Chefs' Warehouse Inc (CHEF) 2013 Q3 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse third-quarter 2013 earnings conference call.

(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 third-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 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 third-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 third-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 37% over the third quarter of 2012. A gross profit increase of approximately 36% over the third quarter of 2012. And an adjusted EBITDA increase of approximately 24% over the third quarter of 2012. A successful completion of our secondary offering of common stock. We continue to be very optimistic about the long-term health of our business, and saw improvement in our key indicators in the third quarter.

During the third quarter, our number of cases sold grew approximately 5.6% quarter over quarter, and 0.8% sequentially 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 year over year; 5.2% and 6.7%, respectively, after adjusting for the estimated impact of acquisitions.

One observation regarding current trends is that we did see some softness in October case volume. While we believe this was influenced by weakened consumer confidence due to the government shutdown, we remain optimistic for a historically strong holiday season. Our growth strategies continue to be focused on growing 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 continue to invest in people, process and product to ensure we preserve our brand as the elite distributor in food services. Our ability to put reps on the street who are better trained than our competition, with superior products and efficient processes, will be the key to our continued success.

As many of you are aware, during the quarter we successfully completed a public offering of 5.175 million shares of common stock, of which 3.8 million were primary shares. The offering resulted in net proceeds to the Company of approximately $75.1 million, $15 million of which were used to repay outstanding borrowings under our revolving credit facility, with the balance to be used for general corporate purposes, including additional acquisitions. We are very excited about the completion of the stock offering because there continues to be a very robust pipeline of attractive acquisition opportunities. This capital, along with our undrawn revolver, gives us the financial flexibility to aggressively pursue those opportunities. While we are still being selective in both the markets and the product specialties that we pursue, as well as how we structure each opportunity, we remain cautiously optimistic that we will begin deploying some of that capital before year end.

In closing, 2013 is shaping up to be a great year for our Company. We continue to execute against our long-term business strategy by focusing on and building out our core markets, and entering new attractive markets that we believe will hold long-term upside for growth.

And, 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 September 27, 2013, increased approximately 36.7% to $170.6 million from $124.8 million in the third quarter ended September 28, 2012. The increase in net sales was largely due to the acquisition of Queensgate Foodservice in December of 2012, and Qzina in May of 2013. And, to a lesser degree Michael's Finer Meats, which we anniversaried during the quarter. Which all added approximately $35.6 million or 28.5% of total sales growth in the quarter. Strong organic growth amounted to approximately $10.2 million of our net sales growth, or 8.2% growth.

Inflation moderated somewhat from the second quarter, and was approximately 2.7%. We are seeing more consistent inflationary trends across a broad group of categories, although it was more moderate than in the second quarter. Gross profit increased approximately 35.8% to $44 million for the third quarter of 2013, versus $32.4 million for the third quarter 2012. Gross profit margins decreased approximately 17 basis points to 25.8% from 25.9%, due to the impact on sales mix from the Michael's acquisition. Excluding the impact of the Michael's acquisition, gross profit margins increased 44 basis points.

Total operating expenses increased approximately 37.8% to $34.5 million for the third quarter of 2013, from $25.1 million for the third quarter of 2012. As a percentage of net sales, operating expenses were 20.2% for the third quarter 2013 compared to 20% for the prior-year third quarter. The increase in the Company's operating expense ratio is attributable to increased amortization expense related to acquisitions, duplicate rent related to the Bronx New York facility, and higher compensation-related expense, offset in part by lower insurance, bad debt and stock compensation expense.

More specifically, warehouse, distribution and selling costs increased approximately $7.3 million, due mainly to the Company's acquisitions. This includes $400,000 of duplicate occupancy costs related to the Bronx facility. As a percentage of net sales, warehouse, distribution and selling expense increased 55 basis points, primarily related to the duplicate rent and the additional regional and sales management added over the past year.

G&A costs increased approximately $2.1 million compared to the prior-year third quarter. And as a percentage of net sales G&A costs decreased by 38 basis points to 5.7% due in large part to the prior-year one-time stock compensation charge related to the departure of the Company's COO.

Operating income for the third quarter of 2013 was $9.4 million, compared to $7.3 million for the third quarter of the prior year. Interest expense for the quarter increased to $2.3 million from $1 million for the prior-year third quarter, due to the 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 $2.9 million for the quarter compared to $2.5 million in the 2012 third quarter. And our effective tax rate increased, as expected, approximately 191 basis points to 41.5% for the quarter. Net income was $4.2 million, or $0.20 per diluted share for the third quarter 2013, compared to $3.8 million or $0.18 per diluted share for the third quarter of 2012.

On a non-GAAP basis, adjusted EBITDA increased approximately 24.4% to $12 million for the third quarter of 2013, compared to $9.7 million in the third quarter of 2012. Modified pro forma net income was $4.4 million. And modified pro forma EPS was $0.21 for the third quarter of 2013, compared to modified pro forma net income of $4.4 million and modified pro forma EPS of $0.21 in the third quarter of 2012. Please refer to our press release for the quantitative reconciliation of these non-GAAP measures to their most comparable GAAP measures.

Now, onto the outlook for the remainder of 2013. We are updating our guidance for the full year of 2013 based upon our current view of the business and the new share count post secondary offering. We expect revenue between $660 million and $680 million. Adjusted EBITDA between $48.5 million and $51.1 million. Net income between $18.5 million and $19 million.

Included in the updated estimated diluted share count of 22 million shares, we now expect net income per diluted share to be between $0.84 and $0.87, and modified pro forma diluted EPS between $0.88 and $0.91. This guidance is based on an effective tax rate of approximately 41.5%.

With that, operator, we will turn it over for questions.

(Operator Instructions)

Karen Short, Deutsche Bank

Thanks for taking the question. This is Shane Higgiins on for Karen. Real quick, you mentioned the October weakness. Was that pretty broad-based geographically? Or are there any patterns there that you could point to, maybe, that was underlying that weakness?

Coming out of September, which was very strong, and we're watching case counts, something usually has to happen for that to change. There was no financial crash, there was no big world event, other than all the noise with the government shutting down. What we heard from our customers across the country was it just seemed like everybody held back just a little bit. Our customers, their outlook for the holiday season looks very strong, parties are booked. Nothing really has changed. So, the only thing we could -- we've seen maybe a good World Series or other events where people would just stay away little bit. But we are really confused at what happened with October. But we do not really see it as any real major change in our business.

Okay. And you guys, I guess maybe you don't have enough time has passed since the government shutdown ended to get a read on what has happened post?

Again, we watch our business daily and we talk to our customers daily. And nobody really seems to be very concerned about what is happening in their business. So we just think it might have been a blip.

Okay, great. And just on your inflation, it looks like it has been coming down sequentially. It sounds like it's been less volatile here. How should we think about that in the fourth quarter in terms of trends, if that continues to go down? And how does that impact your business or how we should think about margins and sales?

Yes, I think a couple things on the inflation piece. One is, you're exactly right, in that there has probably been last volatility overall. If you remember on the second quarter, the 4.1% inflation was largely driven by dairy. But I think 6 of our top 10 categories actually showed some deflation in that 4.1% number. Whereas third quarter, the 2.7% was a little bit more broad-based.

I think 8 of our top 10 categories were inflationary. But nothing was outlandishly inflationary, like dairy was in the second quarter. So, we think that's actually a little more normal environment. Who knows what a crystal ball will look like, but we typically plan, or went into this year planning for 2% to 3% inflation.

Okay. So, I take it that less volatility -- you guys like to see probably something -- and your customers probably like it to be low single digit and stable.

Absolutely. 2% to 3% of inflation is good.

And a lot of up and down. Besides our protein business, which is a little less margin, our overall business, actually, we took some margin in the third quarter. We did have a little volatility up and down, even though there really was not that crazy inflation or deflation environment. It actually worked out pretty well for us. Looking into the fourth quarter right now, the only category that looks like it has some inflation is protein.

Yes, I saw that with the latest CPI data. Okay, so modest inflation, low volatility is good -- equals good for you guys

We like a little bit of volatility but net-net 2% to 3% inflation is a good number

Okay. And just one last one, if I can squeeze it in here. It looked like the acquisitions you guys mentioned, $35.6 million in sales growth there, that was actually a little better than we were looking for. Can you just talk about maybe what's been driving that strength? And how we should think about the growth, the run rate of the sales growth in those acquired businesses?

Yes, those, it's driven, obviously by Queensgate, Qzina, and then we lapped Michael's during the quarter. So, really only half a month of that number was from Michael's. So I don't know how you tried to model that. That might be part of the equation, too.

Got it. Thanks guys.

Mark Millimuth (sic -- Wiltamuth), Jefferies.

Hi, Mark Wiltamuth from Jefferies. I wanted to ask a little bit about the organic sales growth trends and how you felt about the case line improvement. You did improve sequentially but if you look at a two-year stack chart, it's still eroding sequentially. Maybe you could shed some light on that and how you're feeling about the organic sales trends right now.

I think in general we feel really good about the trends. If you comparing it to a couple of years ago, there were some pretty high organic growth numbers in there. But what we have seen sequentially over the last, probably, four to six quarters I think we feel very good about the trends. If you look at first quarter, I think we were at about 3.8% 3.9% case growth, second quarter was 4.8%, third quarter was 5.6%. So that to us is a very good trend. We did mention a little bit of softness in October. But long term we aim to get back in the high single digit low double digit.

Right. And, again, we look at what is happening with our larger companies, our big hotels, casinos where a lot of value is driven, as well. The parties look -- we're hearing numbers are up. Heard Marriott report today, and '14 is looking stronger than '13. So, all the signs point to we're going in the right direction.

Okay. And on your guidance in early September, it sounded like there was some inflation pressure on margins. And it sounds like maybe only the red meats were a problem here in the quarter? Maybe things abated a little bit in terms of the inflation pressure on margin?

Yes, I think for sure. And I think, as Chris had mentioned, when you strip away our protein business, we actually had about a 44 basis point improvement in gross margins. So, that was a good trend for us.

Okay. Thank you very much.

John Ivankoe, JPMorgan.

Thank you very much. Your largest competitor within foodservice, broadly, not necessarily specialty, there's a lot of conversation in the marketplace about maybe what they've done with their sales management, what they've done with their product selection that maybe is causing some looseness in their street business or their specialty account business, their customer business that you and others could potentially be benefiting from. So, if it's an inappropriate question I apologize. But could you talk about what is happening on a competitive basis? And if you could actually quietly be benefiting from some of the changes that are happening elsewhere?

We would like to benefit, for sure. But we are running a pretty tight playbook. And we are just so different than trying to compare us to a typical broadliner. The way we go to market.

We're in specialty in many different categories, over 10,000 items of specialty. There is not a lot of growth out there, and for us to be growing, obviously, we're taking market share, especially in the new markets we are in. We're obviously looking at what the competition is doing but we have a very long-term strategy that we're trying to execute to. And we're constantly changing the mix of what we are selling, and how we go to market. As much as we are looking at what they are doing, we're pretty much -- we got our noses down and we're trying to take market share and run our playbook.

Great. And then separately, if I may, could you talk about the integration success that you have had from a systems perspective with some of your recent acquisitions? And if all the sales and cost benefit from that integration is currently reflected in the numbers, or that could be a little bit of a tailwind from here?

I think there's a couple of things. The most recent acquisition we did with Qzina, we have not converted systems yet. That was by design. As we've probably talked about before, we're in the process of upgrading all of our JD Edwards systems internally. And I would rather wait until that is finished so we do not go through two conversions there.

We have had some success with Queensgate, which was the deal we did right at the beginning of the year. So they are converted onto our system. And lastly is Michael's prior to that, which, given the meat specialty business, we've decided to wait.

So we've got two acquisitions that we have not consolidated. I would say we will plan in the long run of getting those on our system. And I think that will provide a tailwind for us for sure.

And if there is a way to handicap what your type of acquisition could be upcoming, would it be a geographical acquisition or would it be more product line-focused?

I would say right now, there is possibilities in every category in every geography, from fold-ins to new market chef warehouses. We're pretty busy.

That's great. Thank you.

(Operator Instructions)

Scott Van Winkle, Canaccord Genuity.

Thanks. First, any update on timing in the Bronx facility? Anything new that we should be aware of?

Nothing is changing there, no. We are still working through all the permitting process and construction and building away. So it will be mid next year, we are hopeful.

Great. And talking about the oddity of October being a little off, last year was there anything? Obviously you had the storm that throws off the comparison. Is there anything seasonal we should consider? Obviously it's a big holiday and you talked about your big customers have good party numbers, et cetera. Is there anything else we should think about seasonally or comparison to last year?

I don't think seasonally -- Hurricane Sandy was actually a November, a fiscal month November event, didn't impact October. So, no

Scott, there's nothing on the radar. We just hear it is business as usual and it just a little off. Obviously we're always concerned but I don't think I'm that concerned. I'm seeing the bookings, I'm seeing our core customers extremely busy. So, we're anticipating a very good season.

I think that's good. And then following up on the question about what types of acquisitions might be in the works. I understand you have a lot of stuff. And you gave indications of size. Should we expect the size to be stepping up as the Company grows? I think the ones you're talking about now, maybe a little larger than around the time of the IPO? Is that what the expectation is -- maybe larger acquisitions going forward?

I would say, Scott, right now there is just so much at Chef going on between -- we have multiple companies and regions that we plan to expand that business. And once you consolidate some of that, and maybe do some fold-ins, that is highly accretive. So we do want to continue to do $10 million to $30 million fold-ins. As well as great specialty companies that are out there that give us new territory that could possibly be fold-ins to some of the larger ones we are looking at. And we are. We are looking at from the fold-ins, from the $10 million to $30 millions, to anything from $200 million to $300 million now is in our ballpark. We are very disciplined and they have to meet that filters that we go through to say it could be a great Chefs' Warehouse. But, obviously, the capital we've raised and our line of credit, we are in a great place to do a large one.

Thanks. And, finally, John, now that you have a protein business with different margin structure, does the mix stay relatively the same quarter to quarter? Let's forget the volatility of commodity prices and things of that nature. But the mix of your business now that you have different product categories at different margin levels, does that stay pretty consistent quarter to quarter?

I think the relative mix, for instance, between protein and specialty, yes. They're still serving those generally higher-end customers. So the quarterly cadence of earnings for the protein business is very similar to the specialty business. So I do not think it will change the mix quarter to quarter, other than acquisitions, obviously.

Great. Thank you.

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

We thank everybody for joining us on this call on Halloween. I don't think we'll get a chance to talk to everybody so we are wishing everybody a happy holiday coming up, Thanksgiving. And we will speak to you soon. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.