Chefs' Warehouse Inc (CHEF) 2013 Q1 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse first quarter 2013 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 first quarter 2013 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 in Form 10-Q, which are available at www.sec.com.

Today, we're going to provide a business update and go over our first 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 first quarter results. A few highlights for the quarter include the following. An increase in net sales of approximately 42% over the first quarter of 2012; a gross profit increase of approximately 35% over the first quarter of 2012; and an adjusted EBITDA increase of approximately 40% over the first quarter of 2012.

During the quarter, same-store order patterns amongst our customers grew in the mid single-digits, consistent with our expectations. As we previously mentioned, we are seeing modest improvement in our key indicators. We are encouraged by this trend, although we think this will be a slow, steady process throughout 2013.

As for commodities, total inflation went from 1.4% during the fourth quarter to 3.1% this quarter. Cheese deflation continued to moderate during the quarter as we expected, although the dairy categories showed much more inflation quarter-over-quarter with somewhat impacted gross margins.

Our numbers of unique customers, placements, and cases, all grew in the mid-single digits during the quarter, after you adjust for the estimated impact of acquisitions. Each of these KPIs showed sequential improvement from the fourth quarter. We continue to focus on growing in our current markets through increased penetration of our existing customers and the addition of new customers. We also continue to identify new markets that we believe present opportunities for future expansion.

We have now rolled out a depot in Seattle and are excited about the long-term potential of that market. Another example of that is our recently announced acquisition of Qzina Specialty Foods North America. Qzina was founded in 1982 and is based in Pompano Beach, Florida. It is a leading supplier of gourmet chocolates, desserts, and pastry products dedicated to the pastry professional. They currently supply more than 3,000 products to serve some of the finest restaurants, bakeries, patisseries, chocolatiers, hotels, and cruise lines throughout the US and Canada.

We believe that this acquisition combined with our existing business in the pastry category positions us as the leading supplier to the gourmet pastry professionals. In addition, it is an exciting opportunity to enter four new markets in Vancouver, Edmonton, Toronto, and Chicago.

We also continue to work on integrating our Michael's Finer Meats and Queensgate Foodservice acquisitions. So far, the integration of each business is going very well. We are beginning to gain traction in selling our specialty products in Michael's customer base as well as bringing proteins into one of our adjacent markets.

We have also now completed the conversion of Queensgate to our core IT platform and are continually adding new specialty products to their offerings. We continue to find many synergies with these new businesses as we integrate them with our existing operations.

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 mid-April, we issued $100 million in guaranteed senior secured notes to Prudential Capital Group through a private placement transaction, which we believe provides us greater financial flexibility in the event we identify strategic opportunities that may require additional capital.

In closing, we are pleased with our start to 2013. If we have been very busy, we continue to execute against our long-term business strategy by building out our core markets, entering new attractive markets that we believe will hold long-term upside for growth. For the remainder of the year, we'll 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 March 29, 2013 increased approximately 42.2% to $139.4 million from $98.1 million for the first quarter ended March 30, 2012.

The increase in net sales was due largely to the acquisitions of Praml in April 2012, Michael's Finer Meats in August 2012, and Queensgate Foodservice at the end of December 2012, which all added approximately $35.7 million or 36.4% of total sales growth for the quarter. Organic growth accounted for the remaining $5.6 million of our sales growth or 5.7% growth.

Inflation was approximately 3.1% for the quarter. As Chris mentioned, deflation in the cheese category continued to moderate in the first quarter year-over-year. However, we did see a pickup in inflation in the dairy categories.

Gross profit increased approximately 35.0% to $35.2 million for the first quarter of 2013 versus $26.0 million for the first quarter of 2012. Gross profit margins decreased approximately 135 basis points to 25.2% from 26.6%, due in large part to the impact of the mix of Michael's, Praml, and Queensgate on our overall mix as well as the pricing impact of dairy and cheese inflation.

Total operating expenses increased approximately 39.4% to $29.3 million for the first quarter of 2013 from $21.0 million in the first quarter of 2012. As a percentage of net sales, operating expenses were 21.0% for the first quarter 2013 compared to 21.4% in the prior year. The decrease in our operating expense ratio is due primarily to increased amortization expense related to the Company's acquisitions and duplicate occupancy cost on our new Bronx, New York facility, which were all offset by lower distribution cost.

A little more granular information as we lead to expenses. Warehouse distribution and selling cost increased approximately $5.8 million, which includes $347,000 of duplicate occupancy costs related to the Bronx facility but decreased 33 basis points as a percentage of sales primarily related to those transportation efficiencies.

G&A costs increased approximately $2.5 million compared to the prior-year quarter, but decreased as a percentage of sales by 9 basis points to 6.3%. Overall, G&A cost increased primarily due to the amortization expense on the Company's acquisitions as well as increased compensation costs. As a result, operating income for the first quarter of 2013 was $5.9 million compared to $5.1 million for the first quarter of the prior year.

Interest expense for the quarter increased $818,000, due to the higher levels of debt related to the Company's acquisitions. Income tax expense remained approximately flat at $1.9 million for the quarter and our effective tax rate remained constantly at approximately 41.6%. Net income available to common shareholders was $2.7 million or $0.13 per diluted share for the first quarter of 2013, compared to $2.6 million or $0.13 per diluted share for the first quarter of 2012.

On a non-GAAP basis, adjusted EBITDA increased approximately 39.8% to $8.3 million for the first quarter of 2013, compared to $5.9 million in the first quarter of 2012. Modified pro forma net income available to common shareholders was $2.9 million and modified pro forma EPS was $0.14 for the first quarter of 2013, compared to modified pro forma net income of $2.6 million and modified pro forma EPS of $0.13 for the first quarter of 2012. Please refer to our press release for a quantitative reconciliation of those non-GAAP measures to their most comparable GAAP measures.

As Chris mentioned, we're very happy with the additional $100 million of senior secured notes we issued on April 17. We think this was an appropriate next step in our capital structure to support our long-term growth at a very attractive rate.

Also to note, as we said in the release, just yesterday, Qzina is expected to generate approximately $60 million to $65 million in annualized revenue for 2013. The acquired business is expected to contribute modestly to our earnings in late 2013, as the business is being integrated. And we expect Qzina to contribute approximately $0.05 to $0.06 in 2014, once we are complete with that integration.

Now, onto our outlook for the remainder of 2013. We are updating our guidance for the full-year 2013 to take into account current trends in the business, as well as the acquisition of Qzina and the additional interest expense on our senior notes. As such, we expect the following. Revenue between $650 million and $690 million, adjusted EBITDA between $46 million and $51 million, net income per diluted share between $0.84 and $0.94, and modified diluted EPS between $0.88 and $0.98.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Karen Short with BMO. Please proceed with your question.

Hey, there.

Hi, Karen.

Hi, Karen.

Hi, just a couple of questions, you -- many retailers have kind of echoed what you said regarding business trends improving for the quarter. Just wondering if you saw the strength hold into April?

Yes, we did, Karen. We saw it up about 1 percentage point.

It sounds great. And then, with the acquisition of Qzina, the $60 million to $65 million in annual revenues, does that embed any cross-selling or is that the actual run rate now?

That's their actual run rate now.

Okay.

Or their forecasted run rate for 2013, right.

Got it, okay. I mean, obviously, there will be cross-selling capabilities, I would assume it. But I guess the -- so maybe you could just clarify that and then I assume you also have the ability to cross sell in Canada now, is that fair?

Well, obviously, that was one of the attractive pieces in acquiring them, but it's long-term. We are going to formulate a great plan for Canada. We see Chefs' Warehouse obviously entering those markets and becoming a specialty broad line besides being a pastry specialist. So that is the plan for probably more into 2014.

Okay. And then, just looking to your guidance, obviously, you have higher EBITDA and revenue guidance, but your EPS guidance wasn't changed. I am assuming that's just because interest expense expectations come up.

Correct, yes, we factored into account all the trends in the business, higher interest on our debt facility and then the contribution from Qzina, right.

Okay. And so where does adding another $100 million on to your net debt from this balance sheet data as we're looking enterprise value. Correct?

It actually ends up being -- we had some net cash up until the point in time we ended up closing on Qzina. So we've paid down a little bit, I'd encourage you to look at our balance sheet and our earnings release and you'll get a good picture.

Right, okay. And then, just on last question is I guess what's embedded in your topline expectations as it relates to inflation for the full year?

We originally guided and thought it would be somewhere in the 2% to 3% range. I don't think that's meaningfully changed. As I mentioned, we had a little bit of higher inflation than anticipated in dairy, whether that regulates itself or moderates a little bit, everything else overall has kind of been in line with what we've expected.

Yes, it looks like it's kind of moderated at this point.

Okay, great. I'll get back into queue. Thanks.

Thanks, Karen.

Thank you. Our next question comes from the line of John Marrin with Jefferies. Please proceed with your question.

Hi, Chris, John. How are you doing?

Hey.

Hey, John.

How are you?

Good, good. So congrats on the Qzina acquisition and --

Thank you.

[Solid and] very good quarterly performance there. Just couple more questions about Qzina. So it sounds like the deal takes you into four new markets. You're not necessarily baking any synergies into your outlook at this point. But that sounds like there might some overlap in existing markets. Are you looking at cost synergies occurring this year and to the extent that you think it's going to be $0.05 to $0.06 accretive next year, is that topline synergies or cost synergies? And just also can you speak to whether it's accretive on gross margin?

Yes, I think a couple of things, John, as you'd mentioned. Yes, we do expect a lot of cost synergies, that is baked into our guidance for 2014. They currently operate in eight markets, so four of them are overlapping markets. We'll look to rationalizing our routes and things like that and just get more efficient. I think it will take us a little bit longer from a facility perspective just because we need to look at capacity constraints and things like that. But over the course of time, we think it will be -- there will be some nice synergies there. We haven't baked a lot of topline synergies into our model at this point, no. To Chris's point, will it come in 2014 and 2015, absolutely, we expect that.

Yes. Yes, we're looking at them, John; obviously, they complement; we are in the pastry business, the pastry ingredients business, but they're really specialists. So we look at them predominantly as a standalone at this point. We think they have a great runway to grow. And I think what we bring to the table, yes, the cross-pollination, we get to sell each other's accounts. So we're really optimistic that they can grow on their own and then they can complement our ingredient sales to our customers and help us both grow.

Okay. Right. And just a [follow-on terms] question about trends early in the second quarter here. You said that it was up 1%, is that organic growth or --?

Yes, that's organic growth.

Okay. And so inflation has sort of -- is back it sounds like a bit?

Yes, I think it's -- we haven't seen it change much, I think quarter to quarter.

Okay. All right, thanks, guys.

You got it.

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Genuity. Please proceed with your questions.

Hi, thanks. Congrats on the acquisition.

Thanks, Scott.

Right. A little more on Qzina, I was searching through all the markets that we are in, I didn't see all the detail, what were the four markets that they overlap with you?

They are currently -- in the New York Metro area, they are actually in New Jersey, Miami, LA, and San Francisco.

Okay, and is the model similar? Obviously, the product assortment is different, but as far as the delivery model is -- the sales process, is it similar to what's the [practice]?

It is very similar, they are very customer-centric like we are, they have a phenomenal staff of salespeople, a lot of them experts in pastry ingredients, they do a lot of training. There is a lot of expertise in knowing the products to sell them. So we were very excited to get a highly trained sales force to complement ours and we think we could do a lot of cross-selling as we get into it and everybody gets comfortable. Obviously, they introduce us to new markets, so that's a very long-term play and in the markets we're in, we're going to complement each other very well.

Now, this might have a different customer book say in the existing markets than you do, do they open you up to any new type of customer, they are pastry-dessert focused?

They do, they take us into some new channels, new set of customers, so we think it's going to take some time, but I think once we figure it all out, we'll be able to go to their customers that they go out of cruise ship lines which we don't; they do some high-end supermarket chains, especially in Canada, so they do bring us a new customer and obviously we bring them thousands of customers that their products we think will fit into.

Right, and no difference in your kind of formula for integrating a business for this one than any others?

Yes, well, the good thing is we're leaving this one alone for at least a year. So at this point, we have enough on our plates that we thought since they -- we're keeping their facilities and we're keeping management intact, we are going to let them run for a while.

Yes, I think there is a couple of things, Scott, on that front. As I mentioned, there are some opportunities logistically in capturing some operating synergies and cost efficiencies. To Chris' point, we probably will not convert systems until sometime in 2014. We are actually working on an upgrade of our existing JD Edwards platform to a later release, so I think we're going to wait until after that's complete before we convert systems.

Great. And any update on progress, timing, plans for the new New York facility and relocation?

I don't think there's any new news, it's pretty much on track for end of second quarter next year and nothing really new to report.

Okay. And then, just to clarify, the question about April sales, I'm sorry to make the third question about it, I think I confused myself a little bit. I thought you said -- when you said it was up one point, it was one point stronger than what you had seen in the March quarter?

That's correct.

Okay. So it was an acceleration of 100 basis points from --

A modest improvement, yes.

Right, we saw a nice little uptick.

Excellent. Thank you very much.

Thank you. Our next question comes from the line of Andrew Wolf with BB&T Capital Markets. Please proceed with your questions.

Hi, thanks, and good afternoon. Chris, I was wondering if you could update us on some of the decentralized operating structure, the realignment there, how that's going and is that part of the driver of your sales improvement or did you think it's more just the market itself getting stronger?

Well, again, when the market really picks up, make our jobs much easier, but I think you raised a good point, Andy, we put a good amount of talent back into the street closer to our customer as we were talking about. And obviously, we expect to get a return on that investment, so better training, more face time with customers, with salespeople. We've invested and we'll keep investing to be able to continue to do these great acquisitions and obviously drive organic growth.

Great. So right now, it sounds like when you invest in sales, there is a little deleveraging on the sales commission line which is -- but then it drives earnings, right?

I'm not sure I understood your question. Andy, repeat that.

Just I mean the original invest -- the upfront investment in the sales folks, some might guarantee them instead of putting them on straight commission. So, until they become productive, there is a little deleveraging there. So I'm just saying your results for this quarter and until your ramp in the -- if we -- it sounds like I interpreted you right that you are ramping up the amount, your sales coverage. There is going to be some deleveraging on that until the news -- the increased rate of sales coverage on the street.

Yes.

That's what I was getting at.

No, I want to make sure I'm clear on your point. I guess the investment we've been talking about making has really been more on management infrastructure and getting those closer to the field. I'm not sure I'd correlate that to sales commissions or deleveraging around that. So --

Okay. Well, that's all I wanted. So you're not -- your sales expense line is not deleveraging as you add bodies which sometimes is going to happen upfront, because new salespeople --

Yes.

Yes, that's actually more part of G&A than it is sales, those regional managers.

I mean, obviously, when you start adding people, it's a cost. Until you start getting a return on it, your percentage of sales cost does go up and we have been adding people; sometimes, we are trading people, but the investment -- yes, we are all making an investment in sales and we continue to make an investment.

We are and we'll continue, but we're also seeing some better leveraging of SG&A cost. So --

Sure. Now, I'm (inaudible) adding of just food distributors, foodservice distributors --

Yes.

Salespeople in the street. So, I'm not [going] -- I'm just trying to understand where you are at and it's not that the operating structure, I think you're more comfortable with and when the centralized one as you're becoming more natural in the business.

So we are starting to get leverage too. You see that our -- we're down about 42 basis points in our operating expense. So we are starting to get some of that leverage we always talked about.

Sure. No, I see, I'm just talking about this one wine. So that's going to get -- just the sales line itself is going to get better hypothetically as long as the higher -- your regional management structure takes them. Anyway, that's the point I was getting to and --

Got you.

Nice, good to see you. Good quarter and a good acquisition. So --

Thank you.

Thanks, Andy.

Thank you. (Operator Instructions) Our next question comes from the line of Brett Hendrickson with Nokomis Capital. Please proceed with your questions.

Hey, my question was answered, but congrats on the acquisition and I'll talk to you guys offline. Thank you.

Thank you.

That's great. Thank you, Brett.

Thank you. Ladies and gentlemen, at this time, I would like to turn the conference back over to management for any closing comments.

We think the quarter actually was pretty good. We did not have great weather. And even despite the weather not being so kind to us, I think the management team did a great job. I'm really proud of them, and we expect more good news for next quarter. So thank you or joining us and have a good day.