fall as you'll see clubs continue with the 10th outside.
And heaters you know that's already I think baked in we know that that's going to exist or you know like that I always use Paris says. The example, because I've always been that impressions been Ami since I started the business you know how many outdoor cafes, how many people sit outside when you go to Europe and.
I think you're starting to see that I sort in Florida, a year before we were shut out visiting Florida really without quarantine. So.
Naples was the first place I sort of street shut down and.
Allowing tables and restaurants to serve.
In the streets, and I think you're going to see that more and more and places like New York and La and San Francisco in Chicago. So I think that will be the new norm you know going into the full time and you know I think we're going day by day with what we're hearing from the medical community and Therapeutics and following.
In the trends today, we're starting to see that.
The infections are going down.
In the hot spots, Obviously, New York, Connecticut, Massachusetts is doing really well. So really you know, we're really glad to see that going into August and I think are Kelly, where day by day and really again the focus is getting through this year. That's why we you know we strengthened the balance sheet and really get.
And ready as this thing starts to died down and.
One day normality comes back they kill the I'll, just add that similar to the cost structure.
You know the the exponential coal good related inventory reserves, we've taken a really helped us right size inventory from a go forward basis. So.
As I mentioned earlier every distribution company has inventory adjustments in reserves as a normal course of business that 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 were 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 toward to demand right now and so that's how we're thinking about it going forward.
Okay. Thank you that's helpful.
Maybe just one other one here.
Curious if you didn't have surveyed your customer 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 that is if there's an additional.
Extension or new program for for independent restaurants there.
Yeah, I think I think most of them took PPP.
And.
I'm hopeful that a this next round has another round of PPP for him. A you know we work really closely are among the board of Ah if done some other organization independent restaurants that are really lobbying and I think I.
I think Washington, Here's loud and clear again, I think it's over 15 million jobs, okay, and 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 together.
Outside of this so I'm hopeful that another round this come in but I rarely have spoken to a customer who has not taken the PPP money.
Thank you.
Thanks Kelly.
Our next question comes from the line of Todd Brexit C.L. King. Please proceed with your question.
Hey, good morning, I hope you're both while.
Based on food.
Following up on on Kelly's question, specifically and I know, it's an acronym but that the the restaurant relief Phil.
Audits are making its way through through Congress, Chris I didn't know if you had any knowledge of how it's how it's progressing and maybe with its specific targeting towards independent restaurant your thoughts on how meaningful.
It could be further schuff customer price.
I think anything right now Todd is helpful. I'm hopeful you know haven't been on many of the calls and speaking to a you know the coalition that's a that's driving it.
If the and our lobbyist have really.
Been pushing hard and we're getting the optimistic a lot of senators and getting behind a you know with their signatures that a part of it should be to make sure that suppliers and getting paid so we're really happy to see that and I'm hopeful that that is part of it.
I think you know public companies.
Like ourselves you know, especially small public companies you know we're basically on around you know thank God, we have the ability to raise capital.
John I think that they know that we are very important part of this I mean, obviously, if there is no supplies restaurants don't get product. So they realizing that were 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 I'm.
I'm not surprised but I, it's 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 the supply side, they know they're going to need us on the other side.
We are their banks right you know, we give credit so 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.
I think from my seat today, I'm I'm really pleased to see that the money is coming in.
Bankruptcies have a there that there have been some bankruptcies, but not nearly as many as a I think the media was expecting and our customers. The 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 you know they're not.
Going to become analyst and ER.
They're not going to come bankers and they're not going to become lawyers. This is what they do they run restaurants, and they're going to fight.
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.
Any key products because of any sort of stress on the supply trends.
Yeah, you know I think there was a you know there might have been some blips, especially in the beginning the demand at retail was so tremendous.
So you know some things like flower I would here 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 a building this business was that.
Our supply sources were up over 45 countries over 2000 suppliers. So we kind of had redundancies and just about everything.
And our customers are right now the greater understanding if you're going to run out of say, a a tuscan olive oil they'll take one from pool year they'll pick one from California.
I think the fresh was the most challenged.
A lot of farmers. So you know 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 made some 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 I'm pleased to give you that information but.
The good thing about fresh as it comes in daily So you're constantly restocking you know you're not taking two three months of inventory like we do on a lot of our dry goods and products like dairy you know your milk in 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 Papa Johns and products that age they have plenty of life on them. So I think we're in a pretty good spot.
Okay, Great and then just final question for me.
Jim the working cap capital performance really as Ben.
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 for six 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.
[noise] reserves taken for bad debt is that more towards the end of the years, we work through some PPP funding or or what are the thoughts there. Thank you.
Well. Thanks, a 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 workout with hundreds of our customers.
We feel good about ph balance obviously it it has a little bit of an impact on our capacity on our.
On our revolver, but we paid down 60 million of that and 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 though the current low level of bankruptcies that we've seen.
And the conversations that we're having with our customers as they open up when we support them.
We feel good about I mean, especially the the net of reserves the 40% decline.
Since the into last year in our our balance similar to the inventory declined makes us feel good about where we are from a from an aer and an inventory both both of those perspective.
Our next question comes from the line of Bank Levy with National Securities Corporation. Please proceed with your question.
All right. Thanks for taking my question just one quick one from me here on.
Kind of visit Piggy back to a lot of the conversation on inventory levels on one of the one of the <unk> kind of trends that we've seen as our restaurants are you know really kind of the simplifying their menus a unit to reduce their inventory level can you comment on first of all if this kind of menu simplification of the trend that you're seeing and kind of a large scale.
And if so do you anticipate that this is kind of meaningfully lowers the revenue or profit per customer or is this going to really just kind of shift.
You know spend and profitable more concentrated skew count.
Yeah, I think brand again, you know restaurants right now they just want to get to the other side of the so.
They're they're very creative you know the the inventory that I see moving.
Shifts everyday depending on the price of a of the product. So if you got a real big Spike in a lot of the be products, a there you're going to see a lot more seafood and chicken.
On the menu.
You are seeing how are you seeing a lot of a real <unk> I mean, a lotta healthy.
Products being sold them you know people are our gorging on produce now in the summertime and lagoons in grains ER and at the same time.
You know our protein business is doing remarkably well so there's a lot of I guess that the barbecues the comfort food the hamburgers Stakes.
Chicken breasts pork chops. So it's all over the place I think I think they are limiting I think they have to keep it interesting. So I could just see from my own habits motoring for four or five breast different restaurants constantly during the week and a there is always specials. So I think that the menus.
More limited and I think theres more specials, so they're taking advantage of where products are you know do take dips, a they'll buy and they'll create specials and that's really the great part about independent restaurants as their flexibility you know where the menu as semi fixed but it does change on a daily basis.
Very good thanks for taking my questions I'll I'll get back in queue here.
Great. Thank you.
Thank you we have reached the end of the question and answer session and we sat the conclusion of today's call.
Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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