Chefs' Warehouse Inc (CHEF) 2012 Q1 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse first-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Alex Aldous, Legal Services Director of The Chefs' Warehouse. Thank you, Mr. Aldous, you may begin.

Thank you, operator. Good afternoon, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; Jim Wagner, COO; and Ken Clark, CFO. By now you should have access to our first-quarter 2012 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 EBITDA and adjusted EBITDA, as well as both historical and projected modified pro forma net income and modified pro forma earnings per share. These measures are not calculated in accordance with GAAP and may be calculated differently than other companies' similarly titled non-GAAP financial measures.

Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release and on our website, as previously described.

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 projected 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 the final prospectus for our initial public offering and our annual report on Form 10-K which are available at www.SEC.gov.

Today we are going to provide a business update and go over our first-quarter results in detail, and then we will open the call for questions. With that now I would like to turn the call over to Chris Pappas. Chris?

Thanks, Alex, and welcome to all who are listening today. As you can see from today's earnings release, we had a very productive and active first quarter. We did lose some upside in the quarter based on a few factors we did not expect as we entered 2012 which I will get to in a moment.

A few financial highlights for the first quarter of '12 include the following -- an increase in net sales of approximately 18% over the first quarter of 2011; a gross profit increase of approximately 18% over the first quarter of 2011; and an adjusted EBITDA increase of approximately 15% over the first quarter of 2011.

Also during the quarter we continued our integration of the Harry Wils and Provvista Specialty Food acquisitions that occurred in 2011. The integration of those deals are moving along as planned.

There are a few factors that impacted the first quarter that we did not anticipate as we entered 2012. First, we saw material deflation in our largest category being dairy. While we managed targeted growth gross profit from a customer standpoint, sharp deflation did cause some moderation in revenue growth.

Second, we made a conscious decision not to discount price to retain some drayage business from a long-time customer. While we didn't anticipate this business would move away from us this year, we believe this is an isolated incident. It's worth noting we took on the supply agreement several years ago to accommodate the customer and this was a product we didn't supply to other customers.

As we look at the long-term opportunity for this business the great news is that our business continues to prosper and our business model continues to show resilience. Customers continue to support the chef driven restaurants that we supply. Higher-end dining establishments that we serve in the major metropolitan markets continue to see good business momentum. And most importantly, we are executing against our long-term business strategy by building out our core markets and entering new attractive markets that offer long-term upside for growth.

In that regard, we just announced an exciting deal to materially build out the Las Vegas market. Praml International, LTD is a leading specialty foods importer and foodservice distributor located in Las Vegas, Nevada.

Jim will discuss the acquisition in more detail, but we are very excited to significantly expand our business platform in the Las Vegas market and are delighted to reinforce our current team with the experience and dedication of the employees at Praml. They provide an array of unique products combined with the market expertise and strong customer relations that make this a fantastic opportunity to continue our growth strategy.

We also continue to see a robust pipeline of acquisition opportunities in the market place. When we pursued the IPO we felt like it would provide a unique opportunity to pursue a more aggressive approach to build out our platform. We've been pleasantly surprised at the amount of deal activity. Just to be clear, we remain very disciplined in our approach to these transactions.

While we are tempering our forecast for 2012 based on some of the factors that impacted the first quarter, we do expect some accretion from the Praml acquisition to make up for a portion of that. We continue to believe 2012 will be a record year in terms of gross profit, revenue, unique customers on a weekly basis and remain excited about the many growth opportunities in front of us. With that I will turn it over to Jim.

Thank you, Chris, and good afternoon, everyone. We continue to focus on growing the business both organically through increased penetration of our existing customers and the addition of new customers, as well as through acquisition by identifying new markets and fold-ins which we believe present opportunities for further expansion. We made progress against both of these areas during the first quarter.

In the first quarter we saw product placement growth and unique customer growth at a level similar to 2011. We believe we have an opportunity to maintain our successful track record in 2012 by following our key strategies for growth, that is to gain market share in our existing markets by offering an extensive selection of specialty food products as well as traditional broad-line staple food products through our collaborative sales efforts and efficient distribution networks.

We are growing product placement by selling more products to our existing customers, by increasing the breadth and depth of our product selection and increasing the efficiency of our sales professionals while at the same time continuing to provide excellent customer service.

We're growing unique customers by expanding our market share, by cultivating new customer relationships within our existing market through the continued penetration of independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools and specialty food stores.

We also made progress on the acquisition front with the addition of Praml in Las Vegas which services customers in Las Vegas, Nevada and Reno, Nevada. What attracted us to Praml was the company's array of unique products combined with the market expertise. We believe that there is significant untapped opportunity for new customer growth in that geographic territory.

We believe we have the opportunity to capitalize on our existing infrastructure and expertise by continuing to selectively pursue opportunistic acquisitions in order to expand the breadth of our distribution network, increasing our operating efficiencies and adding additional products and capabilities.

Moving on to our warehouse facility, during the first quarter we officially moved into our new warehouse facility in Florida. So far the transition has been seamless and we continue to believe there are many opportunities in the market that our additional distribution capacity will allow us to pursue.

We also announced on Monday that we signed the lease for a warehouse facility in the Bronx which we believe will allow us to better serve our core New York City market and metro New York area market.

With that I will turn it over to Ken to discuss more detailed financial information. And following Ken's presentation we will be happy to entertain your questions. Ken?

Thank you, Jim. Good afternoon, everyone. As Chris mentioned, we are pleased with our first-quarter results. Our net sales for the quarter ended March 30, 2012 increased approximately 17.9% to $98.1 million from $83.2 million for the first quarter ended March 25, 2011. The increase in net sales was the result of increased case volume as revenue per case declined quarter over quarter.

Our increase in net sales attributable to acquisition activity was approximately $8.8 million or 10.6% with approximately $6.1 million or 7.3% of the increase attributable to organic growth. Our revenue growth was compressed by approximately a 173 basis point impact of net deflation and mix during the quarter. This was driven by substantial deflation as well as increased case volumes in our dairy category. This ultimately resulted in a compression of revenue of approximately $1.4 million quarter over quarter.

Gross profit increased approximately 18.2% to $26 million for the first quarter of 2012 from $22 million for the first quarter of 2011. Our gross profit as a percentage of net sales was 26.6% for the first quarter of 2012 compared to 26.5% for the first quarter of 2011. Acquisition activity contributed approximately $2.3 million of the increase.

Total operating expenses increased by approximately 23.7% to $21 million for the first quarter of 2012 compared to $17 million for the first quarter of 2011. Warehouse distribution and selling costs accounted for $2.6 million of the increase. Included in this increase is acquisition activity of approximately $1.4 million.

The remaining increase in warehouse distribution and selling cost was driven by approximately a $670,000 increase in employee compensation, approximately $270,000 increase in fuel and fleet charges, and approximately a $180,000 increase in facility-related costs.

General and administrative costs increased by approximately $1.4 million. This increase was primarily the result of approximately $400,000 of public company-related costs, approximately $260,000 of stock compensation charges, approximately $220,000 in depreciation and amortization charges, and approximately $200,000 of IT-related costs.

As a percentage of net sales total operating expenses increased to approximately 21.4% for the first quarter of 2012 from approximately 20.4% for the first quarter of 2011.

Operating income for the first quarter of 2012 was approximately $5.1 million, which is consistent with the operating income achieved for the first quarter of 2011.

For the first quarter of 2012 we recorded an effective income tax rate of 41.6% compared to 39% in the first quarter of 2011. Net income available to common stockholders was $2.6 million or $0.13 per diluted share for the first quarter of 2012 compared to a net income available to common stockholders of $1 million or $0.06 per diluted share for the first quarter of 2011.

On a non-GAAP basis modified pro forma net income available to common stockholders was $2.6 million and modified pro forma earnings per diluted share was $0.13 for the first quarter of 2012 compared to modified pro forma net income of $2.5 million and modified pro forma earnings per diluted share of $0.12 for the first quarter of 2011. Please refer to our press release for quantitative reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.

On Monday, April 30 we announced entering into a new credit facility. The new credit facility is comprised of a $100 million cash flow revolver and a $40 million term note as well as containing a $40 million accordion feature. This new facility provides the Company with more flexibility to continue to pursue our acquisition and internal growth strategies.

Now on to our 2012 outlook. For fiscal year 2012 we are revising guidance to take into account our recent acquisition of Praml International, the write-off of deferred financing fees, a change in projected duplicate rent expense, as well as the decision not to retain certain drayage business from a single low-margin customer.

Taking these factors into account we expect revenue to be in the range of $452 million and $462 million. Net income per diluted share to be in the range of $0.86 and $0.89. Modified pro forma net income per diluted share, which excludes the projected impact of some duplicate facility rent and lease execution costs and the write-off of deferred financing fees to be in the range of $0.91 and $0.94. This guidance is based upon an annual effective tax rate of 41% and a fully diluted share count of 20.92 million shares. With that, operator, we will now take questions.

(Operator Instructions). Karen Short, BMO Capital Markets.

This is actually Ryan Gilligan on for Karen. I guess our first question is on the most recent acquisition. Can you maybe outline what the annualized revenues are expected to be for and also what the impact the EPS is? For guidance? Sorry.

Sure, Ryan. This is Ken Clark. So for the remainder of 2012 we're projecting retained revenue to be approximately $12 million and then to be slightly accretive for the remainder of this year.

Okay, would you be comfortable to give some color on what the multiple was that you paid?

Ryan, for competitive reasons we prefer not to.

Maybe can you just give like a range? Is it between 0.3 times, 0.5 times, is it higher?

Yes again, given -- this is Jim Wagner. Given the competitive acquisition market that we're involved in right now is why we don't want to give a specific. But it is within the range that we've talked about being between 4 and 6 times, as we've discussed in the past.

Okay, and what is different from this company versus your Company, like what are they going to bring to your Company -- in terms of customer (multiple speakers)?

This company is a best of class service provider in the Las Vegas market with a number of niche products that are well embedded within the Las Vegas restaurant market.

Okay, and then last question is on the cadence of sales throughout the quarter. Industry data points indicated that sales fell off sharply in March and further into April for restaurants. We assume you guys saw the same pattern, so assuming you did what do you attribute the drop off to?

In discussing the quarter we did. There was some lightning in terms of volumes in the quarter in March, not really discussing April at this time. Greater impact, as we just discussed in Ken's presentation, was the impact of deflation on our cases as opposed to case volumes.

Okay, thanks.

Scott Mushkin, Jefferies & Co.

Thanks for taking my question. So kind of along the lines of the same -- about the consumer, are you surprised how fast we've gone from inflation to deflation and maybe how quickly -- and I think it's probably attributed to gas prices how quickly kind of things have slowed since we went over $4, and is that what you attribute it to?

Scott, this is Jim Wagner. In relationship to the inflation and deflation, on an individual category there was a mix of inflation and deflation across categories. But based on the mix that we have, we saw significant rapid deflation fourth quarter to first quarter in our dairy category and that's really where the majority of the impact of deflation occurred in our quarter. As far as it then impacting case volumes like we just mentioned we had strong case volume growth quarter over quarter.

So you think there was obviously a positive volume response.

Yes.

And then I just want to stay with inflation for one second and then I want to go back to the consumer. So your expectations going forward just overall of your products, do you think we're going to go fully deflationary here in the next couple months or is that really not the (multiple speakers)?

Yes, we primarily saw deflation occur in the dairy market. We did see some inflation occur in the other categories, as I mentioned. I don't know that -- we're not seeing anything across all the commodity categories that we'll move into a deflationary period.

Okay, I think that's good news. And then on the consumer, given the March slowdown looks like it had to do with gas prices, do you think that took a step down and we're kind of stable or are you surprised that there was such a -- it seems like a decent reaction and a slowdown?

I'm not entirely following the question. How do you mean?

Scott, are you saying that you think you're led to believe that there was less foot traffic?

Yes, I mean the consumers seemed to slowdown. I think you guys referenced that the cadence through the quarter that was stronger in the beginning and less at the end. And our data has picked up similar stuff, that March was a tougher month just generally, not just for you guys, and I was just wondering --?

We believe, again, you go out to a restaurant in New York it's still very hard to get a seat, so I wouldn't say that there's been a real slowdown. I think March was an abnormal month when you look at year-to-year comparisons due to the way the holidays fell and maybe vacations. But our customers seem very healthy and we don't really see what I would call any sort of significant change in our customers' business.

And then I'll yield, but correct me if I'm wrong -- this is like your most volatile and kind of slowest quarter, isn't that correct?

Scott, this is Ken Clark. It is our slowest quarter typically and it represents about 21% of annual revenue.

Perfect, guys. Thanks. I'll yield.

Andrew Wolf, BB&T Capital Markets.

Good afternoon. I just joined the call so I don't know if I'm going to repeat any questions. But first off, kind of leapfrogging on Scott -- for a typical distributor, broad liner like a Cisco, March is sort of the key to the quarter, it's a bigger month. Is that the same in your business or is it because of the different type of customers, different kind of restaurant is it more smooth throughout the three months of the quarter?

Andy, this is Ken Clark. No, we are consistent with Cisco in that March is the strongest month of the three, particularly because for our quarter it is a five-week month.

Okay, so here's the repeating, and you might have just answered it but I just got on. So was there a change in the March trends versus the other trends or was it pretty consistent with -- and into April? Has there been much change in the trends at the restaurants that you serve?

We did see a couple of weeks that changed in March, but -- in terms of our targets, but, as we mentioned, a significant portion of that was also attributed to the deflation that we talked about. Because of the expanded volumes the deflation had a significant impact and it continued to trend. As far as a trending out that, we haven't seen a significant change, as Chris just alluded to, to our customers' purchasing behavior at this point.

Okay. And just in the guidance where one of the adjustments is the duplicative rent that you'll be incurring, was that contemplated in the previous guidance or just sort of the way their lease came together is that just -- that's how it broke this year and so you're now excluding that? Is there a change to how that duplicative rent expense had been budgeted previously?

Andy, we did include it in our initial guidance. And in our initial guidance we had anticipated signing the lease at the beginning of the year. So we had a $0.03 add back to the pro forma in our original guidance. Because we entered into the lease at the end of April we're only going to incur eight months of the duplicate rent and that add back has now dropped from $0.03 to $0.02.

Last question. On the $1.4 million -- I think was identified in the release related to acquisition activity -- again, you might have said this. But could you talk about that, where it's lawyers and closing fees versus duplicative costs or moving expense, what kind of expense that is? Thank you.

Andy, those are not one-time charges. What we were calling out there, of that $2.6 million increase in warehouse distribution and selling, $1.4 million of it relates to the acquisition activity which is warehouse distribution and selling expenses attributable to the two acquisitions that we performed that anniversary in 2012.

So that's just added overhead and you're just --?

Correct. You got it.

All right, we can make a calculation on the gross margin. Okay, thanks.

(Operator Instructions). Karen Short, BMO.

Can you just clarify the drayage comments that you made? I'm not sure I'm totally clear on what you were trying to say.

Sure, Karen. We had a particular customer that we were bringing in -- actually a particular product for -- that we've had for quite a while that came to a point where -- I think we've talked about this in the past -- that we're really not in the drayage business, where a customer asks you to carry products for a very low margin and you're more of an in and out delivery service for them. That's not our business model.

So this customer got to a volume and to a unit count that their business was ready to go that next step where they didn't need a high touch, high service company like Chefs' Warehouse to service. So I think the only thing that was a surprise is we kind of anticipated separating from this type of business probably next year, so it just happened a little sooner than we anticipated.

And so, sorry, what was the impact on that from a margin or I guess EPS perspective?

Ken?

It's approximately $4 million in revenue. If you want to boil it down to an EPS, it's approximately $0.02-plus when you back out any additional service costs.

Okay and that's something that you think will be just a this quarter event and will no longer impact further quarters?

No, it impacts the year.

No, it's impacting -- this is the entire 2012 guidance and it is included in the rationale for bringing down the top-end of our range.

Okay. And then, sorry, back to the most recent acquisition. I know Ryan asked you a question and I know you're sensitive to disclosing information, but it would seem that that was a fairly hefty dollar revenue acquisition. Are there any risks from an absorption perspective that we should think about? And I guess if you're willing to kind of provide what the distribution center capacity or square footage is associated with that facility that would be helpful.

As we mentioned earlier, Karen, given that it is similar to a fold in because we do already have business that operates in Las Vegas and the opportunity to combine the two businesses, that on a synergistic basis is in that 3 to 6 times that we typically look for.

So you're folding that entire business into that 10,000 -- isn't it a 10,400 square foot facility?

No, no, that's our current facility, but we're looking to fold out. So I said a similar. We'll actually merge the facilities and move into the Praml facility.

Which is how big?

It's over 30,000 square feet.

Okay, that's helpful. Thank you.

Scott Mushkin.

I was wondering if maybe, Jim, you wanted to give us a technology update. I know we're in the process of rolling a bunch of technology through -- that's one question, I actually have two follow ups. We obviously just -- you guys made an acquisition, but I was wondering if you'd kind of give us a little insight into what the acquisition pipeline looks like since last quarter.

Yes, absolutely. So from a technology standpoint, as we mentioned on the last call, we've rolled out the WMS system into all of our warehouses except for Portland and Miami. We will be anticipating the WMS moving into the new Las Vegas facility that we're moving into, i.e. the Praml facility. We're targeting this quarter to do that for the full technology integration. So we're continuing to roll out those. The WMS is going very well across the system.

As far as the other sales-related technologies, same thing in terms of all the integrations that we've done with Portland. And now as well as Praml here in the next five to six weeks they'll be fully integrated into all of our technology that we just talked about so that's gone very well. As far as the business development pipeline, it is extremely strong at the moment. We continue to be disciplined and look for the right acquisitions that fit the strategy.

Should we still anticipate like -- I think what you guys said, what three a year or something like that at least? Or is that still the right number to put on it, if I had it (multiple speakers)?

You know, Scott, these things, it's all about executing. The pipeline, again, I think we've reiterated it's extremely frothy. So it's a matter of getting these deals done and making sure that all the pieces come together and we execute and we continue to do what we've been doing. So we're pretty confident that we can continue to have success in these acquisitions.

Chris, if I could just slip in one more, how about size? I know we've been doing kind of small tuck-ins, that type of thing. Is there anything -- is there any possibility that we could see something significantly larger or is it really going to be around the same size that we've been seeing?

You know, Scott, we are looking at companies -- part of the reason of going public was to have -- delever and now have access to this new line of credit. We are looking at companies, as we spoke about before, from $10 million to over $200 million. So there is the possibility of acquiring a much larger company than we have in the past.

Perfect. Thanks for all the color, guys.

Thanks, Scott.

Karen Short.

Hi, sorry, I don't mean to hog the line here, but I guess I just had a kind of bigger picture question. If you had to look at your quarter, this quarter in particular, maybe could you help me understand what you think you did well and what you think you might have changed if you could have?

Karen, this is Jim I think in terms of all the things that we discuss as key drivers of our business, we executed across all of them. We continue to execute on continued item penetration, we grew placement, we continue to grow unique customers per week as overall customers during the quarter, we continued our acquisition strategy.

Obviously the Praml acquisition closed after the quarter, but obviously a lot of work went into that during the quarter. So from an operating perspective we feel very strongly that we're executing against our strategy that we've reviewed on these calls in the past as well as during the road show.

The deflation, unfortunately, as we've discussed historically, have hockey stick style inflation. The rapid deflation in the dairy category is really what had a hampering effect on us in terms of how quickly it happened just even Q4 to Q1. Obviously you like to do better at everything, continue to sell more customers, but we feel good about what we've accomplished.

So in terms of mitigating that [swing] into the second quarter from a management perspective is there anything you can do or is this something that we kind of have to just deal with for the next three quarters?

Ask the farmers to raise the price of milk and you'll get inflation again.

I think that's one of the reasons that we've definitely taken it into account and that's one of the reasons that we're discussing our guidance as we are here. And I'll also have Ken jump on this answer, give a little more color on that.

Yes, Karen, what I was going to say is what you don't see in the first quarter is the about 50 basis point improvement in margin. If you recall back in the first quarter of 2011, that quarter benefited from an approximately $310,000 mark-to-market gains on a euro hedge that we put in place.

If you pull that out the first quarter of 2011 gross profit margins are more in line with 26.1%. So we actually did a very good job -- I know it doesn't show visually, but we did a very good job of utilizing our price optimization and increasing gross profit margin.

Okay, got it. And then, sorry, just last question. When we look to your fourth quarter of '11, was there any benefit on margin from you being on FIFO?

No, there was not, Karen. As we look we're turning our inventory in excess of 15 times, so there wouldn't be any significant benefit from that.

Thanks.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for closing remarks.

So I think I want to just leave everybody with -- my review of the first quarter is that our team pretty much executed to the strategy that we had laid out. And if you back out really the deflation and the drayage customer leaving us we had a pretty good quarter. And obviously we have high standards, so I think that went way back those two out of the first quarter, Chefs actually executed pretty much to its strategy. So I thank everybody for listening and look forward to talking to everybody on the second quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.