Chefs' Warehouse Inc (CHEF) 2014 Q2 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse second-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 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 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 in 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 on form 10-Q, which are available at www.SEC.com.

Today we're going to provide a business update, go over our second-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.

The second quarter was mostly in line with our expectations, as we continue to see sequential improvement in customer and case growth during the quarter for our core specialty distribution business. A few highlights include the following: an increase in net sales of approximately 25% over the second quarter in 2013; a gross profit dollar increase of approximately 19% over the second quarter of 2013; and adjusted EBITDA decrease of approximately 10% over the second quarter of 2013, reflecting inflationary pressures, investments in infrastructure, as well as the cadence of earnings from our recently acquired businesses.

During the second quarter, our number of cases grew in excess of 3% over the second quarter of 2013 adjusted for acquisitions. In addition, our number of unique customers and placements also grew approximately 9% and 5% respectively versus the prior year quarter, after adjusting for the estimated impact of acquisitions.

We continue to see positive trends across the country in our specialty distribution business. Our overall growth and unique customers, placements, and cases was very strong, particularly in many of our markets on the West Coast and in the South where we are seeing double-digit case growth, where we believe our investment in regional management infrastructure is continuing to gain traction. In addition, we began our move into the new Bronx facility this month and expect to be fully operational in the first quarter of 2015.

As for inflation, we continue to see pressure in the dairy and cheese category, which John will touch on later. We also experienced inflationary pressure on margins and proteins, particularly at Allen Brothers.

Margins at Allen Brothers were not consistent with our expectations this quarter due to beef pricing and a lag in passing those rising prices onto customers. We began implementing solutions to improve procurement as well as our ability to pass on cost increases in a more timely manner. We do believe that this acquisition will be very good for the long-term, but results may be a little bumpy as we work on implementing best practices and better discipline within the business.

While the integration of both Allen Brothers and Michael's has been bumpy at times, we believe that adding center-of-the-plate offerings to our portfolio is extremely beneficial in the long run. Our research shows that customers that buy center-of-the-plate from us spend three times as much on our specialty items as other customers.

Our investments in people, processes, and processes continue to bear fruit. The integration team, which began to assemble in December is continuing to be a valuable addition. The team has been very involved in our system conversion and upgrades, which we will continue to roll out through early 2015.

Our efforts in the greater Chicago area are still progressing. As we said previously, on April 30 we signed a new lease for a 100,000 square foot distribution center, which is expected to open by year-end. We have also hired a proven market leader to lead our Chicago operation and have started to recruit seasoned salespeople in the region. We believe this market has the potential to be our third largest market and affords us significant long-term opportunities.

There continues 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 our core business performing well, a plan to improve performance at Allen Brother,s and the right people and processes in place, we feel that we are positioned well for the future. We will continue to focus on building out our core markets and entering new 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 June 27, 2014 increased approximately 25.3% to $213.1 million from $170.2 million in the second quarter ended June 28, 2013. The increase in net sales was the result of the acquisitions of Allen Brothers and, to a lesser degree, Qzina during 2013, as well as organic growth. These acquisitions accounted for approximately $26.0 million of our sales growth for the quarter or 15.3% acquired growth over the prior-year second quarter.

Inflation increased 13 basis points sequentially and was approximately 5.4% for the quarter. As Chris noted, we particularly felt the uptick in inflation in the dairy and cheese categories, as well as significant margin pressure in the protein category as a result of not passing through our increased cost.

As Chris noted earlier, our organic case growth, adjusted for the impact of acquisitions, improved sequentially to 3.4% in the second quarter. And in addition, our unique customer count and placements grew 8.6% and 4.7%, respectively, versus the prior-year quarter.

Gross profit increased approximately 19.0% to $52.4 million for the second quarter of 2014, versus $44.0 million for the second quarter of 2013. Gross profit margin decreased approximately 129 basis points to 24.6% from 25.9%. A continued uptick in inflation and the challenge of passing those increases on to customers pressured margins in our core specialty business slightly, which decreased 24 basis points, again primarily in the dairy and cheese categories. However, the increased mix in protein sales and the acquisition of Allen Brothers significantly impacted margins during the quarter.

Total operating expenses increased approximately 32.9% from $43.8 million for the second quarter of 2014, from $33.0 million for the second quarter of 2013. The increase was due primarily to the addition of the acquired businesses during the past year, as well as our continued investment in infrastructure. As a percentage of net sales, operating expenses were 20.6% for the second quarter of 2014 compared to 19.4% 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, increased investments in management infrastructure and higher professional fees related to integrating our acquired businesses, as well as the previously disclosed investigation costs related to Michael's.

Warehouse, distribution, and selling costs increased approximately 28.3% due to the Company's acquisitions and the investments in regional management infrastructure, as well as the higher freight and promotional spending at Allen Brothers. This also includes approximately $405,000 of duplicate occupancy costs related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling costs increased 34 basis points, again primarily related to the higher freight and promotional spending at Allen Brothers.

G&A expenses increased approximately 43.9% to $14.0 million for the second quarter of 2014 compared to $9.7 million in the prior year quarter, due in large part to the Company's acquisitions. As a percentage of net sales, G&A costs increased 84 basis points to 6.6%, and the increase in G&A expense ratio relates primarily to the increased professional fees and infrastructure costs related to our purchasing integration teams and the addition of Allen Brothers. Adjusted for approximately $667,000 of unusual items related to the investigation and in integration costs, G&A expenses were up approximately 6.2% of net sales -- I'm sorry, were approximately 6.2% of net sales.

Operating income for the second quarter of 2014 was $8.9 million compared to $11.1 million for the second quarter of the prior year. Interest expense for the quarter increased to $2.1 million from $1.9 million the second quarter of last year due to the higher levels of debt related to the Company's acquisitions, as well as a higher interest rate associated with the Company's senior notes issued in April of 2013.

Income tax expense was $2.6 million for the quarter compared to $3.8 million in the 2013 secondquarter and our effective tax rate was approximately 41.0% for the quarter.

Net income was $3.8 million or $0.15 per diluted share for the second quarter of 2014 compared to $5.3 million or $0.25 per diluted share for the second quarter of 2013. On a non-GAAP basis, adjusted EBITDA decreased approximately 9.8% to $12.2 million for the second quarter of 2014 compared to $13.6 million for the second quarter of 2013.

Modified pro forma net income was $4.5 million and modified pro forma EPS was $0.18 for the second quarter of 2014, compared to modified pro forma net income of $5.5 million or $0.26 modified pro forma EPS for the second quarter of 2013. The decrease in modified pro forma EPS versus the prior year was due in large part to the increase in number of shares related to the Company's stock offering completed in 2013. Please refer to our press release for the quantitative reconciliations of these non-GAAP measures to their most comparable GAAP measures.

In regard to our outlook for 2014, we're adjusting our expectations to incorporate our first-half results as well as trends we are seeing in the business. We estimate that revenue will range between $820 million and $840 million. Adjusted EBITDA will be between $46 million and $50 million. Net income will be between $14.3 million and $16.0 million and net income per diluted share will be between $0.57 and $0.64, and modified pro forma EPS to be between $0.63 and $0.71. This guidance is based on an effective tax rate of approximately 41% for 2014 and an estimated diluted share count of 25 million shares.

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

(Operator Instructions) Our first question comes from the line of Mark Wiltamuth from Jefferies.

Chris, maybe you could talk a little bit about your plans to kind of manage the -- meat inflation moving forward since the proteins are such a bigger part of the business now.

Sure, well, we did a pretty good job in just about all our divisions, managing that inflation. Unfortunately, our recent purchase in Chicago, we're still in the infant stages of -- we actually do have a much bigger experienced management team that joined us over the last few months and is doing a pretty good job going forward managing a lot of that, the price increases, and trying to pass it along. It's just we had unprecedented increases. You have cattle futures at an all-time high. So it's kind of -- they always say it's a once in a lifetime that you see something like this happen so quickly and sneak up on us. But it's process, it's putting in the procedures that we put in at Michael's -- and they did a great job managing through this. And our goal is to have the same process being executed in all divisions, especially now at Allen Brothers and we'll do a much better job in the future.

And John, on the margins, the gross margin decline in the quarter, how much of that was just the mix shift of adding the Allen Brothers to the mix versus failure to pass through margin?

The overall change in margin was about 129 basis points, 130 basis points. About 24 basis points of that was in our core distribution business. As we mentioned on the call, that was primarily dairy and cheese inflation and just some margin pressure there. So of the remaining 100, 105 basis points, I'll come back to you with a split between failure to perform and just the overall mix. I would say order of magnitude, it was probably two-thirds performance, one-third mix.

Okay. And if you could just maybe talk a little bit about -- we saw that filing that you're looking -- it looks like you're going to raise $15 million of debt for Las Vegas DC. If you could talk about that a little bit and what kind of implications that can have for expenses as we look out the next few years.

Yes, actually it's not that much. We amended our bank facility. We had a cap as far as other nonrevolver debt in our credit facility and so we expanded that a little bit to allow -- it's up to $15 million of debt to fund our Las Vegas facility. So we've already spent about $13.5 million -- I'm sorry, $3.5 million of the $13.5 million for the Vegas facility. So that construction spend will probably come between August and March of next year. So we expect to be up and running with our new Vegas facility probably by middle of next year, somewhere in that target.

Thank you. Our next question comes from Andrew Wolf from BB&T Capital Markets.

Thanks, good afternoon. Chris, the 10% case growth in the West Coast and I think you said the South -- I guess you mean Florida -- what's driving that? You mentioned management. Are you adding sales people too and is it sort of on the new customer side, or is it a penetration drive? Or -- if you could you give us a little color?

Andy, it's all of the above. I think I said all along we've been making investments in people, so we've hired a regional vice president. We've hired sales managers. We've hired salespeople. So the investment is paying off. We actually had a really good quarter. I said 21 out of 22 divisions did a great job and performed. Our new baby obviously lagged a little bit, but we're very optimistic to get that up and running and to perform like the rest of our company. So it is. The people are performing, our systems. We're still in the midst of completing our upgrade of our enterprise system. So a lot of moving parts. We've swallowed a lot and the new facilities are going to really help us in efficiencies and able to add new categories. And that's why we have been adding these people and they're starting to pay dividends.

And I guess as I try to back into what the other rest of the country did, the East, New York, and the Mid-Atlantic primarily, you've got around maybe a 2% case number, something like that. So first of all, is that in the ballpark? And secondly, was that some of the hangover weather in April and has the recent months gotten any better? Or is that just -- is the region just depressed or is there something competitively going on?

Actually, the Northeast, all divisions are pretty much either at or above budget. So they performed really well. Case growth was great. Obviously, more is better but we had -- the weather didn't help us but we're seeing some really good, strong signs of penetration. Our customers are doing well and our new sales staff is starting to perform. So we're firing on most -- most pistons are really firing well.

And capacity in New York, obviously that's where a lot of the growth, the future growth, will come once we're in a new facility and can add some categories.

Okay, yes, that's -- I should have thought of that. Great. And just on gross margin, I think you called out -- originally, you said you couldn't pass through the pricing increase and -- I think in protein -- and that sounds to me like a competitive dynamic.

Yes. Well, let me give you --

But later on you started referring to it more as sort of underperformance. So can you help me understand what the root of that? I know you're kind of (multiple speakers)--

Let me give you a little more clarity. We always said 1%, 2% inflation is really healthy. I think the quarter came in at about like 5.4%. So these are crazy numbers for the wholesale business to have that kind of inflation. So our core business passed along 99-point-something percent. Not bad. In a market like this, they did an unbelievable job passing on the increases.

The real headwind we had, Andy, was that -- part of the Allen Brothers business is they sell a very expensive product. And it gets to a certain point where the customer is looking at you for some relief that this is temporary and is asking you to share the pain. Because their menu prices are -- for those of us who eat out every day, you're starting to see them, they're pretty high.

So optimistically, we thought it was not going to be until 2016, but it looks like the herd is catching up. And a lot of experts are leading us to believe that we'll get some relief starting in maybe as early as early 2015. So with the crazy prices we saw in the -- what we specialize with in Allen Brothers, which is the best prime beef in the world, the prices just got to the point where we had to share the pain.

I know that that kind of sticky pricing is typical and I understand it's sort of a sticker shock even a high-end chef can get. Over time, like over the next couple quarters before supply catches up and maybe pricing starts coming down, is that pain sharing going to shift? Normally, [in the beginning the] --

Yes, we've done a --

-- distributor eats a lot of it and then over time it gets passed through. Do you think you're kind of stuck?

We've done a much better job over the last few months catching up. So we remain optimistic the rest of the year that we'll get a balance. And nature finds a way, and we're in business for a long time and it's our job to find a way to be more profitable. So there's some mix shift. There's new customers. There's lots of ways that we're working very hard to catch up. We're buying better. We're improving our salesforce and our management team. So that all goes into mitigating the headwind that we've had.

Okay. And just last, more of a housekeeping for John. I think last quarter you said Chicago was about a $3 million investment, mainly -- in terms of running through the P&L, I should say -- and mainly in terms of hiring salespeople early and all that, ainly hitting Q3 and Q4. Is that still pretty much on plan, as planned?

Yes, I think we're still on schedule. We had mentioned in the release we've hired the market president. She's doing a terrific job. She's started to recruit people so we've got a number of people in the pipeline on that front. So I think, yes, the cadence of that impact will still be building third and into the fourth quarter. So yes, everything is still on track. We expect to be in the facility around year-end. So all that is still progressing.

Thank you.

Thanks, Andy.

Thank you. Our next question comes from Karen Short from Deutsche Bank.

Hi, just a couple questions on guidance and then the quarter's results. So you indicated the quarter was in line with your expectations. So obviously, we were off from -- I mean at least I was off in terms of what I was looking for. And since your outlook hasn't really changed that much, was just wondering when I look at the second half of the year, are we kind of equally -- or is consensus kind of equally too low in the third and fourth quarter? Or is there one that's more off than the other? Or any color you'd be willing to give there?

Yes, I think maybe the one point of clarification, Karen, is that I think our results in the second quarter were in line with the exception of Allen Brothers. That would be the --

Okay. And then I guess looking at leverage in general, obviously we've talked about this year being kind of a year of not transition but kind of building of infrastructure. But is there any reason why when we look to next year, to the extent that your strategy is always going to be buy three to five companies a year, that you shouldn't always be a leverage -- operating leverage story. I mean obviously, the Allen Brothers is a different story as it relates to the mix of the business. But is there any reason why in fiscal 2015 you wouldn't revert back to being operating leverage three to five companies a year, fairly steady, stable?

Yes, I think --

Because you're obviously not getting the leverage now, even though you have very strong revenue growth.

Correct. So we've made a number of investments. Our view is, the investments we've made, we should be between $1 billion to $1.5 billion in revenue a year with the G&A infrastructure that we have put on. So I would probably be a little more conservative. Probably getting into $1 billion to $1.2 billion, our G&A starts to revert back to our more historic leverage. So that's really what our goal is. That's what we've built the business around and our plan. So beyond that, I mean continuing to grow, we could add a little bit of investment. But I think we will end up -- I've always characterized the operating expense leverage that warehouse and transportation, they're stair steps. Right? So you'll leverage warehouse expense until you need to add a new facility. Then costs go up. Then you fill the warehouse and that starts to leverage. So they're big stair steps.

Transportation is really a truck and a driver. So they're much smaller stair steps. Selling is pretty correlated to volume. G&A is where there's an opportunity to leverage expenses. And that I think is where --

That's right, yes. I think our first goal, Karen, right now, the way we entered the year and were looking out towards the next six months to a year, is we built this platform. Obviously, we're building a platform to grow exponentially, but right now to fill in the dots we add another $150 million to $200 million of volume, which obviously can easily be done through acquisitions and we're growing very nicely organically. So when we can add that kind of volume, all the numbers start to make more sense and we're looking at north of the 7% EBITDA that is our first goal. So we're not that far away. We just need -- we had a little more luck with inflation and a few other things. We even look a lot better right now. But we're really focused on that number and filling in the dots. So that's our next -- I call it the next step up.

So in terms of the [ops] or the infrastructure that you have or will have in order to get back to the story of leverage, does that -- is that predicated on consolidating facilities in LA, San Fran, Vegas, Miami? Or is it just initiatives that you're in the process of right now?

A couple of points -- (multiple speakers) --

A follow on -- sorry.

I'm sorry, I think consolidating the Qzina facilities in San Fran, LA, New York, and Miami, that is certainly going to help. The G&A infrastructure is really leveraging that via bigger volume, so trying to get to that $1 billion, $1.2 billion in volume.

Okay. And then I guess just last question then I'll get back in the queue, is what are you seeing right now in inflation and what's your outlook for the remainder of the year? If you said it, I missed it.

I think we've seen a -- I would expect current trends to be, for July, to be in line with June. Our view at the beginning of the year was inflation as kind of the 2.5% to 3%. When we saw the first quarter inflation at the 5.2% we were probably more closer to 3%. Today, I'd probably say maybe it's even 3.5% for the full year.

Yes, I mean the good news is that it's kind of everyone is getting used to it at this point. So it's not a daily battle. There's no magic food out there. So the price is the price. So we're hoping that it's going to start to soften a little bit. Again, it's supply and demand. So if demand slows down a little bit, some prices will drop and that's usually when we hopefully -- we get back a little bit out of that margin because we don't have to pass it -- we don't have to drop it all at one time.

And for the second half, obviously, we start to lap. Last year is when you really started to see it start to creep up. I think we were -- I don't remember the numbers off the top of my head, third quarter maybe just under 3%. We were 3.7% or 3.8% I think in the fourth quarter. And so that's where you really started to see this kind of continual sequential uptick. And so hopefully, we'll start to lap that and the year-over-year inflation will start to soften from this 5% we're seeing right now.

Okay, got it. That's helpful. Thanks.

Thank you, Karen.

Thank you. Our next question comes from Kelly Bania from BMO Capital.

Hi, good evening. Thanks for taking my questions. Just curious, first, to follow up on expenses. You called out the higher net shipping costs and catalog promotion costs, I guess related to Allen Brothers. And I was just wondering if you could remind us what's driving that, if there's any opportunity to kind of improve those costs and maybe can quantify how much that is impacting expenses?

Yes, I think first on the catalog expense, one of the things that we tried to guide shareholders towards is that catalog expense, you spend it, or you expense it as you mail the catalog. So there's a lot of mailing that goes on in the consumer direct business throughout the first three quarters when a lot of the sales from those come in the fourth quarter. So overall catalog expense, if you give me a minute I'll come up with that number. On an annualized basis, we spend about $3 million to $3.5 million a year on catalogs. How much was in the quarter I'll have to come back to you on. But it's probably 30% of that number, close to $1 million.

Yes. So the profit from the catalog business mainly comes from the fourth quarter. So right now we're building -- we have the expenses without the revenue and then it catches up in the fourth quarter.

50% of the B2C revenue is generated in the fourth quarter, primarily in December. but it's all in the fourth quarter.

Shipping costs, they just have an inherently -- obviously they're doing a lot of consumer mailing. They have actually a fairly national customer base in the wholesale business and so their outside shipping cost is an opportunity for us, but they have a fairly high spend there too.

Got it, that's helpful. And then on the Bronx facility, you mentioned you were starting to move in and I guess on track to be in there in the first quarter. Can you talk about how that's going and what impact we should expect that to have on the expense line item for the rest of the year and into next year? Are we still going to be excluding that going forward now that you're starting to move in?

Well, we started moving in and we'll continue to move in over the next few months. Our offices won't be ready until sometime early probably first quarter of 2015. So we're hoping to be fully operational, operation-wise and let go of the other warehouse as soon as probably -- I think our target goal is second quarter of next year. And obviously, at that point we'll have more efficiencies. We don't need all the double staff that we have right now moving trucks back and forth, facility to facility, dual management teams. So I think we'll get the expense, the big expense reduction in labor and operations probably starting second quarter of 2015.

Got it. And then on the common IT platform expenses for Allen Brothers and Michael's, can you give us little more color on what that will allow you to do in terms of benefits? And are there more costs related to that transition as well?

There may be a few transactional costs, Basically, we're upgrading the system that's currently at Michael's to give us more granular data on margin. Right now, we'd like to have more visibility in the margin like we do in our specialty distribution business. And so we're upgrading kind of a perpetual inventory system and the ability to report margin at the SKU level more timely and daily, weekly, that kind of thing. We are then taking that same system and converting Allen Brothers' system, they're on a, kind of a prior legacy system from the same software developer, and we're upgrading that platform to the same platform. So our intent and our expectation is that we'll have a lot more transparency around margin on a daily and weekly basis.

That's a great question and really a good analogy will be someone who needs glasses and is walking around and can't always see things far away. And you put on a really good pair of glasses and now everything comes into focus. So the new system is very necessary for a company like us to manage all these divisions and we're very much looking forward to that implementation and having the transparency and the upgradeability to really manage margin much. much better in inventory. So it's going to be a great help.

And the timing on that is?

We expect before year-end to convert and have that up and running at Michael's. We'll implement the first wave of the system before year-end at Allen Brothers. Probably won't be all the way there. It's probably to have it fully operational, it will be early next year. But it's good. It's got a lot of resources devoted to it and it has been for the last three or four months, but we're getting close to finishing that project at Michael's.

Great. Thank you.

Thank you. Our next question comes from Scott Van Winkle from Canaccord Genuity.

Hi, thanks. A quick add-on, on Allen Brothers. We talked about passing through price and inflation, et cetera, and the sticker shock. And is there any loss of volume that when you see prices normalize you'd expect to recover as a result of this inflation? Are you seeing that today or the loss of volume that is?

Loss of volume in what way, Scott? We're not losing customers. Our top line is pretty healthy.

Well, I am just thinking the $60 one pound dry aged steak doesn't sell as well as the $40 pound.

Again, Allen Brothers, I mean their core customer is a prime house. So the good news is that when we get normality that customer is very loyal. And the pressure is not every day, what is the price doing, oh my God, this is costing me $40 on my menu, what am I going to charge. The bad news is that they can't change the menu. That's how they built their businesses. And the rest of our business, even our protein business, the customer base, they'll take substitutes.

And that's what we love about our business, the diversity, the diversity with the thousands of products and diversity with thousands of customers. This is a unbelievable boutique business, which again we are extremely excited about the future of the brand. We just ran into an unprecedented period. We got caught kind of shorthanded and we know that the future is going to be very bright for the brand.

Thanks. And then on the new facility in New York, fully operational first quarter of next year. What's the timetable to build out the offering from where it stands today to where you envision it being with center of the plate?

The wheels are turning already. We have our plan. It's how quickly we can get the people in place, the new divisions in place, and get everything humming. But if had to give you a time period, I would say give the first half of the year to get into place and the second half of the year to really start improving. I mean already we started to increase our business in the New York market with the Allen Brothers product. So that's actually starting to take off very nicely. So the wheels are in motion.

Great, and one last one. The integration team that's been assembled, is that team also in charge of relocating in facilities? I'm thinking New York, Chicago, the efforts in Las Vegas. Does that fall into that responsibility as well, actual physical relocations?

That team right now, I mean that team is to integrate acquisitions and when they're not doing that, they're training and they're -- right now, most their time is focused on our project fusion, integrating our upgrade in our enterprise system. So no, the physical move that -- we do that on a local level and we have an ops team and a team that assists the local operator in doing it. So they'll help, but that's not their primary job.

Great. Thank you.

You got it.

(Operator Instructions) Our next question comes from John Ivankoe from JP Morgan.

Hi, thanks its Amod Gautam. You touched on timing a little bit, but how big is the Allen Brothers B2C business now? And how much should we expect it might contribute to the margins in the back half of the year, in the fourth quarter specifically that might help offset inflation in the second half?

Yes, it's about a $22 million, $23 million business today. About 50% of that revenue comes in the fourth quarter. Margin is a challenge with that business. We don't typically disclose kind of the granular bottom-line margin in that business. The gross margins are meaningfully better than the wholesale market, but there is also a lot of cost, obviously the catalog expense that we talked about and shipping costs, and things like that.

So it does significantly -- so when you look at the cadence of Allen Brothers contributions, or expected contributions, obviously we mentioned that they fell short of our expectations this quarter. I would say a lion's share of their overall profit, greater than 50% of their overall profit, comes in the fourth quarter.

Yes. What I can tell you is that those margins are much more insulated in the wholesale business. We're able to merchandise and market. In the catalog business there is a lot more flexibility and a lot more ability to protect your margin.

So that's a really good segue into what I was going to ask about next, which is just some more color maybe on how you expect to build it out? For instance, like you mentioned cataloging, so how you increase consumer awareness of it. And then in terms of how you're benchmarking prices, what are kind of the competitors or whatnot that you might compare the pricing to, to determine where you want to price the B2C business?

Well, Allen Brothers is the Rolls Royce of that business. So I mean we do look at -- there are some people that do compete in the prime beef business directly to the consumer, but they have a very loyal following and we are investing to increase the circulation, especially online. Actually, we're in the market right now to add an addition to that team to help us. We think the online -- more of the online presence is -- still hasn't been tapped. So that's one of the areas that we're very optimistic that we can really grow that business. And much less -- more inexpensively than the catalog business. Obviously, catalogs are very expensive. So it's a lot less money to do it online and that's really where a lot of our focus is going to go.

Okay, very helpful. The last thing I wanted to ask about was, Chris, you talked about making kind of investments in people from sales to managers, I think particularly in the western and southern markets. So are you still seeing opportunities from an internal staffing standpoint, and maybe even from customer demand standpoint as it relates to the uncertainty around the broadlines merger, the upcoming broadlines merger?

Again, CHEF is a very special company. It's a niche player. It's a huge market. We know who the big guys are. We like to think we're much more nimble. Everything we do has a purpose. There is a strategy of really focusing again on our core customer. And all our metrics -- we're a very metric driven company. Everything points that what we're doing is working. So we continue to execute to that strategy. We are penetrating. Adding the management, like I said earlier I think with Karen, we're building this in layers. And the first layer, adding the management, which can manage the different divisions, we felt that the capability right now to go a $1.1 billion, $1.2 billion is a sweet spot for this management team.

And that's where a lot of the numbers -- G&A comes down and especially with the new facilities, we start to get a lot of efficiencies. I would say imagine a truck going out, if it's a third full it's not very efficient and then when it fills up usually it's very efficient. And then when it's -- you have too much demand you got -- need another truck, you start all over. So we're at that point now that we're very close. We think that the next stage of growth that we're prepared to manage and the next acquisition really brings us to that sweet spot and that's our goal.

Appreciate the color. Thanks, guys.

Thank you.

Thanks, John.

Thank you. At this time, we have no further questions. I will turn the call back over to Chris Pappas for closing comments.

Okay. Well, I thank everybody for joining us on this call today. We've made great strides in building out the platform needed to continue to grow rapidly as a young public company. I really look forward to a very bright future as Chef builds out its national presence and we keep strengthening our team. And I look forward to everybody joining us on our next quarterly call. Thank you very much and have a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.