Chefs' Warehouse Inc (CHEF) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Chefs' Warehouse fourth 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 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 fourth 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 among others historical and projected 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.

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, and quarterly reports and Form 10-Q, which are available at www.sec.gov. Today we're going to provide a business update and go over our fourth 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. We are very pleased with our fourth quarter results, particularly in light of the current economy, the impact of Hurricane Sandy, and the extra week in our prior year fiscal year.

A few highlights for the fourth quarter of 2012 include the following-- an increase in net sales of approximately 22% over the fourth quarter of 2011; a gross profit increase of approximately 16% over the fourth quarter of 2011; and an adjusted EBITDA increase of approximately 22% over the fourth quarter of 2011.

During the quarter, same-store order patterns among our customers grew in the mid-single digits, consistent with our expectations. As for commodities, total inflation went from 1.7% during the third quarter to 1.4% this quarter. Dairy and cheese deflation continued to moderate during the quarter as we expected, which slightly compressed our gross margins.

We continue to believe that substantial growth opportunities exist in our current markets through increased penetration of our existing customers and the addition of new customers. During the quarter, our unique customer placement in case grew in the mid-single digits, after you adjust for the estimated impact of acquisitions, Hurricane Sandy, and the extra week in our prior year fiscal year.

We also continued to identify new markets that we believe present opportunities for future expansion. During the third quarter of 2012 we acquired Michael's Finer Meats, based in Columbus, Ohio. Integration of that acquisition is going very well. This acquisition will complement our existing product offerings, significantly enhance our capabilities in center-of-the-plate categories, and provide an avenue for growth with specialty products.

We recently started to roll out more specialty products to Michael's customers, and have also identified ways to efficiently get some of Michael's product into certain of our facilities. We expect to have more progress on both fronts as 2013 progresses.

In January we announced the acquisition of Queensgate Foodservice, a $40 million-in-revenue food service distributor based (inaudible) in Cincinnati. This acquisition further strengthens our foothold in the Ohio Valley and provides a platform on which to leverage the Michael's acquisition, and also offers exciting synergies as we integrate this business with our existing operations. We're very grateful to both the Michael's and Queensgate teams. They're very dedicated and we're very happy to have them as part of the Chefs' team. We look forward to growing both business to the next level with their support.

There continues to be a very robust pipeline of attractive acquisition opportunities. We continue to be very disciplined in our approach to these transactions, and we will be selective in both the markets and product specialties that we pursue.

In addition to adding to our operating platform, we have continued to add management and leadership talent to support our growth. We recently hired [Rodney Aguirre] as our Regional Vice President of the West Coast, who will have oversight over our Southern California and Las Vegas operations. We remain focused 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 grow our business in each market.

In closing, 2012 marked a year of significant growth for our Company. It was a record year in terms of revenue, gross profit, cash flow, and profitability. We are executing against our long-term business strategy by building out our core markets; entering new attractive markets that we believe offer long-term upside for growth. During the remainder of 2013 we will continue to remain focused on driving organic growth, strengthening our infrastructure, and pursuing additional attractive acquisitions.

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 December 28th, 2012 increased approximately 22.4% to $142.6 million from $116.5 million for the fourth quarter ended December 30th, 2011.

As Chris alluded to, there was a fair amount of noise this quarter related to Hurricane Sandy and the prior year week. Adjusted for the estimated impact of these factors, net sales increased approximately 32.6%. The adjustments are approximately $3 million of sales related to Sandy and $6.6 million of sales in the prior year period related to the extra week.

The increase in adjusted net sales was due largely to the acquisitions of Michael's Finer Meats in August 2012 and Praml in April 2012, which accounted for $31.6 million or 28.8% of our adjusted total sales growth for the quarter.

Organic growth accounted for the remaining 3.8% of growth. Adjusted for the estimated impact of acquisitions, Hurricane Sandy, and the extra week in our prior fiscal year, our unique customer placement and case growth was approximately 4.3%, 6.9%, and 3.1% respectively.

Inflation was approximately 1.4% for the quarter. Deflation in the dairy and cheese categories continued to moderate in the fourth quarter.

Regarding Hurricane Sandy, the components of the estimated impact from the storm are as follows-- net lost revenue was approximately $3.0 million; lost gross profit on those sales was approximately $770,000; increased inventory damages were approximately $400,000; labor and other cost inefficiencies were approximately $150,000; and increased reserves for bad debts were approximately $530,000. Hopefully this information is helpful in your modeling.

Continuing down the P&L, gross profit increased approximately 16.4% to $36.1 million for the fourth quarter of 2012, versus $31.0 million for the fourth quarter of 2011. Gross profits margins decreased approximately 130 basis points to 25.3% from 26.6%, due in large part to the impact of the mix of Michael's and Praml acquisitions, and the impact of Hurricane Sandy I just mentioned.

Total operating expenses increased approximately 32.5% to $28.2 million for the fourth quarter of 2012, from $21.3 million for the fourth quarter of 2011. As a percentage of net sales, operating expenses were 19.8% in the fourth quarter of 2012, compared to 18.3% in the prior year. The increase in our operating expense ratio is attributable to increased insurance costs, increased amortization expense related to the Company's acquisitions, and the impact of Hurricane Sandy.

A little more granular information-- warehouse distribution and selling costs increased approximately 20.7% to $19.3 million, which includes $260,000 of duplicate rent we're paying on our Bronx facility. Excluding that duplicate rent (inaudible) approximately 67% to $8.9 million compared to the prior year quarter.

As noted above, this includes approximately $530,000 of incremental bad debt reserve related to Sandy. Excluding the impact of Sandy, G&A cost increased approximately $3.4 million or 120 basis points versus the prior year quarter, to 5.8% of net sales. This increase is primarily the result of increased investments in information technology initiatives, increased insurance expense, and increased amortization expense from the Company's acquisitions.

Operating income for the fourth quarter of 2012 was $7.9 million compared to $9.7 million in the fourth quarter. This decrease in operating income was primarily related to the impacts of Hurricane Sandy and the prior year 53rd week.

Net income available to common shareholders was $3.6 million or $0.17 per diluted share for the fourth quarter of 2012, compared to $5.2 million or $0.25 per diluted share for the fourth quarter of 2011.

On a non-GAAP basis, adjusted EBITDA increased approximately 21.8% to $11.6 million for the fourth quarter of '12, compared to $9.5 million in the fourth quarter of 2011.

Modified pro forma net income available to common shareholders was $4.9 million, and modified pro forma EPS was $0.24 for the fourth quarter of 2012, compared to modified pro forma net income of $4.8 million and modified pro forma EPS of $0.23 for the fourth quarter of 2011. Please refer to our press release for a quantitative reconciliation of those non-GAAP measures to their most comparable GAAP measures.

Now, on to the 2013 outlook. Based upon current trends in the business, as well as the recent acquisition of Queensgate Foodservice, we're expecting revenue between $610 million and $640 million in 2013.

If you recall from our third quarter call, we provide some revenue guidance to assist in your preliminary models for 2013. At that time, our last twelve months September revenue was approximately $455 million. Bringing that forward through to the fourth quarter of 2012, our -- adjusted for Sandy was (inaudible) [$83 million].

The pro forma impact of the Praml and Michael's acquisitions are expected to add an additional $60 million to $65 million in 2013, and the addition of Queensgate Foodservice is expected to add an additional $40 million to $45 million for the year.

Lastly, we continue to expect modest organic growth in the low to mid-single digits, particularly in the first half, and inflation in the 1% to 3% range. We expect adjusted EBITDA between $43 million and $47.5 million, and net income between $17.7 million and $19.8 million for the year. As a result, we expect net income per diluted share between $0.84 and $0.94, and modified pro forma net income per diluted share between $0.88 and $0.98.

This guidance is based upon an effective tax rate of approximately 41.5%, and estimated fully diluted share count of approximately 21.1 million shares.

One last comment on the quarterly distribution of those earnings -- if you recall, our first quarter is typically our seasonally lightest quarter, and then our fourth quarter is typically our strongest quarter of the fiscal year. So, as you think about the contribution in each quarter, it should follow that cadence.

With that, Operator, we'll turn it over to questions.

(Operator Instructions). Andrew Wolf, BB&T Capital Markets.

Just wanted to ask you, can we take the -- or have you taken, sort of, that $0.5 million write-off of bad debt, and can we multiply it by sort of the inverse of the receivables to sales ratio, and say that about $5 million worth of your business kind of closed or, you know, had to shutter their -- close their restaurants due to the storm? Am I thinking right?

Yes. I mean, that's a good way to think about it. I think the piece that you don't catch, or don't capture there -- that $500,000 includes both restaurants that went out of business or customers that went out of business; then there are some restaurants that are struggling, filed bankruptcy, so we're -- they still may be customers and still may be active, but the collectability of that account may be a little into question. So, we provided -- we went through, account by account, and looked at all that. So, it's not -- I wouldn't conclude it as $5 million that, you know, went away. It's something less than that.

I got you. So, some of these guys got in trouble because they had a bad, you know, fourth quarter, and you had to increase the reserve; but they may end up --

You know, we -- hopefully, we'll continue to collect that.

-- staying in business.

We'll continue.

Okay. Yes, and they may end up staying in business. Okay. That helps.

On the guidance, you know, there's -- looks like almost 40 basis points of, let's say, EBITDA -- adjusted EBITDA margin variability at the low and high end. Obviously there's sales leverage. But, you know, I think it -- if, you know, just sort of putting different numbers in my model, it appears to be more than that. But, you know.

So, beyond sales leverage, what are the variables that could swing -- you know, you've got $0.10 EPS guidance range as well. What variables are you trying to manage tightly to, let's say, get to the upper end. And if you end up at the lower end -- let's say you hit the middle of sales, what are the things that -- this year, that are -- you guys are -- is it expense side, or is it the gross margin side? If you could elaborate on that, that would be helpful.

It's both, really. You've got sales mix. You've got inflation/deflation. You've got operating expenses, fuel, labor rates. I mean, there's a lot of moving parts.

Andrew, as you know, in our business, if the economy picks up just a little bit, the trucks are running. The -- it's the same fuel, the same manpower. We get another box per customer, it's all -- that's all to the bottom line. So, a lot of it is that incremental business. You know, that's our cream. No pun intended.

That's fine. Have you seen any change in the new year, post-Sandy, or just in same-store sales for your customers?

We were pretty pleased. January was good. February, the weather got a little cold, so that scrambles it a little bit. But, I always said that I think our customer base is a little more insulated from the really low-end casual, where they're much more affected by a slight income change.

So, I think that -- I think we're pretty comfortable. Our customers are doing pretty well. Obviously they're not knocking out of the ballpark, except for the fortunate few. And we're optimistic that, you know, it looks where we're guiding to. And if we get a little bump in the economy it'll be a really great year.

Great. Well, that's a -- good to hear. And lastly, guys, I just wanted to drill a little bit into the potential sales synergies that you had talked about when you purchased the Michael's business.

Sure.

And have you -- there are two different synergies. I think we talking about whether you could sell the high-end aged and custom cut meat to other customers you're already serving; or you could penetrate, using sort of a center-of-the-plate strategies, to penetrate the existing Michael's folks with the core specialty products. Could you just comment on that?

And also -- and this'll be my last question -- what -- how Queensgate is going to be integrated. A little more around that.

Sure. Well, I'll start with the second. Queensgate -- we do have an integration plan, and we're planning on integrating them. We're very excited about that acquisition, and it came at a perfect time, because obviously we bought Michael's, which is a center-of-the-plate expert, and now we get both customer base. They do have an overlap. And our business is about relationships. So, now we get two great companies, you know, geographically in sort of the same area, with a lot of overlap, and we get to leverage all the relationships. And it's off to a great start, and we do expect great things.

And it is the model. If we could do that in every city, we would do it all day long. So, we're very fortunate to find two great companies with great management teams that could work together, and I think you'll see really good numbers from them in the future.

We will, Andy, have a little bit of short-term costs around that integration, just changing out systems and putting that process in place. But the sales synergies are starting to happen, and we're in the process of -- where we've identified a way to get Michael's meat into some of our other markets, and things like that. We've already started taking the Chefs' products into their market. So, it's all progressing really well.

Great. Thank you.

(Operator Instructions). Karen Short, BMO Capital.

How's your ankle?

You know, I'm off the crutches, so life is pretty good.

Good. Okay. So, just looking at your guidance, I guess I wanted to ask, in terms of cross-selling with Michael's, kind of, what does your top line guidance imply? And kind of maybe elaborate a little bit more on where you're at -- how many markets you've kind of applied cross-selling to -- things like that?

Yes. I think as far as the Queensgate opportunity, it will be probably $2 million. You know, $1 million to $3 million. And that's what we kind of implied in our -- we gave you kind of the pieces of the buildup of the revenue, and we said kind of $40 million to $45 million. They're at about a $40 million run rate today. So, it'll be in that kind of low to mid-$40 million. Obviously we expect some organic growth just on their core business. But synergies -- probably another $2 million.

Yes. And it'll take a little time. You know. We have to integrate routes -- you know, see where we can eliminate trucks, add trucks, integrate sales people, who becomes a specialist; so, this is a really -- obviously, we'll get a bang for our buck this year, but the real bang will come in the next few years.

Yes. Yes. And like I just mentioned to Andy, there's some shorter-term integration costs. Obviously, centralizing IT and some of the back-of-the-house operations/functions -- that happens kind of in the latter half of the year. We're currently scheduled to convert systems at the beginning of the second quarter, but it'll take a little bit of time to get that cost out. So, the contribution from that deal will happen more in the second half.

Okay. And then you talk a lot about -- or, I mean, back in last summer, I guess, a lot about really needing to focus on bulking up the sales force and things like that. Can you maybe give us an update on where you are at, maybe in terms of number of sales people, and where you still have gaps, and things?

Well, we've been adding sales people. I mean, it's -- I think now our total is over 140 people. So, we added a VP of the -- Southern California. We added a VP for the East Coast. We hired the -- a general manager and a new sales manager to add to the team in New York. We're probably getting ready to hire another VP for our -- to cover from San Francisco all the way up to Portland.

So, you know, we've been layering in people. We're doing a lot of training. And we expect to get the benefit of better-trained staff, better-managed teams, and more relationships.

Okay. And then another question. And this hasn't really been talked about since your IPO, but one of the (inaudible) was, you looked at your EBITDA margins and your productivity in New York -- the New York facility, and then compared that to your other facilities around the country. And obviously there was significant upside to EBITDA margins at your -- all of your other facilities from higher utilization. I don't know if you want to -- if you could maybe just provide a directional update on where EBITDA margins are in kind of the rest of the country versus New York? (Inaudible) maybe since the IPO?

I don't think we get that granular on the reporting, Karen. But, I mean, a lot of it's just common sense. As we take a facility and pump more volume through it, eventually it's going to have more operating profit, so EBITDA is going to increase. So, distribution business -- either you have too little space or too much space.

So, when we build a new place, acquire a new company, it usually takes -- you know, it usually starts at a level. And then as we continue to add volume, the bottom line gets bigger and bigger. So, you know, we are doing better in the places that we have made the investments, and we're adding sales people. It takes a little time, but those margins do get better.

Okay. And then last question. If you said it, I missed it. What will your CapEx be for 2013?

We're expecting total CapEx around $23 million to $25 million. A lot of that's already funded via the New Market Tax Credit facility (inaudible) about -- almost half of that, $21 million of it, is already funded and cashed, sitting on the books. So, unfunded CapEx or something that's got to be funded via cash flow is more like $12 million to $14 million.

Got it. Okay, thanks. I'll get back in queue.

Thank you. That's all the questions we have for today. I'd like to thank all participants for joining today's conference. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.