Chefs' Warehouse Inc (CHEF) 2012 Q2 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse Second 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, Alex Aldous, General Counsel for 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; and John Austin, CFO.

By now you should have access to our second 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 our annual report on Form 10-K, which is available at www.sec.gov.

Today, we are going to provide a business update and go over our second 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. Welcome to all who are listening today. As you can see from today's earning release, our second quarter reflects continued sales momentum and growth, despite continued uncertainty in overall economic conditions.

A few financial highlights for the second quarter of '12 include the following; an increase in net sales of approximately 15.7% over the second quarter of 2011, a gross profit increase of approximately 16.1% over the second quarter of 2011, and an adjusted EBITDA increase of approximately 18.6% over the second quarter of 2011.

Also during the quarter, we continued our integration of the Provvista Specialty Foods and Praml acquisitions. The integration of those deals is moving along as planned.

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 acquisitions by identifying new markets and fold-ins, which we believe present opportunities for further expansion.

During the quarter, we saw product placement growth and unique customer growth, but we did see some sequential growth trends moderate during the second quarter, as John will discuss in more detail that are causing us to take a more conservative view regarding the second half of 2012.

While we saw growth across the customer base, same-store order patterns among customers grew more moderately in Q2 compared to earlier in the year. In addition, deflation in dairy and cheese categories was higher in the second quarter than in the first quarter, although we expect that to moderate somewhat in the second half of 2012.

We believe we have an opportunity to maintain our successful track record in 2012 by following our key strategies for growth, which are 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 and to continue to pursue attractive acquisition opportunities.

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

During the quarter, we saw both our number of unique customers and our number of placements, our measure of account penetration increase in the mid single digits compared to the prior-year quarter.

We were also very active on the acquisition front and expect those efforts to bear fruit in the balance of 2012. 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, increase our operating efficiencies and add additional products and capabilities.

We continue to see a very robust pipeline of acquisition opportunities in the marketplace. 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 continue to be pleasantly surprised at the amount of deal activity. Just to be clear, we remain very disciplined in our approach to these transactions and we will be selective in both the markets and product specialties that we pursue.

While we are tempering our forecast to 2012, we continued to believe 2012 will be a record year in terms of revenue, gross profit, and profitability. As we look at the long-term opportunity for this business, the good 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. More importantly, we are executing against our long-term business strategy by building out our core markets and entering new attractive markets that we believe are for long-term upside for growth.

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

Thank you, Chris and good afternoon, everyone. Our net sales for the quarter ended June 29, 2012, increased approximately 15.7% to $114.8 million from $99.3 million for the second quarter ended June 24, 2011. Both our placements and number of customers continued to grow during the quarter compared to the prior year. However, our case growth showed some sequential softening, particularly in June.

Excluding the impact of acquisitions and the exit of loan margin trades business, core placements and unique customers grew approximately 7.2% and 7.5% respectively for the quarter over the prior year, indicating our sales force continues to be effective in both adding new customers and penetrating customers with additional products. However, case growth at 3% over the prior-year quarter slowed slightly from year-earlier trends. We believe this is consistent with some of the macro trends in the second quarter, reflecting softening of consumer spending.

Our increase in net sales attributable to acquisition activity over the prior-year quarter was approximately $12.7 million or 12.8% of the total 15.7% increase in net sales, with approximately $2.9 million or 2.9% of the total increase attributable to organic growth.

Our revenue growth was compressed by approximately 240 basis points from the net impact of deflation during the quarter, primarily in the dairy and cheese categories.

Based on current trends and prior-year pricing, we do expect deflation to moderate somewhat in the third, into the fourth quarters of 2012.

Gross profit increased approximately 16.1% to $34.5 million for the second quarter of 2012 from $26.3 million in the second quarter of 2011. As a percentage of net sales, gross profit increased 9 basis points to 26.54% from 26.45% in the prior year quarter.

Total operating expenses increased by approximately 18.3% to $22.0 million for the second quarter of 2012 compared to $18.6 million for the prior-year quarter. As a percentage of net sales, total operating expenses increased to approximately 19.1% for the second quarter of 2012 from approximately 18.7% for the second quarter of 2011.

Warehouse, distribution, and selling costs accounted for $2.3 million of the increase, which represents a 13 basis point increase as a percentage of sales. This includes approximately $184,000 of duplicate rent related to the new Bronx facility. Excluding the impact of the duplicate rent, warehouse, distribution, and selling costs decreased 3 basis points as a percentage of net sales.

The overall increase in operating expenses also includes an increase in G&A costs of approximately $1.1 million or 30 basis points as a percentage of sales prior to the year -- versus the prior-year quarter. This increase in G&A costs consisted primarily of additional IT investment, costs related to being a public company, and stock compensation costs.

Operating income for the second quarter of 2012 increased approximately 10.6% to $8.5 million compared to $7.7 million for the same period last year.

For the second quarter of 2012, we reported an effective income tax rate of 41.5% compared to 39.2% in the second quarter of 2011.

Net income available for common shareholders was $4.4 million or $0.21 per diluted share for the second quarter of 2012 compared to net income available for common shareholders of $2.7 million or $0.17 per diluted share in the prior-year quarter.

On a non-GAAP basis, modified pro forma net income available to common shareholders was $4.7 million and modified pro forma net earnings per diluted share was $0.23 for the second quarter of 2012 compared to pro forma net income of $4.1 million or $0.20 for the prior-year quarter.

Please refer to our press release for quantitative reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures.

Now onto our 2012 outlook. For fiscal year 2012, we are updating our guidance to take into account current trends we are seeing in consumer spending. In addition, our guidance incorporates the previously-announced acquisition of Praml, the exit of certain low-margin business, the write-off of deferred financing fees, and projected duplicate rent expense.

With that in mind, we expect revenue to be in the range of $445 million and $455 million, net income per diluted share to be in the range of $0.77 to $0.83, and modified pro forma net income per diluted share, which excludes the impact of the duplicate rent and write-off of deferred financing fees to be in the range of $0.80 to $0.86. This guidance is based upon an annual effective tax rate of 41.7% and fully diluted share count of 20.9 million shares.

With that, operator, we'll now take questions.

Andrew Wolf with BB&T Capital Markets.

Wanted to ask about the sales slowing? Of course, the obvious question is, has that continued into July? It sounds like you're saying it has. Second, could you give sort of some degree of slowing? Was it sort of 7 to 5 to 3 type of thing? Then the follow-up is, is there any discernible difference across the Company either by geography or by the type of venue, whether it's restaurant or retail?

Sure, Andy. This is John. Let's see on your question about the sequential slowing of growth, I'll give you a couple of data points. As we mentioned in the prepared remarks, unique customer growth was about 7.5% for the quarter versus the prior year. Placement growth was 7.2% and case growth was about 3.0%. Compared to the year-to-date numbers, unique customer growth was about 7.9%, placement growth 7.2%, and case growth 6.1%. So you can see the sequential trend, opening new customers, so adding unique customers, continuing to add placements and account penetration held up pretty well where the year-to-date trend was relative to the quarterly trend. But where you saw a little bit of softening was case growth. In particular in June, that case growth number was at 2.6%. So it was definitely a slowdown, particularly in June.

We had seen July, the trends generally have stabilized in the last couple of weeks of July, so we're not seeing further erosion. But they have kind of maintained at that level. So that obviously is what impacted our guidance.

Got it. Now, is that -- is the case growth running between 2.5% to 3.0% let's say. Is that the drayage adjusted number?

That is adjusted to exclude the drayage number.

Yes, that's what I --

It's just kind of core -- yes, core growth.

Okay and when we get to -- it looks like the press release is saying that the 5.3% is sort of a real number, which is the nominal plus the deflation. Am I interpreting that right? If so, what's that gap between case and the real? Is that some trading down by the customers in the product type?

No, I'd actually say with case growth at 3% and that adjusted organic growth, if that's the right way to phrase it at 5% is probably a little bit of pricing. You saw a little bit of margin expansion. Also the 5%, that's a fully -- I'll call it a fully absorbed number. So when those numbers, those core numbers I was citing for you a minute ago, we've excluded the impact of acquisitions from the exit of the drayage business. So it's really a measurement of our core health. The 5% is an all-in number based on our reported numbers.

Okay, just as in your guidance, it sounds like either you're looking for inflation to get a lot better or the cases to get a little better or both -- I mean are you looking for inflation by year end overall?

Yes, we haven't guided to inflation although we would expect to see, given where dairy prices trended throughout last year, we would expect the impact of the significant -- in the first and second quarter there was a lot of deflation in those two categories. So we'd expect that to moderate some. I'm not sure we'll get to an inflationary environment by year end.

Andy, this is Chris. We have started to see some dairy prices climbing. So obviously with all the noise on corn and the price of corn going up, we do expect to see some inflation in the second half of the year.

Is that dairy pricing? That sounded like it must be in July, at least some of the government numbers put out it looked like things were still deflating in dairy pretty strongly in June. So is that fairly recent?

Yes, I think in July we started to see the -- particularly the cost of butter went up.

Got you. All right, thanks. I'm going to get back in the queue.

Scott Mushkin with Jefferies & Company

Just wanted to talk about the guidance a little bit. Just kind of get a feel for some of the lever points. I mean obviously with the revenues coming down I guess about $7 million in the guidance, that's going to be part of it. But it seems like it can't be all of it. So I was wondering if can you talk about it a little bit about the acquisitions? Are they not being as profitable to start with? Can you talk about maybe a little the margin considerations as we move forward? Just a little bit more color to the kind of the buckets that reduce guidance would be helpful.

Scott, the margin's pretty healthy. Obviously, we're predicting that we've taken down the volume guidance based on what we're -- what we saw in June. It's really the flow through. As all distributors, when your trucks are full, you make a lot more money than when you have room on the truck. The business is not -- it's only slightly soft. So, the loss of flow through is really coming from that lost volume. So, the volume is not enough taken down that you can say that you're going to get rid of trucks and you're going to get rid of some people. It's that annoying slight decrease in volume that distributors hate, because really that's your cream. So hopefully that volume comes back and you really get that flow through from that last bit of filling up the trucks.

Scott, just to add to that, I think whether it's in the $7 million to $10 million range on the top line, the flow through impact of that is really probably two-thirds to three-quarters of the overall impact and then there's a little bit of cost investment there as well so.

Okay that's helpful and then maybe any thoughts, it's been a little bit time since we've seen an acquisition, kind of how things are trending on that front? That'd be good.

Well, again, the pipeline is frothy. We have spent a lot of time meeting with people that are very interested in joining the Chefs' Warehouse. So, I would say that I am extremely optimistic that we will be very active in the second half of the year.

Then just one more if I could slip it in, any update on the warehouse transition?

The New York facility?

Correct.

Yes, it's pretty much on schedule. Permits, everything is moving along. So I think no news is good news.

Scott Van Winkle with Canaccord.

First just to make sure I have it right, when you tie inflation that includes any impact of mix, so that's like the total number there right?

It's the total number. So it's a little bit of mix. It's by category so it is a weighted deflation number by category, but yes mix has a little bit of impact.

When you see an environment where case volume softens month over month, what's the sales force response to that?

Obviously, we give them instructions that they need to get out there and sell as much as they can. But the softening came pretty quick towards -- as of May, we really didn't see it coming. It seems all of sudden in June the consumer got a little spooked and started to spend a little bit less money in the restaurants. So we are reacting. We are getting more aggressive and we are pursuing new business and trying to penetrate the existing customers as much as we can. So optimistically we think we'll get it back with a little wind behind our back. It can't hurt.

You're talking about back half being more active on acquisitions. Does this aid that M&A process at all, having a little bit softer environment?

I think so. I always thought the pipeline was frothy, but I think it's even frothier than what I was expecting and I would think that the environment is bringing more people to the table.

I would assume that -- there was a question I think Andy asked about or maybe it was Scott asking about recent acquisitions. I assume the same phenomenon you're talking kind of globally would affect recently-acquired businesses as well?

I think the impact would be -- sure, in fact, we saw the impact across the board. Obviously New York is our largest market so it's going to have the biggest impact. But we did see the same general impact across the board.

Then lastly, if you're seeing little lighter case volume in existing customers, obviously the customer numbers are growing. Does that create any incremental capacity? I mean is there a phenomenon where if case volume comes off a little bit, maybe the availability of incremental new customers picks up?

Again, we've inherited many new customers with the acquisitions we've done over the past year. So, we've added more trucks. We've added capacity. We anticipate adding more customers, to continue to add customers. Our customer count is up 7% to 8%. So with the trend that we are seeing, you'd like to be optimistic and believe that your sales people will fill up those trucks.

(Operator Instructions) Karen Short with BMO Capital Markets.

Ryan Gilligan on for Karen. Now that you've completed three acquisitions in the last year, can you talk about retention rates, especially at Harry Wils since that's been in the business the longest? Has there been any unexpected customer loss? If so, can you quantify how much and what the reasons were?

I think we are trending to where we thought we would be in these acquisitions. We've done enough of them that we kind of build into our model the kind of volume and customers that we think we're going to retain. So I think that it's fair to say that it's as expected.

You guys did a pretty job controlling expenses this quarter. Can you talk about some of the reasons behind that?

I think it's a lot of our continued focus on WMS, [Zillient], I mean all of the technologies we've put in place I think have some incremental impact. I don't think there's any one particular item that jumps out as driving that but --

Yes, we have tremendous transparency to our business with all the technology that we have invested. So it's easy to control those levels immediately.

On the WMS, have you guys rolled that out to Portland, Miami, and then Las Vegas yet?

It's currently not in those markets.

We're still in the implementation phase there and I think our target is within the next 6 to 12 months to have those installed.

Thank you. Mr. Pappas, there are no further questions at this time. I'd like to turn the floor back to you for closing comments.

Great. Well, thank you for listening to our call. We are very excited about the acquisition opportunities the second half of the year as well as growing in our existing business. We look forward to our Q3 call. Thank you very much.