Chefs' Warehouse Inc (CHEF) 2013 Q2 法說會逐字稿

Greetings. And welcome to The Chefs' Warehouse Second Quarter 2013 Earnings Conference Call. (Operator Instructions)

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 now 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 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 on Form 10-Q, which are available at www.sec.com.

Today, we're going to provide a business update and go over our second quarter results in detail. Then we will open the call for questions.

With that, 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 second quarter results and the continued sequential improvements in our business. A few highlights for the quarter include the following -- an increase in net sales of approximately 48% over the second quarter of 2012, a gross profit increase of approximately 45% over the second quarter of 2012, and an adjusted EBITDA increase of approximately 41% over the second quarter of 2012.

We remain encouraged by the continued improvement in our key indicators but still expect this to be a slow, steady process throughout 2013. In all, though, we believe that our core customers, our business and the broader economy are making progress.

During the quarter, our number of cases sold grew approximately 4.8%, adjusted for acquisitions, which was consistent with our expectations. In addition, our number of unique customers and placements also grew in the mid to high single digits during the quarter -- 5.7% and 7.9% respectively -- after adjusting for the estimated impact of acquisitions.

Going forward, we will continue to focus on growing in our current markets through increased penetration of our existing customers, adding new customers and identifying new markets that we believe present opportunities for future expansion.

We are also very happy with our new greenfield location in Seattle. Albeit small at this stage, we are excited about our progress, and we will continue to invest in sales personnel to drive growth in that market.

We continued to make great progress in our integrating of our recent acquisitions. We recently began leveraging the operations, Queensgate and Michael's Finer Meats, in Cincinnati and the surrounding markets. We are also beginning to capture our initial purchasing and delivery efficiencies with our Qzina acquisition.

We still have a long way to go with these initiatives, but we are very encouraged about these long-term opportunities. There continues to be a very robust pipeline of attractive acquisition opportunities we are exploring. We are being selective in both the markets and product specialties that we pursue as well as the construct of each opportunity. The $100 million in guaranteed senior secured notes that we issued through a private placement in April provides us greater financial flexibility in the event we identify strategic opportunities that may require additional capital.

In closing -- we are pleased with our progress midway through 2013. We have been very busy and continue to execute against our long-term business strategy by building out core markets and 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 Austin to discuss more detailed financial information. John?

Thank you, Chris, and good afternoon, everyone.

Our net sales for the quarter ended June 28th, 2013 increased approximately 48.2%, to $172.2 million from 114.8 million for the second quarter ended June 29th, 2012. The increase in net sales was largely due to the acquisition of Michael's Finer Meats in August of 2012, Queensgate Foodservice in December 2012, and Qzina in May 2013, which all added approximately $45.6 million for 39.7% of total sales growth for the quarter. Organic growth amounted to approximately $9.8 million of our net sales growth, or 8.5% growth.

Inflation was approximately 4.1% for the quarter, while inflation -- or deflation, as the case may be -- was mixed for most of our top product categories. Inflation in the dairy category increased significantly year-over-year.

Gross profit increased approximately 44.5% to $44.0 million for the second quarter of 2013, versus $30.5 million for the second quarter of 2012. Gross profit margins decreased approximately 66 basis points, to 25.9% from 26.5%, due in large part to the impact of the mix of the Michael's acquisition on our overall mix. Excluding the negative impact on gross margins associated with the Michael's business, gross margins decreased approximately 13 basis points, due largely to the impact of the dairy inflation.

Total operating expenses increased approximately 50.3%, to $33.0 million for the second quarter of 2013 from 22.0 million the second quarter of 2012. As a percentage of net sales, operating expenses were 19.4% for the second quarter of 2013, compared to 19.1% for the prior-year quarter.

The increase in our operating expense ratio is due largely to increased amortization expense related to the Company's acquisitions, duplicate occupancy cost on our new Bronx, New York facility, and increased compensation-related expenses, which were all partly offset by efficiencies in distribution costs.

More specifically, warehouse distribution and selling costs increased approximately $7.2 million, due mainly to the Company's acquisitions. This includes $371,000 of duplicate occupancy costs related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling expenses decreased 24 basis points primarily related to the efficiencies in transportation on cost.

T&A costs increased approximately $3.0 million compared to the prior-year second quarter. And as a percent of net sales, G&A costs increased by 53 basis points to 5.8%.

Excluding amortization of $1.2 million in the second quarter of 2013 and $277,000 in the second quarter of 2012, G&A costs increased by five basis points as a percent of net sales over the prior-year quarter.

Operating income for the second quarter of 2013 was $11.1 million, compared to $8.5 million for the second quarter of the prior year. Interest expense for the quarter increased to $1.9 million from $895,000 for the prior-year second quarter, due to higher levels of debt related to the Company's acquisitions, as well as the higher interest rate associated with the Company's recently issued senior notes.

Income tax expense was $3.8 million for the quarter, compared to $3.2 million in the 2012 second quarter; and our effective tax rate increased approximately seven basis points, to $41.6 million for the quarter. Net income available to common shareholders was $5.3 million or $0.25 per diluted share for the second quarter of 2013, compared to $4.5 million or $0.21 per diluted share for the second quarter of 2012.

On a non-GAAP basis, adjusted EBITDA increased approximately 41.5% to $13.6 million for the second quarter of 2013, compared to $9.6 million in the second quarter of 2012. Modified pro forma net income available for common shareholders was $5.5 million, and modified pro forma EPS was $0.26 for the second quarter of 2013; compared to modified pro forma net income available for common shareholders of $4.7 million and modified pro forma EPS of $0.23 for the second quarter of 2012. Please refer to our Press Release for the quantitative reconciliation of these 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 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. Note that the interest cost on this facility is slightly higher than our revolver, which will impact the balance of 2013.

Now, on to our outlook for the remainder of 2013. We are updating our guidance for the full year 2013 and expect the following -- revenue between $650 million and $690 million, adjusted EBITDA between $46.5 million and $51 million, net income between $18.0 million and $19.8 million, net income per diluted share between $0.86 and $0.94, and modified pro forma diluted EPS between $0.90 and $0.98. This guidance is based on an effective tax rate of approximately 41.5% and an estimated fully diluted share count of 21.1 million shares.

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

(Operator Instructions) Andrew Wolf, BB&T.

Congratulations, nice quarter.

Just on the inflation rate increasing -- was that all in dairy? And I heard you say deflation -- were other categories deflating? Or could you give us a little more of a sort of --

Little more color?

-- categorical -- little more color (multiple speakers)?

Yes, sure.

Yes. Of our top 10 categories, for instance, seven of those categories actually showed some modest deflation; three were inflationary. But dairy was the one that was pretty outsized -- it was about 13.3% year-over-year increase in revenue per [case], our measure of inflation. So that was the one that was probably the most abnormal.

Okay.

And in regard to the gross margin statement -- I think you said sort of a pro forma look on gross margin still was a little contraction. Was that due to -- you couldn't pass through the fall rate onto dairy, given that much inflation?

Correct. We think that was mostly the impact of dairy inflation, correct.

Okay.

And then, could you just update us on the build-out of the new facility in the Bronx -- its schedule, it's [non-scheduled] costs, moving, and so forth?

Yes. Nothing really to update from the last call, Andy. It's moving along, and we expect to be in that building, obviously, this time next year. And nothing really out of the ordinary to report.

So that's on track?

That's on track.

I know it's an important move for the Company.

Just one other question, then I'll get back in queue. You were talking a little about cross-selling, or had been asked a little about cross-selling.

Yes.

Particularly with Michael's, now that there's a major center-of-the-plate offering -- could you update us on cross-selling either [protein] into other customers --

Yes --

-- outside of Michaels, and vice versa?

Of course. That has started. We have a whole integration team, very focused on the whole cross-selling between Michael's and Queensgate. And I think it's going as well or even exceeding expectations. And we're very optimistic that we're going to meet all our objectives over the next few years. So that is on target, and it's going very well.

In regards to getting Michael's into New York or Florida -- do you have to have cut shops close to the Broadline facility? Or can the product be shipped? Or is it too heavy? Or can you just help us --

No, Michael's --

-- understand that logistically?

Sure. Michael's has customers all around the country. So they're experts at shipping multi-units around the country. So they easily supply New York customers or East Coast customers. But our big strategy is -- Michael's has tremendous amounts of growth within their Ohio Valley markets and within the 200-mile market that they're in, besides their multi-unit growth. Our long-term growth is to have cut shops strategically located around the country that feed our CW customer base. So that is the long-term strategy that we hope to execute to.

Thank you.

John Marrin, Jefferies.

Nice job, once again, on organic sales growth.

Was hoping you could talk a little bit about the drivers behind the acceleration quarter-to-quarter -- how much was cross-selling, how much was core? And then, maybe if you could just share with us the cadence of business in the quarter -- if you saw any volatility, or how the quarter ended?

Yes. I think we don't break out organic growth between cross-selling and core organic. There are so many products and pieces to that puzzle. I think the piece -- as Chris had mentioned a minute ago, we're really starting to gain some traction on Queensgate and Michael's, for instance, is one of our key opportunities. We're still very early in that process. But we're starting to see some decent traction there. So I'd say that's a small component of organic growth today. I think it will continue to improve, and we expect that to continue to grow.

John, there's a very healthy amount of growth coming from new customer acquisitions. And again, it is a mixture of customers being introduced to us through the companies that we have been buying. So it's coming through cross-selling, and a lot of it is coming through our core process of prospecting and customers who always have been calling us. So a lot of growth comes from new salespeople on the street and new customers that we acquire.

On top of that, we did see a nice increase in penetration of existing customers. And it comes from various sources. Part of it is from new product lines, and part of it is from, again, continuing to educate salespeople. And we have thousands of items in each warehouse. So they have the opportunity, as they get educated, to further penetrate their customers. So we're seeing really good, healthy growth coming from all aspects of our business.

Okay.

You had a second piece to that question (inaudible).

Oh yes, I was just wondering about the cadence of the business for the quarter -- any sign of volatility or choppiness you could share with us?

Yes. We're excited about and happy about kind of the cadence through the quarter. So I'd say June was a little softer than May, but still meaningfully better than April. So there was good continued improvement in all of our key KPIs we talked about.

Right.

July was actually right in line with June, so didn't see a falloff there. I've seen some commentary in the marketplace about July being even softer. But as far as our year-over-year case growth -- which is, I think, the most important one to look at relative to revenue -- that actually was still nicely positive.

Right.

Yes. Even with the rainy June and the extra-hot July, and the Fourth of July falling at a date that really disrupts the week, we were really pleasantly satisfied with the kind of growth we had.

Okay.

All good indicators.

That's great. Great color, thanks, guys.

Let me just ask one more question here. Just to drill down a bit on gross margin -- if you back out Michael's, and you back out dairy inflation -- the gross margin performance was pretty good relative to [mod] model, anyway. Can you talk about some of the strength in the rest of the business, perhaps?

Yes. I think, again -- I think the business is holding strong. We did have the inflation in the dairy, which did impact margin. But overall, we're hitting the streets, we're servicing the hell out of our customers. And we're entitled to make a healthy profit, and we try really hard to keep the bottom line where we think it should be. So overall, I'm very happy with where the margin is and where things are going.

All right. Thanks, Chris and John.

Thank you.

(Operator Instructions) Scott Van Winkle, Canaccord Genuity.

Following up on the question about the cadence to quarter -- more kind of looking forward -- Chris, can you give us an idea of what the sentiment is, if the salespeople are feeling really good about the opportunity more so than they were a couple months ago, a year ago? What's the sentiment like?

I think we have a lot of positive momentum. Again, what we're doing hasn't been done in -- I call it the high-end [casual] for the high-end business -- buying companies and building cultures. So they're seeing the success, they're getting excited about having more lines to sell. They're starting to ask for even more. So we're really excited the direction that -- what we've done, and we're able to execute. So people are starting to believe it. And success is infectious. So we got buy-in from the sales force and from management, and we're really going in a good direction.

When you make an acquisition at any of these three, for example, that started the integration -- is there any material change in how people are compensated, as maybe a little more incentive base, or less? Or anything of that nature?

Not too much on the sales side. I mean, going in, we try not to disrupt them too much. Over the course of time, will there be a little bit of uniformity around our sales comp plan? Probably over the course of time. But I don't think it's going to be a significant wholesale change for these guys.

We've always been a company that tries to create opportunity for our employees. We're always trying to find ways to motivate, incentivize. So it's really the opportunity to sell more product to the same customers and acquire new customers. That's how everybody makes more money. So creating those opportunities creates the excitement. And I think we're seeing the effects of that.

Got you.

And then, John, the gross margin -- you talked year-over-year for mix, and inflation impact. How about sequentially? It was up sequentially while down year-over-year. Is that because of Qzina? Can you talk about it, from Q1 to Q2?

Yes. Q1 to Q2 -- I think when you strip out Michael's -- obviously Michael's and Praml had a bigger impact. So in the first quarter, Praml impacted the first quarter. Whereas we lapsed at, I think, April 26th or 28th. So that really didn't have much of an impact in the second quarter, so that was a piece of the puzzle.

We did own Qzina for two months of the year. They're probably a couple basis points -- or a couple hundred basis points, I'm sorry -- higher than our average. But that really didn't have a huge impact on that front. They're small enough that it was really not that big a deal.

Okay.

And then, the inventory level -- did Qzina come with a lot of inventory that we would see the sequential increase?

They did, yes.

Yes. I think that's an opportunity for us over the course of time. Each of their facilities -- they had eight facilities doing roughly $65 million in revenue. So they had a lot of inventory at each location. In the long run, one of our big opportunities with Qzina is integrating their operations with our existing operations that we overlap in four markets. So that will help operational costs, it'll help inventory turns, it'll help a lot of things.

Yes. There's tremendous amounts of SKU rationalization that down the road we will achieve. Because we do sell many similar types of product. Right now, the most important thing was to hold the customers that they have and get their salespeople aboard, believing that they can cross-sell as well. And over time, as that business grows, the inventory gets more balanced.

So my belief is that pastry business -- we can double it. And as you grow your inventory, you already have it; you're just going to turn it faster. Because you're such a large importer, and you have to carry such a wide SKU base, which is really the attraction to customers who do buy from Qzina. Because they do have so many different types of products. It is their strength. But as that business continues to grow, the inventory starts to make more sense, you'll get more turns.

Great. Thank you.

Ladies and gentlemen, this is the end of our Q&A portion and our Conference Call for today. You may disconnect your lines at this time.