Chefs' Warehouse Inc (CHEF) 2014 Q1 法說會逐字稿

Greetings and welcome to the Chefs' Warehouse first quarter 2014 earnings conference call. 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 2014 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 estimated EBITDA and adjusted EBITDA as well as both historical and estimated 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 estimated 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, go over our first quarter results in detail and review our updated 2014 guidance. Then, we will open the call for questions.

With that, I would like to turn the call over to Chris Pappas. Chris?

Thanks, Alex, and welcome to all who are listening today. As expected, our first quarter results were significantly impacted by the severe winter weather affecting many of our key markets. While we can't change the weather, we are extremely happy that more seasonal spring weather has started to arrive in the Northeast.

In addition, as we mentioned on last quarter's call, the cadence of Allen Brothers' earnings is significantly weighted towards the fourth quarter, which is due to the fact that nearly 50% of the revenue in Allen Brothers' business to consumer channel is generated in the holiday season, while the promotional spend in the B2C channel the spread throughout the year. With that said, our results for the quarter were in line with our expectations.

Now, moving on to our results. A few highlights include the following. An increase in net sales of approximately 34% over the first quarter in 2013, a gross profit dollar increase approximately 34% over the first quarter of 2013, and an adjusted EBITDA decrease of approximately 3% over the first quarter of 2013, reflecting investments in infrastructure as well as the cadence of earnings from our recently acquired businesses.

During the first quarter, our number of cases grew solidly over 3%, over the first quarter of 2013, adjusted for acquisitions. In addition, our number of unique customers and placements also grew approximately 7% and 6% respectively versus the prior-year quarter, after adjusting for the estimated impact of acquisitions.

Weather is obviously out of our control, but we do want to point out that results outside of the Northeast and Mid-Atlantic regions continued to be very strong during the first quarter while the regions is impacted by weather were relatively flat year-over-year. While we started to see glimpses of spring, April volume trends were comparable to what we saw in the first quarter. However, we did see continued inflation, primarily in the dairy category.

Our growth strategy continues to be focused on three things; 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. Our recent investments in people, processes and products are beginning to bear fruit, but we still have much work to do. The integration team is working on some shorter-term opportunities, which I will describe in a minute. We also have longer-term opportunities to consolidate facilities in markets like Los Angeles, San Francisco, Las Vegas, and Miami that will drive greater revenue and cost opportunities.

The integration team, which we began to assemble in December, has been focused on systems upgrades, sales training, and working with our newly acquired companies like Allen Brothers to expand their footprint within shops warehouse. We continue to work on upgrading and integrating the Allen Brothers and Michael's technology platforms, which is a step towards enabling us to leverage the Allen Brothers' e-commerce platform. We will be able to give you more details around the project in the coming months as our project plan is flushed out.

As we said on our fourth quarter call, we were considering opening a new distribution center in the Greater Chicago area. On April 30, we signed a new lease for a 100,000 square foot distribution center and have hired prudent market President to lead our Chicago operation. We could not be more excited about having a President in one of the top markets in the United States. We believe this market affords us significant long-term opportunities. John will talk about the financial implications of our Chicago expansion in a moment.

There continued to be many options presented to us for acquisitions. We are actively looking at those that meet our criteria and believe that there are meaningful additional attractive opportunities for us to capitalize in 2014. With weather issues now hopefully behind us, we could not be more excited about 2014. We will continue to focus on building out our core markets and entering new ones and attractive markets that we believe will have 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 March 28, 2014, increased approximately 34.3% to $187.2 million from $139.4 million in the first quarter ended March 29, 2013. The increase in net sales was the result of acquisitions of Qzina Specialty Foods and Allen Brothers during 2013, as well as organic growth. These acquisitions accounted for approximately $36.4 million of our sales growth for the quarter or 26.1% of our 34.3% growth over the prior-year quarter.

We estimate that weather impacted us by just under $2 million for the quarter, primarily in the Northeast and Mid-Atlantic markets. Inflation increased 150 basis points sequentially and was approximately 5.3% for the quarter. We particularly felt the uptick in inflation in dairy, cheese, and the protein categories.

Gross profit increased approximately 33.5% to $46.9 million for the first quarter of 2014, versus $35.2 million for the first quarter of 2013. Gross profit margin decreased approximately 14 basis points to 25.1% from 25.2%, due mainly to the increased mix of protein sales resulting from our acquisition of Allen Brothers, offset in part by the margin contribution from Qzina.

In addition, despite higher inflation and the challenge of passing those increases on to customers, our core specialty product margins remained strong. Total operating expenses increased approximately 44.9% to $42.4 million for the first quarter of 2014 from $29.3 million for the first quarter of 2013. The increase is due primarily to the addition of the acquired businesses during the past year, as well as continued investment in infrastructure.

As a percentage of net sales, operating expenses were 22.7% for the first quarter of 2014 compared to 21.0% for the prior-year quarter. The increase in our operating expense ratio is attributable to the higher net freight costs and catalog advertising costs at the Company's Allen Brothers subsidiary, higher delivery labor cost in our core business, increased investments in management infrastructure and higher professional fees, including the previously disclosed investigation costs related to Michael's.

As we noted on our year-end call, the cadence of earnings from Allen Brothers is impacted in part by their significant promotional spend throughout the year related to catalog mailings. Warehouse distribution and selling costs increased approximately 43.0% due mainly to the Company's acquisitions and the investments in regional management infrastructure we talked about. This also includes approximately $462,000 of duplicate occupancy costs, related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling costs increased 97 basis points, again primarily related to the higher delivery labor costs, higher freight and promotional spending at Allen Brothers.

G&A expenses increased approximately 49.4% to $12.9 million for the first quarter of 2014 compared to $8.6 million in the prior-year first quarter, due in large part to the Company's acquisitions. As a percentage of net sales, G&A cost increased 70 basis points to 6.9%. Adjusted for $395,000 of investigations costs related to Michael's, G&A expenses were 6.7% of net sales. The increase in G&A expense ratio relates primarily to the increased professional fees, infrastructure costs related to our purchasing and newly formed integration teams, as well as stock compensation costs.

Operating income for the first quarter of 2014 was $4.5 million compared to $5.9 million for the first quarter of the prior year. Interest expense for the quarter increased to $2.1 million from $1.4 million in the first quarter of last year 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 senior notes issued in April 2013.

Income tax expense was $1.0 million for the quarter compared to $1.9 million in the 2013 first quarter, and our effective tax rate was approximately 41.5% for the quarter. Net income was $1.4 million or $0.06 per diluted share for the first quarter of 2014 compared to $2.6 million or $0.13 per diluted share for the first quarter of 2013.

On a non-GAAP basis, adjusted EBITDA decreased approximately 3.2% to $8.0 million for the first quarter of 2014, compared to $8.3 million for the first quarter of 2013.

Modified pro forma net income was $2.0 million and modified pro forma EPS was $0.08 for the first quarter of 2014, compared to modified pro forma net income of $2.9 million and modified pro forma EPS of $0.14 for the first quarter of 2013. The decrease in modified EPS was due in large part to the higher anticipated interest costs and the increase in number of shares outstanding related to the Company's common stock offering completed in September of 2013. Please refer to our press release for the quantitative reconciliations of these non-GAAP measures to their most comparable GAAP measures.

Now, on to our outlook for 2014. As Chris mentioned, we are excited about our opportunity to build out our Chefs' Warehouse in Chicago market. We disclosed on our last earnings call that we expect that the cost from this initiative to be between $1 million and the $3 million range, depending on the path we took in that market. We are currently planning one greenfielding this facility and leveraging our Allen Brothers' presence where possible. And therefore, our start-up costs will consist primarily of occupancy cost and payroll as we work to build volume.

Consequently, we are adjusting our expectations to incorporate this initiative. We continue to estimate that revenue will range between $810 million and $840 million. And taking into account our Chicago expansion, we now expect adjusted EBITDA to be between $47 million and $52.5 million. Net income to be between $14.3 million and $16.8 million and net income per diluted share to be between $0.57 and $0.67, and modified pro forma EPS to be between $0.63 and $0.73.

This guidance is based on an effective tax rate of approximately 41% for 2014, at an estimated diluted share count of 25 million shares.

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

Thank you. Ladies and gentlemen, at this time, we will now be conducting our question-and-answer session. (Operator

Instructions) Karen Short, Deutsche Bank.

Hi, thanks for taking my questions.

Hey, Karen.

Hey, a couple of questions just on Chicago. Can you maybe talk first about when do you think that distribution center will be operational? And then, can you maybe break out how you -- how those -- I'm assuming the $3 million change in EBITDA is almost entirely related to Chicago as it relates to the build-out costs, but can you maybe kind of give some buckets on that?

Sure. Yes, the $3 million is all related to Chicago and its buildout. In the announcement, we've already hired a Regional Vice President. We are hoping to be in the new building, Karen, in the early fourth quarter. So, we're in the process right now of hiring salespeople and starting to build our team for that business, which obviously we're very excited about. That's the market that the biggest market that we're not in and we've been waiting for this for a while.

Yes. And the other thing, Karen, related to the $3 million. Chris is correct in that it's almost all Chicago related. Most of that will be in the third and the fourth quarter, obviously as we ramp up. People -- we'll have a little bit of cost in the second quarter but (inaudible).

Okay. And then, I guess just you had talked that you might go greenfield versus an acquisition. I mean, obviously, I would have preferred I guess an acquisition, but can you maybe just discuss the decision to go Greenfield any other acquisitions?

Well, again, we're not opposed to doing one. I mean in San Francisco, kind of the same scenario took place where we've built our warehouse and we had a very small business; and then, as soon as we opened and hit the street, we were able to do another two or three acquisitions. So, we expect, I mean, we've looked at a bunch, and we continue to look at acquisitions, but without the Allen Brothers brand and our presence with Qzina was strong enough to actually launch and we have a lot of clients that are in Chicago, Karen, plus hotel groups, which we really expect to do a lot of business with, and a lot of people that were encouraging us to open. So it's sort of a greenfield, but we are anticipating obviously doing a lot of business pretty quickly in Chicago; and if history repeats itself, we'll probably end up doing a few acquisitions as well.

Okay. And then, just on inflation, wondering what you -- I mean obviously, when you had your last call inflation in protein or center plate had been accelerating. But I'm assuming you expected that when you had your previous guidance, but I guess -- or when you gave your guidance on your fourth quarter call, but just wondering if you're seeing any dampening impact on demand from the higher inflation, especially in center plate?

I think there is a possible shift in mix. So again, we've had historical high prices. Chefs are very resourceful. So unless you are a super high-end steakhouse and you're stuck with having to sell, strips and revise Chefs' summary resources so they start mix it up, as they did before. They start to sell different cuts to get their average food cost down.

So, a bunch of that is going on, but I don't think there is less demand for beef in our type of a clientele; at the same time, chicken sales are up and pork had the same problem as beef, they had the -- unfortunately, they had that very bad incident where they had to kill a lot of the pigs due to that spread of disease. So, there's a lot of headwind in protein, for sure.

Okay. And then, just last question, your inventory was up almost double the sales increase. Is that related to the transition to the new facility? Is there anything to talk to there?

Yes, I'm sorry, repeat that.

She said double the inventory.

Yes. Well, it's relative to sales. So --

Yes, [about the sales]. Yes.

Right. So, we -- no, I think just timing wise, it's just a cadence of quarterly revenue relative to inventory volumes. So, no, it's not -- there is nothing unusual there. And all of our turns in our respective businesses are right in line with where we expected to be ledger wise and things like that. So --

Great, thanks. I'll get back in queue.

Thanks, Karen.

Thank you. Andrew Wolf, BB&T Capital Markets.

Hi, good afternoon.

Hi, Andy.

Hi, Chris, John. On the gross margin, been a little better behaved year-over-year. I guess two questions, one is on the increasing inflation guarantees, it appears you were able to pass most of that through to the customers? That's the first one on inflation.

Yes, I think our team did an excellent job passing a lot of that inflation on to the customers, Andy, you are absolutely right.

Yes, in our meat businesses, net-net, there was a little bit of a challenge in our inflationary costs [relative to be] and pass it on, but in our core business, say we'd actually really strong. So gross margins held up very well.

Okay. And then, I guess last quarter, Michael's had their -- appeared to have quite a hiccup in the gross margin and I thought it was going to persist, but because of the pricing readjustments, but maybe it's because Allen Brothers is blending in with a better margin, I'm not really sure. But could you just give us a sense of how, now that you've got almost a $200 million business in meat, did the gross margin improve and was it better managed over at Michael's or was it mainly the mixing in of Allen Brothers?

Yes, I think there are two things, one, Allen Brothers is a little bit lighter margin, especially given the fact that they don't have as much B2C business at this time of year Michael's was down slightly as we expected and to your point, as you would expect, but they actually did a very nice job managing through that. So net-net, our meat business was lower than our specialty business. But Michael's [said] real nice job and we saw a little bit of pressure in gross margins and the meat just with inflation.

Yes, well said.

Okay.

I think the tremendous upswing in prices always, you can only do your best and as it normalizes, customers get used to it. So it's part of the business.

Okay. Moving on just to sales, it looks like you lost a 1.5% to the weather. So the real sale was around 3%. So, it sounds like weather adjusted around 4.5%. But then, Chris, if I heard you right, you said you run around 3% in April. I know there is Easter this year which hurts, I think. So, I mean what should we be thinking of the cadence of real sales and really what -- do you think things are going to pick up or is it --?

Again, with the weather, I mean April was still not great weather in the Northeast. So, I was reading an American Express statement the other day that was showing how they saw the major impact of weather in their clientele and we kind of saw the same thing; when the weather is good, we see much stronger results. We're not seeing anything, Andy, that says that the consumer is spending less, it's actually the opposite. So we're very optimistic to get some good weather. I mean, all our country clubs opened in April and did no business. So we're very optimistic. Once the weather gives us a break that, again, as you can see, we are obviously spending money hiring salespeople, sales managers, launching new categories. So I mean we hit our internal budgets. So, we think we're on track and hopefully the weather start to be in our favor, we expect a really good spring.

Alright, that's it from me. Thank you.

Thank you, Andy.

Thank you. (Operator Instructions) Mark Wiltamuth, Jefferies.

Hi, good afternoon. On the new DC in Chicago, how much capital is going to be going into that versus expense? And how much firepower do you have left on the balance sheet to do acquisitions in the remainder of the year?

Yes. So let me take the second piece of that first. We've got about $28 million worth of cash on the books at this point and an undrawn revolver, which is about $140 million. So plenty of firepower. Chicago will be relatively limited as far as CapEx, that's a leased facilities that the landlord is building out for us. So, it'll all be kind of P&L expense as opposed to CapEx for Chicago.

Okay. And how big is this and how much could you support in terms of revenue out of that facility?

It's a 100,000 square feet. And with the mix of protein business, which we'll run out of there, plus the regular CW business, I could foresee doing $150 million to $250 million out of that building.

Okay. Alright, thank you very much.

Thank you.

Thank you. Karen Short, Deutsche Bank.

Hi, I just wanted to follow up on depreciation, so -- and actually, sorry, the timing of the move into the new facility in the Bronx. Any update on that timing? And then, on depreciation, I am assuming depreciation will ramp once you actually -- once that facility goes live or -- and if so, how much will depreciation ramp based on that?

Yes. Most of the depreciation, it will start to ramp a little bit later in the year once we're starting to utilize the facility. We won't be fully in and fully utilizing the facility until beginning of 2015. So, it would really be a 2015 issue more than 2014. The other thing I'd point out is the other area of depreciation that will start to tick in in 2015 is our IT project. We've been upgrading our JD Edwards platform. The total initiative there is about $5 million that will get amortized or depreciated over by five years -- seven years, I am sorry, not five years.

As far as dollar amounts, so we're investing about $20 million -- just under $25 million in the Bronx, most of that will be longer-lived, 25 years or 30 years. Refrigeration systems and racking obviously will be shorter than that. So we haven't finished our cost allocation method. So, I'd rather steer away from guidance for 2015 here.

Okay, great. Thanks, that's helpful.

Okay.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

We're very excited about Chicago and we're excited about spring hopefully, finally arriving; and we thank, everybody, today for joining us and we look forward to our next call. Thank you very much.

Ladies and gentlemen,this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.