Chefs' Warehouse Inc (CHEF) 2012 Q3 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse Third 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. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alex Aldous, General Counsel and Corporate Secretary 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 third quarter 2012 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section.

Through 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 third quarter results in detail. 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. First, I'd like to give our thoughts and prayers to those impacted by this week's storm. The impact is significant and will be felt for quite some time. I would also like to thank our team of dedicated food service professionals who have done a terrific job responding to these challenges.

In regard to the third quarter, we continued sale momentum and growth during the third quarter despite continued uncertainty in overall economic conditions. A few highlights for the third quarter of 2012 include the following, an increase in net sales of approximately 23% over the third quarter of 2011, a gross profit increase of approximately 22% over the third quarter of 2011, and then adjusted EBITDA increase of approximately 22% over the third quarter of 2011.

We also continued to build out our platform as we entered the Midwestern market and expanded our center-of-the-plate capabilities with the addition of Michael's Finer Meats. We continue to see a very robust pipeline of acquisition opportunities in the marketplace which will be a critical component of our longer term growth strategy. We believe we have the opportunity to capitalize on our existing infrastructures and expertise, particularly in a slower growth economic environment by continuing to selectively pursue those opportunities in order to expand the breadth of our distribution network, increase our operating efficiencies, and add additional products and capabilities. These acquisition opportunities will also provide excellent future organic growth as the economic environment improves in the future. Just to be clear though, we remain very disciplined in our approach to these transactions and will be selective in both the markets and product specialties that we pursue.

Given our preliminary assessment of the impact of Hurricane Sandy, we have revised our review of the remainder of 2012 and will provide some preliminary views on 2013, which John will cover in more detail shortly.

During the quarter, same-store order patterns among our customers grew more moderately compared to earlier in the year and Q3 of last year, consistent with our expectations. As for commodities, deflation in the dairy and cheese categories moderated in the third quarter as we expected. Sequentially, total inflation/deflation went from 2.4% deflation during the second quarter to 1.7% of inflation this quarter, driven largely by the moderation in dairy and cheese pricing. We do expect the impact of dairy and cheese deflation to continue to moderate in the fourth quarter of 2012.

Despite the tough economic conditions, we believe we had an opportunity to maintain our successful track record in 2012 by following our key strategies for growth, which are to gain market share both in our existing markets and with the acquisition of new markets, by offering an extensive selection of specialty food products as well as expanding into other specialty areas such as center of the plate, produce, and other categories that are highly aligned with our customer base.

During the quarter, we saw a number of unique customers and placements grow in the low single digits. We have now lapped the acquisition of Harry Wils and with that the impact of planned attrition related to customer overlap. The greatest impact of that attrition is in the third quarter and to a lesser degree, the fourth quarter. Adjusted for this impact are key statistics of unique customers, placements, and cases all grew in the mid single digits.

During the third quarter, we acquired Michael's Finer Meats, based in Columbus, Ohio. Michael's distributes an extensive portfolio of custom cut beef, seafood and other center-of-the-plate products to many of the leading restaurants, country clubs, hotels, and casinos in Ohio, Indiana, Illinois and Western Pennsylvania. So far we're very pleased with the addition of the Michael's team and the progress we are making on the integration front. We believe that Michael's will complement our existing product offerings and significantly enhance our capabilities in center-of-the-plate categories and also provide an avenue for growth with specialty products.

In addition to adding to our operating platform, we have and will continue to add management and leadership talent to support our continued growth. We continue to focus on placing senior management closer to our customers in each region so we can best address our customers' unique product and service needs as we continue to grow our business in each market.

In closing, we are tempering our forecast for 2012 due to the impact of the hurricane. We continue to believe 2012 will be a record year in terms of revenue, gross profit, cash flow, and profitability. 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 offer long-term upside for growth.

With that, I will turn it over to John to discuss more detailed financial information. John?

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended September 28th, 2012, increased approximately 22.7% to $124.8 million from $101.7 million for the third quarter ended September 23rd, 2011. Acquisitions contributed the majority of this growth or 22.3% of the total 22.7% growth. We lapped the acquisition of Harry Wils and the related planned attrition from that acquisition. Adjusted for this attrition are placements, number of unique customers and cases continued to grow in the mid single digits during the quarter compared to the last year.

Organic growth was positively impacted by approximately 1.7% inflation as the significant deflation in the dairy and cheese categories moderated somewhat from the first and second quarters of 2012.

Based on current trends and prior-year pricing, we do expect the impact of planned customer attrition and the impact of dairy and cheese deflation to continue to moderate in the fourth quarter of 2012. Also note, the prior year was impacted by a 53rd week in the fourth quarter of 2011.

Gross profit increased approximately 21.6% to $32.4 million for the third quarter of 2012 from $26.6 million in the third quarter of 2011. As a percentage of net sales, gross profit decreased 25 basis points to 25.9% compared to the prior year, which was due in large part to the Michael's acquisition on our overall product and margin mix.

Total operating expenses increased by approximately 17.7% to $25.1 million for the third quarter of 2012 compared to $21.3 million for the prior-year quarter. As a percentage of net sales, total operating expenses decreased to approximately 20.1% for the third quarter of 2012 from 20.9% in the third quarter of last year.

Warehouse, distribution and selling costs increased approximately $3 million to $17.5 million, which includes $260,000 of duplicate rent expense on our Bronx facility. Excluding that duplicate rent expense, warehouse, distribution, and selling costs decreased 42 basis points to 13.8% of net sales compared to the prior-year quarter.

In addition, G&A costs increased approximately $735,000 compared to the prior-year quarter, primarily as a result of increased investment in information technology initiatives, increased amortization expense from the Company's acquisitions and increased stock compensation costs, offset by lower levels of accrued compensation costs.

Stock compensation costs in the third quarter of 2012 included $713,000 of non-cash charge for the acceleration of vesting on shares related to previously-announced separation of the Company's Chief Operating Officer.

Operating income for the third quarter of 2012 increased approximately 37.2% to $7.3 million compared to $5.3 million for the same period last year.

For the third quarter of 2012, we reported an effective income tax rate of 39.5% compared to 37.9% in the third quarter of 2011. Net income available for common shareholders was $3.8 million or $0.18 per diluted share for the third quarter of 2012 compared to a net loss available for common shareholders of $1.2 million or $0.06 per diluted share for the last year's quarter.

On a non-GAAP basis, modified pro forma net income available to common shareholders was $4.4 million and modified pro forma net earnings per diluted share was $0.21 for the third quarter of 2012 compared to pro forma net income of $4 million and $0.19 for the prior-year quarter.

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

Now on to our 2012 outlook. For fiscal year 2012, we are updating our guidance to take into account the uncertainty surrounding the impact of Hurricane Sandy. In addition, our guidance incorporates the previously-announced acquisitions of Praml and Michael's. While we were tracking within the range of our previously-announced guidance, we are currently assessing the impact of this week's hurricane in our financial results. It is still too early to precisely predict the impact on our fourth quarter results for 2012 as well the duration of that impact but we have incorporated our initial assessment into these expectations.

With that in mind, we expect revenue to be in the range of $460 million to $480 million, net income per diluted share to be in the range of $0.70 to $0.76, and modified pro forma net income per diluted share, which includes the impact of duplicate rent, the impact of deferred financing fees, and non-cash stock compensation charges related to the previously-announced management changes to be in the range of $0.75 to $0.81. This guidance is based on an annual effective tax rate of approximately 41% and fully diluted share count of 20.9 million shares.

We are currently in our planning process and won't provide guidance for 2013 until our fourth quarter conference call. I would like to point out a few items that might help in your financial modeling.

Our last 12 months revenue for as of the third quarter was $455 million and the annualized revenue expected from the Praml acquisition, which was acquired on April 27th, 2012, was approximately $20 million. The annualized revenue expected from the Michael's acquisition, which was acquired August 10th, was approximately $80 million to $85 million. We do expect more modest organic growth in 2013, at least for the first half of the year given current economic conditions to be in the low to mid single digit range. This incorporates our preliminary view of inflation for 2013, which we would expect modest inflation to be in the 1% to 3% range.

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

(Operator Instructions) Karen Short from BMO Capital.

Just first question I want to just talk about is I'm trying to triangulate your top line growth this quarter as it relates to your total top line and then you call it what your acquisition contribution was and then you call it inflation. I guess when I do the math, it doesn't seem like there was any organic growth. So I guess the first question is can you talk about that a little bit? I mean I realize that inflation and the acquisition number is going to be a little squishy, so it's not direct math. But --

Yes, it's not direct math. I think that other key thing to keep in mind is the attrition from the Harry Wils acquisition. I think the Company had previously had talked about the expected attrition given the customer overlap. We expected that number to be in the kind of the 25% to 30% range. So when we initially closed on the Harry Wils acquisition that first quarter included a decent amount of that planned attrition. So that's creating some of that year over year.

So of the 21-ish million, it's 25% to 30% attrition?

I'm sorry.

Of the revenues associated with Harry Wils, is what in the $20 million range. So --

Yes, roughly Harry, slightly more than that. But yes, so that attrition is kind of masking the -- I guess the core growth in our business. So that's one of the reasons we commented on the fact that when you scrape that away, the core components of unique customers, placements and cases, they were all growing in the kind of the 4% to 5% range.

Got it. Okay, that's helpful. Then you guys haven't talked about this that much, but I have to believe that the exchange rate, the unfavorable exchange rate is impacting your top line and your gross profit dollars. Can you maybe just give a little color on that?

Yes, a little color. For the quarter we had about $5.7 million of imported purchases that were paid for in Euros, so it's not a huge number. Certainly it had some impact on I guess the average exchange rate declined from about 1.42% last year, 1.42% last year to about 1.25% this year. So it had some impact but it's not a huge number.

Then just two updates on your facilities. I guess everyone's obviously concerned about everyone's welfare. Any impact on your facilities as a result of the storm? Then the second question would be any update on the facility transitioned to the new facility?

Yes, thank God, Karen, our facilities are all intact. None of the facilities took in water. So, we were pretty lucky there. New York, we're in that construction phase, we did start construction. So we don't see really a delay. We don't, as of right now, we don't see any delay in continuing the construction project.

Got it. I'll get back in the queue.

(Operator Instructions) Scott Mushkin from Jefferies & Company.

This is actually Mike Otway in for Scott. Thanks for taking the questions. Just a couple things. With the change to the regional management structure that you guys laid out a few months ago, could you maybe talk about how or maybe it hasn't changed, how your strategy has changed? About how you go into some of those regions or how you're looking at some of the supply chain or warehouse portions of the business? Any thoughts there would be great.

Well we made our big concentrated effort to have more leadership as we grow in our existing op co's. And as we plan to continue acquiring companies, we thought it was really important to break up the country into regions. Having people crisscrossing constantly on a weekly basis was not going to make much sense with so many op co's in our plan. So by creating this regional management structure and having say an east coast VP who's spending more time visiting our operations and making sure that our processes are being followed through and making sure that integration of the acquisitions is being followed through was a really important step to insure our continued success.

Chris, have you found someone else for I think you guys were still looking for a regional manager out west or is that kind of ongoing?

We are constantly looking to add some talent, but with the addition of the two people on the east coast, it's really allowed our other VPs to spend a lot more time on the west coast as well as myself. So we will hire the person if we find the type of person that we are looking for. But right now, I think that we are -- we're pretty much covered and we do anticipate -- we've talked about our frothy pipeline with lots of acquisitions that we've been talking to and we're optimistic that we'll continue to make these wonderful acquisitions and we'll acquire some talent from these acquisitions.

Thank you and John just -- and I apologize if I missed this but in terms of the update and guidance as it relates to Hurricane Sandy, did you kind of quantify what that was specifically relative to some of the other moving parts?

Yes, there's -- it's obviously it's very preliminary and we're still day by day and hour by hour kind of assessing kind the impact to customers and things like that. But our best guess right now is it's probably somewhere in the $10 million to $15 million in revenue range. That's what we use to build into our model.

(Operator Instructions) Scott Van Winkle from Canaccord.

First, guys, I apologize. I joined the call a little late. It's a heavy earnings report night. So if you said this, I apologize. But on the Michael's acquisition is there a timeline that you can lay out for things like cross selling opportunities, getting the integration in. You've got a couple acquisitions you've done obviously as a pipeline coming forward. I'm wondering what the timeline on that specific deal might be?

Well I mean the Company is up and running. It was a opportunistic opportunity to acquire Michael's so it was not a city that we were really -- had a big major plan for the next 12 months. So taking that into consideration, it was such a great company. At this point, we're letting them operate and continue their organic growth while we build out a long-term plan really of how we're going to leverage Michael's, cause really they are processor and their clientele base, to leverage that processing capabilities into future Chefs' Warehouses going through the Ohio Valley. So, to give you an exact date right now would be really hard to do. All I can tell you is that we are very active and we're very optimistic that '13 and '14 we would be able to leverage them.

With the most recent Sandy issue and I know this is really hard, John, but what kind of basic assumption, did you just say it's going to be a month that things are kind of stuck in Manhattan? Was that kind of the assumption you're making at this point?

Yes, I mean basically what we did and obviously it's still at the very high level and we haven't been able to get to kind of an individual customer level necessarily, but about -- we assessed about 20% of our overall sales are in kind of the more severely impacted areas, be that lower Manhattan, the Jersey coast and things like that. There's probably another 25-ish percent that is in moderately affected areas, so upper Manhattan, Connecticut, those kind of areas. So today, I mean we're obviously we're looking at this daily as I mentioned earlier. We're probably at about a 50% ship rate out of New York of our normal volume. Obviously we expect that and it's -- we've lost a couple of days obviously where we completely closed. Today, I think we were at about a 50% rate and hopefully that will continue to build as customers open back up and power's back on in certain areas. So, it's -- I don't want to imply that that $10 million to $15 million estimate has more science or more granular numbers to it than it that it's intended to be. But I think that's our initial estimate of what we think is going to play out as businesses come back on line.

Then can you just remind me when would you -- in the beginning of next year, when you do lap the dairy price kind of fall off? Was that March of '12?

Let's see. We had a fair amount of deflation actually even in the first quarter. So, that was a little bit before my time. So I think it was probably a little bit earlier than that. Chris, you may have a little bit more insight into when the dairy prices really started to decline.

I think it was fourth quarter of last year and first and second quarter of this year was when it started really taking the big dip.

So it gets a little easier on those comparisons here in the coming months, right?

Yes, it is. Dairy's still down. It's still not back to where it was. So we still have deflation in the dairy categories.

Yes, so for the quarter, Scott, we had about almost 9%. It was 8.9% year-over-year deflation in dairy and compared to second quarter, I think that was around 17% or 18%. So it's moderating but it's still deflationary versus last year.

Karen Short.

I just wanted to ask, you guys haven't really talked about this and I'm not sure if you're ready to yet, but any comments on what you think the cost savings could be in dollars in terms of the new facility? John, I know obviously you weren't prepared to answer that earlier.

I don't think we're quite there yet. Karen, I think we're still on track to finish construction. It'll probably be sometime in the third quarter of '13. We're hopeful to be in the new facility by year end. So it's probably really '14, 2014 question about what that cost savings is. But I don't have a good number for you at this point.

Then just on the operating expenses, your leverage is actually better than we were looking for at least. Any color there? Anything that was going on that you can point to?

I don't think there's anything particularly. I mean Michael's probably had a little bit of impact on that, just given their expense ratio. They're a slightly lower gross margin and slightly lower operating expense ratio. But we did see some nice leverage and I mean I think that was across the board. There weren't any particular items to call out there.

Then I guess just the last question. Obviously, you gave us the contribution on your top line from acquisitions. But, and I guess we now have more color on Harry Wils. But can you comment on how Praml, Provvista, and Michael's all contributed? Can you kind of break those out in buckets in terms of revenues?

We don't generally give specific financial information by subsidiary. We did, obviously, as it relates to kind of getting your thoughts around 2013's top line. I'd say all of them tracked exactly where we thought that they would be. We're still early in the process with Michael's and we have some integration costs. Obviously they were -- we only owned them for six or seven weeks I guess in the third quarter. But a lot of our initiatives in the fourth quarter, I think somebody asked about cross selling opportunities. Scott had asked about cross selling opportunities. We're starting that process of trying to figure out how we get our products into their facility and vice versa. So there will be some costs associated with that. So I think we're still on track with where we thought we would be and what we expect to be. Certainly expect Michael's to contribute nicely for next year.

Then I guess just in terms of attrition, I mean again you guys did comment from the very beginning on the attrition. Well you commented that you expected attrition associated with Harry Wils, but I guess the percent seemed higher than I would have expected. Is it fair to say that that was a fairly unusual situation from an attrition perspective and that's not what we would be expecting from all your other acquisitions?

Yes, absolutely correct, Karen. The reason we decided to acquire Harry Wils was a competitor of mine for 30 years in Manhattan is where their strength was. When we built the model, we knew there was so much overlap that we would not be able to keep all that business. Where say when we bought a company in Portland, we expected to keep all of it and we did. So, we kind of knew what we were getting into and that's why we kind of paid the price that reflected the amount of attrition we would have. So, from it we got some really good key accounts and we eliminated a competitor and we kind of kept the business we thought we'd keep. It does play with our numbers though.

There are no further questions. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.