Chefs' Warehouse Inc (CHEF) 2014 Q3 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse third-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Alex Aldous, General Counsel and Corporate Secretary for The Chefs' Warehouse. Thank you, 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 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 measurements 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 third-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 third quarter was another successful quarter for our specialty distribution businesses, the net sales for which were up almost 11% organically over to Q3 of 2013. While we are very encouraged by those results, we continue to work through a few kinks related to our Allen Brothers business, which I will go over in a few moments.

First, a few highlights for the quarter include the following: an increase in net sales of approximately 22% over the third quarter in 2013. A gross profit dollar increase of approximately 15% over the third quarter of 2013. Since the quarter ended, we completed another tuck-in acquisition, this time in the Maryland market with the addition of Euro Gourmet, adding it to our portfolio.

Now, we'll go into the results in a little more detail. As I said before, we were very encouraged by net sales growth in our core specialty distribution businesses units for the third quarter. During the third quarter, a number of cases grew in excess of 5% organically over the third quarter of 2013.

In addition, our number of unique customers grew 10%, and placements grew nearly 6% versus the prior year's third quarter in our core business, all adjusted for acquisitions. This growth was relatively broad-based, with double-digit growth continuing in the Western and Southern regions of the country.

We are looking forward to having additional capacity for growth in our core and New York market once we complete our move to the new distribution facility in the Bronx. So very good progress there, and the good news is that our success in top-line growth and our core specialty business appears to be continuing into the fourth quarter.

As for inflation, we continue to see pressure in the dairy; cheese; and protein, both meat and seafood, categories in our core businesses, which John will touch on a little later. We also experienced inflationary pressure on margins in our protein specialty businesses, particularly at Allen Brothers.

We continue to consistently build Allen Brothers as the most prestigious national high-end brand in protein, and started to see significant traction in our other markets with Allen Brothers' product lines. The escalated beef prices and a lag in passing those rising prices on to customers continued to be a headwind at our Allen Brothers division.

We continue to add top industry talent and implement new technology to improve sales productivity and procurement in the Chicago facility. We are confident with our move in into our new Chicago facility, the addition of top industry talent, and the continued rollout of exciting product lines nationally, we expect that Allen Brothers will pay big dividends over the long term, especially as the beef-inflation cycle runs its course.

Moving on to our facilities, we still expect to open our Chicago warehouse by the first of the year, and believe that Chicago market has a long-term potential to be one of our largest markets for The Chefs' Warehouse. In addition, our move into the new Bronx facility is progressing, and we continue to expect to be fully operational in the first quarter of 2015.

I would now like spend a moment discussing our most recent acquisition of Euro Gourmet, which is based in Beltsville, Maryland. The company is a wholesale specialty distributor of imported domestic products along the East Coast, with annual sales of approximately $5 million.

We believe that this acquisition both complements our already extensive mid-Atlantic product selection and expands our customer base in that market. While not a particularly large acquisition for us, we continue to look for complementary fold-in opportunities like this.

There continues to be many options presented for us for acquisitions. We're actively looking at those that meet our criteria and believe that there are meaningful additional attractive opportunities for us to capitalize in the coming months. With our core business units performing well, the Allen Brothers business starting to move in the right direction, and the right people and profits in place, we feel that we are positioned well for the future.

And with that. I will turn over to John Austin to discuss more detailed financial information. John?

Thanks, Chris, and good afternoon, everyone. Our net sales for the quarter ended September 26, 2014 increased approximately 22% $208.1 million from $170.6 million for the third quarter ended September 27, 2013. The increase in net sales was the result of the acquisition of Allen Brothers during late 2013, as well as organic growth. Allen Brothers accounted for approximately $19.5 million of our net sales growth through the quarter, and organic growth contributed the remaining $18 million, or 10.5%, of our growth over the prior-year third quarter.

As Chris noted earlier, our organic case growth, adjusted for the impact of acquisitions, improved sequentially to 5.1% for the third quarter. In addition, our unique customer count and placements grew 10% and 5.6% respectively, versus the prior-year quarter, all adjusted to exclude the impact of acquisitions.

Inflation increased 26 basis points sequentially and was approximately 5.6% for the quarter. We particularly felt the uptick in inflation of the dairy category, as well as in cheese, meat and seafood. For instance, dairy, as measured by revenue per case, was up approximately 30% over the prior-year quarter.

Gross profit increased approximately 15.3% to $50.7 million for the third quarter of 2014 versus $44 million for the third quarter of 2013. Gross profit margins decreased 143 basis points to 24.4% from 25.8%.

A continued uptick in inflation and the challenge of passing those increases on to customers pressured margins in our core specialty businesses slightly, which contributed approximately 40 basis points of gross margin compression, again, primarily in the dairy, cheese, and protein categories.

In addition, the increased mix of protein sales contributed approximately 30 basis points of margin decline, as a result of the acquisition of Allen Brothers. While the balance was attributable to the performance of Allen Brothers.

Total operating expenses increased approximately 20.7% to $41.7 million for the third quarter of 2014 from $34.5 million for the third quarter of 2013. The increase in operating expenses was primarily due to the addition of Allen Brothers, as well as our continued investment in infrastructure.

As a percentage of net sales, operating expenses were 20% for the third quarter of 2014, compared to 20.2% for the prior-year quarter. The decrease in our operating-expense ratio is attributable to the $1.5 million settlement we received from the former owners of Michael's Finer Meats, related to the previously disclosed accounting -- inventory accounting issue and the related investigation, which were offset in part by higher net freight costs and catalog advertising costs at Allen Brothers and increased investments, primarily in IT infrastructure.

A little more granular detail, warehouse distribution and selling costs increased approximately 21.6% due to the Company's acquisition of Allen Brothers and the investments in management infrastructure, as well as the higher freight and promotional spending at Allen Brothers. This also includes approximately $412,000 of duplicate occupancy costs related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling costs decreased 5 basis points as a result of the increase spent mentioned above, offset by the efficiencies of scale.

G&A expenses increased approximately 18.3% to $11.2 million for the third quarter of 2014, compared to $9.5 million in the prior-year quarter, due in large part to the Company's acquisition of Allen Brothers and investments in IT I mentioned earlier. These were offset in part by the $1.5-million settlement I discussed.

As a percent of net sales, the G&A cost decreased 17 basis points to 5.4% percent of net sales. However, excluding the impact of the settlement, G&A cost increased approximately 54 basis points to 6.1% of net sales.

Operating income for the third quarter of 2014 was $9 million, compared to $9.4 million for the third quarter of the prior year. Income tax was flat year over year at $2.9 million, and our effective tax rate was approximately 41% for the quarter. Net income was $4.2 million, or $0.17 per diluted share for the third quarter of 2014, compared to $4.2 million, or $0.20 per diluted share for the third quarter of 2013, reflecting our common stock offering, which completed in late September 2013.

On a non-GAAP basis, adjusted EBITDA was $10.6 million for the third quarter of 2014, compared to $12.0 million for the third-quarter 2013. Modified pro forma net income was $3.7 million and modified pro forma EPS was $0.15 for the third quarter of 2014, compared to modified pro forma net income of $4.4 million, or $0.21 modified pro forma EPS for the third quarter of the prior year.

The decrease in modified pro forma EPS versus the prior year was due in part to the increase in the number of outstanding shares, as a result of the Company's stock offering completed in September 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 the remainder of 2014, we're adjusting our expectations to incorporate our year-to-date results, as well as the trends we're seeing in the business. Given the approximately $2-million negative impact that Allen Brothers had on current results, and the likely impact it will have on the balance of year, we estimate that revenue will be in the range of $825 million to $835 million, adjusted EBITDA will be between $43.7 million and $46.3 million, and net income will be between $14.3 million and $15.5 million.

Income per diluted share will be between $0.57 and $0.62, and modified pro forma EPS to be between $0.60 and $0.65. This guidance is based on an effective tax rate at approximately 41% for 2014 and 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 conduct our question-and-answer session.

(Operator Instructions)

Mark Wiltamuth, Jefferies.

Yes, good afternoon. This is actually Chris on for Mark. John, if I could get your take on inflation in general, hopefully, a little bit of commentary in terms of how prolonged do you expect the protein inflation to really persist going into 2015? And then, any added color to which you could provide us to why dairy has become more of a prevalent issue versus the beef protein, which you've called out historically.

Yes, what I'll do is I'll comment on the general environment, what we're seeing across all of our largest product categories, and then I might turn it over to Chris on the beef and dairy issues. We saw a sequential uptick in inflation. We were at 5.6%.

Our top 10 categories, I think only one or two of them were deflationary, but what we were seeing is some really significant inflation in a lot of our key categories. So for instance, we had almost 30% in dairy, with 29.7%, 29.8%. Meat and seafood were 9% and 15%. So pretty meaningful amount of inflation, and the uptick there, it is really difficult to pass that along quick enough.

I think Chris will say, and I'll turn it over to him, dairy, he's been in the dairy business for a long, long time, and I'm not sure that we've ever seen that kind of inflation.

No. When butter shoots up from $1-something to over $3 a pound, it's market-changing. So actually that has started to come down drastically, so we are starting to get relief in some of the dairy markets.

As far as beef, pork already started come down, which is a great sign and there is some relief. I don't think anybody expects really the beef market to come down anytime soon. But what we could do is, we could buy a little better in dip markets, and the customers are starting get used to it.

We inherited -- we bought Allen Brothers last Christmas, and a lot of the prices are up to 25% increases. So there's drastic, drastic headwinds with that inflationary environment. As the market settles, my experience in the business for 30 years is that as people get used to it, they raise their prices and they start to live with it. And we are hearing from our customers that hopefully as it comes down, they will be able to make some of their money back and we will capture a lot of our margin back. So maybe towards the end of 2015, going into 2016, but right now, a lot of the experts are calling it 2016.

In 2016, you're talking about the beef, the herds, they're normalizing and things like that.

Normalizing the herd.

Right. As I assume or look towards 2015 from a gross margin standpoint, you'll -- obviously you'll lap Allen Brothers this coming December, but you will still be receiving some inflationary pressures. Is there anything in which you can mention, in terms of how you view your gross margin progression for next year at all at this point.

I think it's a little early for us to comment on 2015. We still believe in a long-term guidance or goal of mid to high single-digit top line, and I think we -- we've started to talk about growing into our infrastructure. We expect to return to that 7%, 7%-plus EBITDA target.

So that's absolutely still intact from where we expect to get to. Exactly when that happens as we get -- I think when we get into the $1 billion, $1.2 billion range, we start to approach that. We'll give you more specific guidance likely in early January.

So keep in mind, our core business was down about 40 basis points, with incredible amounts of inflationary pressures. So, we've already started to see the dairy markets come back to a level of normalcy. So we're optimistic there that as we increase our buying power, obviously, we have done one little acquisition. We said that we would like to do a whole bunch and some in the next few months, so we are optimistic about that.

So as we eat up our cost, buying power continues to increase, normalcy in markets, we can't be but optimistic about capturing the margin back. And especially as the beef markets normalize, we think we're going to be in a great position to get our EBITDA margin back to what we're used to.

Okay great. And then, my final question is from a customer level, if you will. How traffic trends progressed throughout the quarter, maybe how they're looking quarter to date. Did you see any type of regional pockets of strength or weakness? And then I have a quick follow-up to that, if you will.

I think in our report, organic growth was fantastic, obviously helped a little bit by the excessive inflation. But our case growth of 5% very, very healthy, double-digit growth overall, in a lot of our regions. I think we mentioned we saw the growth continuing into the fourth quarter. So I don't think we've seen anything but positive signs in our customers' business.

Something is driving this growth. Obviously, we like to think a lot of it is that we do have penetration, so our penetration per customer is going in the right way. So I think it is a combination of our customers business looks healthy, and we're starting to penetrate further selling more products to our existing customer. So all healthy signs. Plus I think we had about 10% increase in our customer base organically, so extremely healthy numbers.

Right. You mentioned that persisted into Q4?

Correct.

Yes. Case growth in 2004 started very similarly to how third quarter started, so pretty good, strong numbers.

Great, and then my last question is in regards to the M&A environment, if you will. I realize you now have a dedicated team towards integration of some of your more historical acquisitions, and you just took on Euro Gourmet; it's a small tuck-in. You've been quiet on that front, for the most part, over the last year or so in reality. So I'm curious, you did say that you are still looking and that there's opportunity out there. But has there been any type of dialogue internally about a strategic shift, in terms of its scaling back acquisitions to focus on the existing operations and riding the ship at Allen Brothers, if you will

Yes I think we took the break. We had a tremendous amount of things internally to get straight. We had to digest Allen Brothers, we started building out the new warehouse facility in Chicago, so obviously that's a huge market opportunity, so a lot of focus on that. We had our computer systems, our enterprise systems upgrade, so that required a lot of time.

And I think the pipeline is extremely frothy. I think that being optimistic, you could see a very busy 2015, 2016 for us. Obviously, there's never -- the timing is always -- on closing, you never know when these deals close. But the pipeline remains very frothy, and I think that we have digested Allen Brothers. We continue to hire the talent -- top talent that we've been finding to get our arms around that and get ready to really grow Chicago and take Allen Brothers nationally as a brand. I think we've got to take care of our house duties, and I think we expect to get a lot of these deals done in the future.

While there has still been a number of things in the pipeline, so it's not like we haven't been working on them.

Correct.

Okay great. Thanks and good luck in Q4.

Thanks.

Karen Short, Deutsche Bank.

Hi, it's actually Ryan Gilligan on for Karen. One of the large broadline distributors recently mentioned they gained a decent amount share in the New York market. We're curious if you notice this, if you noticed any impact to your business from it. I know you don't have a ton of overlap, but just curious on what your thoughts are there.

No, New York actually -- despite the lack of space, we are operating out of three warehouses, and we anticipate moving into our new space completely in January. Their business continues to grow; it is extremely healthy. We don't see any signs of that business, that growth slowing down.

And actually we had a sequential uptick from the first and second quarter in that market.

Right. So New York is our largest business. We have our most experienced people, and we have a lot of confidence that they will continue to do a great job.

That's really helpful. Thanks. Would you say that the competitive environment is relatively unchanged then?

Again, with the thousands of items that we sell, we cross over with many small companies. And then obviously, in our larger markets where we do sell a much larger portfolio products, in the broadline we compete with some the larger ones.

But competition has not really been something that we focus on as something that curtails our business. It's really getting our own house in order, getting our own systems up and going. We concentrate on a particular segment of the market, and we think we dominate that and we're going to get stronger and stronger in that sector.

That's helpful. Thanks. Last question is a big-picture question. Are you still thinking about rolling out a cash-and-carry format, or do you have too many things on your plate at the moment?

I think right now there's lots of things to keep us busy with, Chicago, our new facility in San Francisco, moving New York. I think right now we have plenty of business opportunities to grow our business.

Great, thanks.

Andrew Wolf, BB&T Capital Markets.

Thanks, good afternoon. I want to check, because I joined the call a little late, did you call out a loss at Allen Brothers of $2 million?

We did, Andy.

How does that compare to either the year ago or the quarter, and is that really about this unprecedented inflation not being passed through?

Obviously we didn't own them a year-ago quarter, so it's not really comparable. We clearly didn't expect that. We expect them to be about breakeven this quarter as far as their sequential --

A lot of that, Andy, top line is healthy. The new product lines are actually performing better than expected. So the long term, I'm extremely optimistic. All the things we bought them for, entry into Chicago, a great brand, the best brand in high-end protein.

I think we got a little unlucky with the timing. When you're selling steakhouses that go up anywhere from 15% to 25%, there's a lot of pushback. They had a significant, very important large customer as well, who -- we had to work that customer coming -- as soon as we acquired them, prices started to go through the roof. So we've had to take that relationship and nurse it.

So I think the headwinds caught us coming into that acquisition. And we're very optimistic long term things will neutralize, get back to normal, and we expect great things from them.

Okay. I think last quarter you mentioned you want to bring the systems in there for transparency on pricing and margins.

Right.

By customer. And I think management, can you update us on how those two, both the management side, the personnel side and the systems side at Allen Brothers?

Well implementation is taking place as we speak, so we're moving closer and closer to having great transparency. We have made a bunch of key hires, so I think we have hired extremely talented people to run that business on a day to day, and we are very excited about the people. We are very excited about getting the IT nailed down. And even more excited when we actually move them next year, so we put everything under one roof. We think that solves a lot of the issues of getting the process and getting the efficiencies down to the level that we expect and being able to run a much better business.

Thanks. I appreciate this disclosure. So on the core distribution business, profits were up, but it seems like not -- margins still contracted some. Could you give us a sense of the gross margin and then the operating expenses. Roughly, I think you said 40 BPs or something. And how much operating expense might have been down at the core businesses -- or up, excuse me. And how you see that playing into next year? I know that dairy probably drove the gross margin side, but what you're looking for on the operating expense side.

Andy, the 40 basis points was the weighted contribution from our specialty business, so most of that was inflation-driven. Virtually half of that was from dairy alone. So it was really inflation-related.

On the expense side, I think we're tracking where we expected to be. Most of the increased costs, particularly this quarter, was in the IT area. When you normalize for that $1.5 million settlement that we had with the former owners of Michael's, we were still up with as a percent to sales. But expect that to normalize once we build scale, when we get into that $1 billion to $1.2 billion range, I expect total operating expense ratios to be back in line with our historic numbers.

So the core business, Andy, it seems extremely healthy, between the organic growth, customer acquisitions, with all our projects going on. Everything has to go right for us to exceed expectations. And unfortunately, with the headwinds of the tremendous inflation we had, it exposed some of our growing pains.

Overall, I'm extremely happy with what I'm seeing. From the sales side, procurement gets better. Operationally we are getting more efficient. When you think about the amount of warehouses we're running, we haven't consolidated a lot of them yet. So I think this picture starts to change as we consolidate, and we get this enterprise system completely upgraded, I think that you're going to start to see great things.

That's very helpful again. The last thing, it's getting back to the IT spend. Can you give us, if it was most of the increase in the core op -- expense ratio in the core business, is that going to be -- and how long is it going to stay at that elevated spending rate? When do you think the project starts to come to completion?

Well again, we move into -- we start to complete the move in New York in January. Chicago, we're expecting to open I think January 1. San Francisco, I think is a little later on, and then LA is probably a little later on than that. So you're going to start see the consolidation.

I think that the real trophy comes as we start to eat up all our G&A expense. Remember I've hired regional vice presidents. I put in infrastructures to get ready for our expansion. So, I think the volume -- the efficiencies will get better as we consolidate facilities. You need less people, less managers, and all the obvious stuff, but really it's as we have our organic growth is really healthy, plus we do a few tuck-ins and some acquisitions. That's going to eat up a lot of the G&A.

At the unit level, they're actually doing a great job. I think John said that actually operating cost actually starting to come down already without consolidating the facilities.

Yes, maybe a little granular detail there, Andy. My commentary around warehouse transportation and selling, I view those, they're field-related experience, not really corporate G&A. And they actually went down 5 basis points, even though cost dollars are up as we start at the leverage and get a little more efficient, you're starting see a little bit of scale leverage there.

G&A, when you normalize for that $1.5 million, like I was talking about was, we have already started to lap a lot of our people investments. We're not fully done there, but so the year-over-year cost was driven a lot by IT.

So a little granular detail on that. We have upgraded our system, actually a week or so ago, at Michael's. We put the new IT system in Allen Brothers about three weeks ago, so upgrading them. We are probably about 40% done on our field ERP implementation with JD Edwards, so we will finish that in early next year. We probably won't do much more in the balance of this year.

So we are making good progress. As it relates to that overall IT spend, that ends up getting leveraged when we build a little bit more scale.

Okay. That's very helpful. Thank you.

Thank you, Andy.

John Ivankoe, JPMorgan.

Thank you. I'd like to ask question for my education, so I'll apologize in advance for that. You obviously do have some inventory, whether it's in proteins or it's in dairy. In a market like we saw this quarter where cost goes straight up, you could imagine a situation where you're buying low and selling higher and you are actually having a pretty good gross profit dollar per item in an inflationary market. So, could you -- and again, I'm sorry for the basic question. Explain why that might not be the case for a business like yours?

Yes. Sure. Dairy, I think if you look at it, it will look you in the face, it becomes obvious that milk and cream, there is no inventory; it comes in every day. So there is no real advantage, especially when it's so unexpected. In the case of dairy and butter just went through the roof. So it wasn't like you could buy 30 or 40 loads and then sit on it, which would've been a wonderful thing.

In the meat business, a lot of the middle cuts, you do age them a few weeks. A lot of the product though comes in and goes out, your ground hamburger, so you might catch a few pennies on the way up. If the market wasn't sky high, I think you'd absolutely be right. There would've been a few weeks where you would be able to capture it, because you have the inventory.

The scrutiny right now, because they are all suffering from food cost, and I think if you hear the steakhouse people report, they'll say sales are great; traffic is up; margins are tough, because it's very hard -- we're starting to see steak prices, prime steaks in the $50s, $60s, I've even seen them on menus in the $70s.

So we're entering really new territory. I think it is a hypersensitive market that takes away some of the upside that you couldn't experience in a market that -- we always said that we like a little volatility, and still holds true. The volatility we saw right now, I would not mind not seeing it for another lifetime. So looking forward to getting more normalized types of volatility.

I understand that. Thank you for that answer. A prime steakhouse, presumably always has to buy prime, so they'll be buying it from somebody, if not from you. Are you actually seeing some of your customers actually downgrading the quality of their meat? And maybe that's one of the reasons that you are having a difficult time passing on some of your prime meat prices, as you're basically -- the market is screwed up enough that even if demand is falling, are prices still going up because the supply is so short?

Yes. I think what we've experienced is that when you look at our other divisions, everybody sells prime meats. And our margin is holding up, maybe a little bit we had to give up. But I think that the perfect storm came as we bought this very high profile company that everybody expects their products to be perfect with, and a lot of customers asked us to work with them.

So I think we were in a position where, could we have raised the prices and said this is the market? Perhaps, but I think the timing and our outlook was the we want to build relationships with these customers, so our top line is good, we're opening new accounts.

And we feel that taking it on the chin a little bit now and building the relationships for a very long-term relationship was probably good business. And just about every expert says this market can't continue forever, so we think we're already seeing it. We hear from the retail markets, which drives the market and it's getting to get more pushback, people are starting to switch to pork. Chicken sales can't be better. So at a certain point, the market is going to start to give us back our margin.

Okay and one final question for me. Obviously you can get sales from existing accounts; you can get sales accounts that had previously been opened that you just simply haven't been serving. But the question that I'm asking you is about new restaurants that are being opened. What are your sales associates telling you, if they are, about what the addressable market at restaurants is changing year over year?

Well it's been a very healthy market for openings. Our new customer base, and a lot of customers come from openings, so when we're starting to see 10% additional new business coming in, it shows a pretty good sign that restaurants are opening -- our type of customer restaurants are opening. And as I go around the country and visit our units, I see -- talk to a lot of salespeople. It's nothing but positive signs.

Thank you.

(Operator Instructions)

Scott Van Winkle, Canaccord Genuity.

Hi thanks. Most my questions have been asked already, but to stick on the high beef prices, what about the consumer side? We're going into the consumer quarter of Allen Brothers aren't we? Is sensitivity going to be an impediment -- price sensitivity going to be a big impediment to the consumer side this quarter?

I don't expect much. I think that with the consumer side, since so much is the fourth quarter, it allowed us to get into a position to try to hold onto margin. That product is cut and is frozen. So it gives you a completely, completely different strategy to look forward to that fourth quarter and hold onto your profitability.

Scott, the one thing I'll add to that from an expectation management perspective, I think we will still see some margin compression, if you will, on that consumer business. Not nearly like the wholesale business.

And we did, not to go too deeply granular into it, we did take a price increase.

And John, what kind of tailwind is fuel, going forward here with what we've seen with prices?

Fuel is a relatively small percentage of our overall cost structure. As we're talking, I'm going to find my report and tell you. But it's down in the 25-basis-point range. It's not a big number in our P&L.

We don't travel very long distances.

Great. Thank you.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to Mr. Pappas for closing remarks. Thank you.

Thank you, ladies and gentlemen, for joining us this evening. I hope you have a wonderful night. We look for to talking to you again shortly. Be well.

Thank you. All parties may disconnect. Have a great day.