Chefs' Warehouse Inc (CHEF) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Chef's Warehouse Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Mr. Alex Aldous, General Counsel and Corporate Secretary of Chefs' Warehouse. Thank you, Alex. 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 fourth 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-10K and quarterly reports on Form 10-Q, which are available at www.sec.com.

Today we are going to provide a business update, go over our fourth-quarter results in detail, and review our 2015 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 fourth quarter was another strong top-line quarter for the Company, with revenue growth of 18%, which included 8.8 percentage points of growth from acquisitions. We did, however, continue to see very high inflationary pressure in many of our key categories. However, compared to the third quarter we did a much better job of managing that inflation.

During the fourth quarter, our number of unique customers grew approximately 10.7%, placements grew approximately 5.7%, and case growth was approximately 3% versus the prior year's fourth quarter, all adjusted for acquisitions. This growth was relatively broad based, with double-digit growth continuing in the western and southern regions of the country. While the weather has not been helpful in the new year, our KPIs related to growth have held up reasonably well, and be it on weaker comps from last year's poor weather.

As I mentioned, we continued to see inflationary pressure during the fourth quarter, primarily in the dairy and protein categories, both meat and seafood categories. We managed that much more successfully, and saw a 21-basis-point increase in gross profit margins in our core specialty categories. While our overall revenue was strong, gross margins were slightly lower than we anticipated, particularly in our pastry category, as we prepared to consolidate certain warehouses, and transitioned out a large pastry customer.

Moving on to acquisitions, in January we announced that we entered into a definitive agreement to acquire Del Monte for approximately $191.2 million. Del Monte was founded in 1926, and supplies high-quality USDA inspected beef, pork, lamb, veal, poultry, and seafood products in Northern California. In addition, Del Monte's staff of high-skilled butchers are able to provide fresh portion-controlled products to satisfy customers' needs on a fresh, cut-to-order basis.

Del Monte is one of the best companies I have seen in this category, with an experienced Management team and a group of dedicated associates. The culture, diverse customer base, and extensive, experienced sales force and protein expertise is a perfect fit and complement to our entire organization. It will allow us to further strengthen our West Coast presence, and build a West Coast protein strategy, particularly in a key culinary market like San Francisco.

Mr. John De Benedetti, the CEO and Principal Owner of Del Monte, will be named Executive Vice President of our Protein Division, and will also be joining the Company's Board of Directors post-closing. We expect that he and his team will expand our center-of-the-plate offerings, and strengthen our existing protein businesses. Last week we received HSR approval, and still expect to close the transaction near the end of the first quarter of 2015.

Moving on to Allen Brothers, we continue to consistently build that business as the most prestigious national high-end brand in protein, and continue to see significant traction in our other markets with Allen Brothers product lines. The performance of Allen Brothers improved sequentially from the third quarter, due in part to the seasonal contribution from the B2C component of that business. However, the year-to-year over impact from the mix of protein continued to dilute margins somewhat.

The combination of Del Monte, Allen Brothers, and Michael's brings us closer to a national platform we are looking forward to building, so all our specialty companies can start to pull from our protein suppliers, creating what we call a family of Company options to our customer base.

Lastly, our integration of Euro Gourmet, which was announced in October of 2014 is going very well. As a reminder, Euro Gourmet is based in Beltsville, Maryland, and was founded in 1999. They are a wholesale specialty distributor of imported and domestic products in the Mid-Atlantic, and we folded them into our Baltimore-Washington facility. We believe this acquisition both complements our already extensive 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.

Moving on, a little bit about our facilities. Our Chicago warehouse is getting ready to open. We just received our certificate of occupancy, and are extremely excited to attack this market. We continue to add top industry talent in the Chicago facility, and believe that Chicago market has a long-term potential to be one of our largest markets with our Company. It will also give us the opportunity to consolidate one of the Cocina branches and the Allen Brothers storage facility into our CW 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. Over the past few weeks we've consolidated the Cocina New Jersey branch into our Bronx facility. We are scheduled to move the balance of our product categories in over the next months, ultimately going from three operating facilities to one in the metro New York area.

We also have plans to move into our new warehouse in San Francisco in mid-2015, which will accommodate one of the Del Monte branches, as well, and allow us to consolidate the Cocina San Francisco facility. This is included in our guidance for 2015. We also expect to complete construction of our new Las Vegas facility later this year, which will provide us ample opportunity for continued growth. This facility will also include a new culinary center, which will enhance our sales and marketing efforts.

As you can see, we have a lot going on. We are happy to have 2014 behind us, and are excited about the prospects of growth. With that, I will turn it over to Mr. John Austin to discuss more detailed financial information. John?

Thanks Chris, and good afternoon, everyone.

Our net sales for the quarter ended December 26, 2014, increased approximately 18% to $228.2 million, from $193.4 million for the fourth quarter ended December 27, 2013. The increase in net sales was the result of organic growth, as well as the acquisition of Allen Brothers during late 2013, and to a much smaller degree, the acquisition of Euro Gourmet. Acquisition growth accounted for approximately $17.1 million of our net sales growth for the quarter, and organic growth contributed the remaining $17.7 million, or 9.2%, of our growth over the prior-year fourth quarter.

Inflation increased 125 basis points sequentially, and was approximately 6.9% for the quarter. We particularly felt the up-tick in inflation in the dairy category, and the meat and seafood categories. While our overall outlook for 2015 is in the 3.5% range, protein prices are expected to remain high, particularly in the first half of 2015.

Gross profit increased approximately 15.5% to $56.9 million for the fourth quarter of 2014, versus $49.3 million for the fourth quarter of 2013. Gross profit margins decreased 55 basis points to 24.9%, from 25.5%. This was due in large part to the greater mix of protein business, as we lap the acquisition of Allen Brothers. Allen Brothers' relative performance, even though it improved sequentially, also contributed to this decrease. As Chris noted earlier, our gross margins in our pastry category were also softer than we expected. However, our continued focus on managing inflation resulted in a 21-basis-point increase in margins in our core specialty categories, which partially offset these margin headwinds.

Total operating expense increased approximately 15.7% to $45.2 million for the fourth quarter of 2014, from $39.1 million for the fourth quarter of 2013. As a percentage of net sales, operating expenses were 19.8% for the fourth quarter of 2014, compared to 20.2% for the prior-year quarter. The decrease in our operating expense ratio is attributable to lower amortization expense, investigation costs related to our previously disclosed Michael's inventory issue, and deal-related costs, as well as higher reduction in contingent earn-out liabilities. All these were offset by higher warehouse labor costs and higher net shipping and catalog costs at our Allen Brothers subsidiary.

In a little more granular detail, branch-level operating expense, which consists of warehouse distribution and selling costs, increased approximately 57 basis points, due in large part to the Company's acquisition of Allen Brothers, and the related higher freight and promotional spending at Allen Brothers. Warehouse labor costs in our protein business has also contributed to that increase.

G&A expenses decreased to approximately $11.1 million for the fourth quarter of 2014, compared to $11.2 million in the prior-year quarter, due in large part to the lower amortization expense, investigation costs, and deal-related costs I just mentioned, offset in part by -- offset by the reduction in contingent earn-out liabilities. Adjusted for these items, G&A costs were flat as a percent to sales.

Operating income for the fourth quarter of 2014 was $11.7 million, compared to $10.2 million for the fourth quarter of the prior year. Interest expense was nearly flat at $2.1 million, versus $2.2 million in the prior-year fourth quarter. Income tax was $4.4 million in the fourth quarter of 2014, compared to $3.2 million in the prior year, which -- the current year included a $519,000 charge related to a New York state tax audit for the periods 2010 through 2012, net of the associated federal tax benefit from that tax issue. Adjusted for this charge, our effective rate for the fourth quarter was approximately 40.2%.

Net income was $5.2 million, or $0.21 per diluted share for the fourth quarter of 2014, compared to $4.8 million, or $0.19 per diluted share for the fourth quarter of 2013. On a non-GAAP basis, adjusted EBITDA was $12.2 million for the fourth quarter of 2014, compared to $13.4 million for the prior-year fourth quarter. Modified pro forma net income was $4.9 million, and modified pro forma EPS was $0.20 for the fourth quarter of 2014, compared to modified pro forma net income of $5.4 million, or $0.22 per share for the fourth quarter of the prior year.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Mark Wiltamuth with Jefferies.

Yes, good afternoon, guys. It's actually Chris Mandeville on for Mark. I just wanted to start off real quick on the gross margin decline. I was curious if you could give some additional color in terms of maybe buckets as it relates to the product mix shift, the performance of Allen Brothers, and then the pastry margin decline?

Yes, let's see. Most of that 55 basis points of margin compression was related to the protein space. That was a combination of the overall mix, so obviously we're lapping the acquisition of Allen Brothers. We did halfway through December last year, and now we've got a whole quarter; and Allen Brothers' performance. On a relative basis, I don't know the split. I'll come back to you on the split of that 55 basis points. The impact from pastry was much smaller. We actually had a slight lift in margin in our specialty business. We had about a 21-basis-point improvement in gross margins in our specialty business, so most of the 55 compression was from the protein side of the business.

Okay, and then in regards to the Allen Brothers entity, I'm curious to get your take on what your expectations are, and what's built into 2015 guidance as it relates to their performance of that side of the business?

Yes, when we initially gave guidance, that topic came up, too. We do expect to significantly improve Allen Brothers' performance. It won't be all the way back to -- we didn't plan for it to be all the way back to where we think it should be, but there's some meaningful improvement. I know we called out the performance of Allen Brothers last quarter because it was such a big driver of our results for 2015. I'd prefer not to get into individual operating company performance. But qualitatively, we're going from a loss to making a little bit of money, but it's not where, we're not planning for it to be where it ultimately will be.

Yes, we're expecting sequentially it gets better and better.

Okay, great. Lastly, I saw sequentially that your case volumes slowed a little bit. Presumably, that's due in part to the significant inflation that you are realizing. But I was wondering if there is anything else within that number that would have caused a decline? Then as we look to the first half of the year, given your commentary on how bad the weather has been in the northeast, should we more or less try and attempt to be quite conservative in regards to our sales growth in the first half of the year?

Yes, there's maybe a couple of data points I think are important. Our overall case growth was probably a little softer in the fourth quarter, mostly related to cuisine. I think we were still seeing nice case growth, double-digit case growth on the West Coast. We're still capacity constrained in New York, so we're not fully operational yet in our new Bronx facility, where we are hopeful that obviously will give us capacity then, and generate a little bit higher case volume. But New York was still positive.

I think the cadence of case growth throughout the quarter. December was a little softer than October and November. Again, not alarming, but it definitely softened a little bit in December. The things I would probably point to or you ought to think about in relation to the model, we're basically forecasting a mid-single-digit case growth number for 2015.

The weather is probably not great. The good thing is the first quarter is not our strongest quarter, anyway; but weather's not ideal right at the moment. I think what we're seeing right now is relatively decent comps versus last year. Now last year had lousy weather in the first quarter too, so I wouldn't consider it robust, but it's the comps are reasonably good.

The other thing I'd probably keep in mind just relative to quarterly cadence, we're still going to be cycling -- Allen Brothers actually performed okay in the first quarter last year, where this year they're still in a little bit of a turn-around mode. That has an impact on the quarterly year-over-year piece, but not--

We're seeing pretty good case growth. Where we don't have a foot of snow, we're actually seeing a very healthy case growth.

Okay, thanks guys.

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Hi guys, it's Mark Sigal for Scott. With respect to the core business, you commented you drove about 21 basis points of improvement in gross margin. The last couple of quarters I think you were 40 basis points or so in decline in the core business. Can you talk about the specific elements where you're managing inflation more closely? Is it better procurement? Are you able to pass through pricing a bit more easy, a combination of all of the above?

I think you got it. It's a combination of all of the above. It's the new norm. People are accepting that meat prices are high, and a lot of food products have gotten more expensive. I think as a Management team, we've really focused on it. I think we're starting to get the benefit of it, of being able to manage it, pass it on better, different sources of supply. Obviously coming out of a year last year where we had record inflation in most of our major categories, it put a big emphasis that we get our arms around it, and start to manage it better, in case it doesn't -- we don't get any relief in the commodity markets.

I think maybe I'll add a little more color on that, as well. In the last quarter, where we had the 40-basis-point compression in our core specialty business, we had a lot of hyper-inflation. Dairy was crazy, meat, seafood, poultry. We saw actually the same actually or a little bit higher inflation overall; but those same categories were still highly inflationary versus the prior-year quarter.

But when you look at how we were able to pass those through, I think the general premise that we've always talked about is modest inflation is good. You can pass it through relatively quickly. When things are really volatile or there's hyper-inflation, that's hard to pass it through as quick as you really need to. That's why you probably saw last quarter we did not get that passed through as much as we -- I think we did as good a job as we probably could with that hyper-inflation. This quarter I think you see us catching up to that, and we were able to get it passed through.

That makes sense. Then on Allen Brothers, are you able to quantify at all the seasonal lift to gross margin you got with Q4 benefiting from the strong B2C business?

Yes, I'm not sure we can quantify it exactly for you, just because I don't want to talk about individual profitability of operating companies. But our percentage margin was weaker this year. Gross margin was weaker this year at Allen Brothers than it was in the fourth quarter last year. Part of the reason for that is last year we, by the time we closed, we closed right before the holidays, so a larger portion of their mix was in the B2C space, where this quarter you had a full quarter of wholesale business plus the B2C. We were down year over year. I think last year we were at about a 33% margin at Allen Brothers on a gross-margin basis; and this year we were at about a 22%. That 22% is a sequential improvement from the third quarter.

Okay that's what I was trying to get at, the sequential lift and trying to quantify that.

Yes.

Okay. Lastly, pending the close of the Del Monte deal, you'll gain significant expertise and specific category management on protein. What are the types of things, the new capabilities or new processes for category management in protein that you pick up with incorporating the new Del Monte team?

Well again, I think we said that there was many reasons why we thought Del Monte would make a great acquisition and part of Chefs. Part of it is their leadership team, and we'll be -- their CEO is going to become our EVP of Protein. He's also joining our Board, so we get a very strong leader. We're going to improve our purchasing, which is very important in the category -- especially in a very expensive category of beef. Getting our arms around that, being able to -- have his purchasing power and expertise, we're counting that benefiting us around the country.

Our strategy is to be to the finer restaurant, the up-scale casual, a solution sell. Having the plethora of products that we've already put on our trucks and that Del Monte brings, a combination now with the management skills in understanding that business better than our existing specialty food management team, I think obviously we are expecting to do great things together.

All right, thanks.

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Hi. This is [Lucy Hong] calling for Kelly. Thank you for taking my questions. I'm just wondering, we track restaurant industry sales data, and we noticed a very strong sales trend in the last few months, especially in January. I'm just wondering if you're seeing of that at all, and quarter-to-date performance wise if you're seeing stronger sales?

Well, I think the weather again, we've had such a crazy weather pattern for this first quarter; but what I could say is that where the weather doesn't affect business, we're seeing exactly that. We're seeing strong business. It's double-digit growth in many of our markets. We hear from our operators that business is pretty strong. We have a pretty optimistic view that our core customer is doing well, and should have a great year.

Okay, thank you. One more question. More about B2C component of Allen Brothers. Would you talk more about how you're expanding that e-comm online platform, and the customer response to that, and if you have plans to develop that further? Thanks.

Yes, we've been pretty pleased with the B2C platform. Most of this past year was really getting our arms around it and building a better system to operate it and expand it. The plan right now is to strengthen it, and to continue adding Chef Warehouse specialty items to the portfolio that we feel associate with the brand real well. The customer of Allen Brothers online is somebody who really appreciates the best steaks that you can buy in the country, so we're matching the portfolio of products to really complement that. As we get more comfortable, we'll start to expand that business and really take it to the next level. But we're pretty pleased where it's at, at this point.

Okay, thank you.

Thank you. Our next question comes from the line of Karen Schwartz with Deutsche Bank.

Hi, it's actually Ryan Gilligan on for Karen.

Hi.

Can you guys comment on how you expect the new facilities will impact margins in the near and long term?

Yes, I think there's a couple things. There is certainly some benefit associated with consolidating multiple warehouses into one. A mitigant or offset to that is they're typically the new facility has adequate room for growth, so it's a bigger footprint. Very often it has a higher cost per square foot. I wouldn't bank a ton of benefit in the first year. I think where that pays down the road is ample room for growth, so you can continue to grow. Then as you leverage that facility and fill it up, that's where you get paid. Does that make sense?

Yes, it does. So it's more of a volume story initially than it is a margin story?

Yes, you've got a little bit better efficiency around being in one warehouse than in multiple warehouses, but your cost per square foot goes up.

Right, so you're not moving boxes twice. You're on one system. A sales management can better manage together. Long term, we expect to do what we've done throughout our history when we've done these building moves, is usually a period of getting the Management team on the ground, consolidated, and then get them focused on growing the business. We've done that very successfully over the history of our Company and our growth.

Got it, that makes sense. Can you maybe just talk about the purchasing opportunities that are available to you guys as you guys get larger in size?

Yes. Well again, our focus right now is to get Del Monte as part of Chef Warehouse, consolidate a lot of that purchasing power and expertise. That strategy is -- we plan obviously soon as Del Monte comes on for that strategy to be in effect. As we consolidate our warehouses right now on the Cocina side, we expect to get better control of the inventory and better control of being able to manage the margins, and how those products go to market. I would optimistically, as we grow sequentially, you get more efficiencies logistically. That should add to our margins, especially in year of 2016 and 2017 as we grow into our facilities.

That's helpful, thanks. A last quick question on CapEx. I'm not sure if you guys provided it, but do you have expectations for what CapEx will be this year?

Yes, I think it will be around $20 million to $22 million, is what we're expecting. We've got a little bit of costs left to finish the Bronx, and costs to finish the Las Vegas facility. Our view is the maintenance component of that number is probably around $5 million in that relative order of magnitude. Then we've got a little bit of CapEx to finish those two growth projects.

Great, thanks.

(Operator Instructions)

Our next question comes from the line of John Ivanko with JPMorgan.

Hi, guys. This is Jason on for John. How you doing?

Hi, how you doing?

Great.

First question I had was on your total interest expense. Post the Del Monte acquisition, are you guiding to a specific total number in addition to that new debt?

Yes, the total number we've guided to is $13 million to $14 million. For today we're running a little over $8 million. Then we'll fund the Del Monte acquisition. It's about a $125 million or $130 million of cash need at close. Then there is a convertible note that also has about a 2.5% coupon, so that will add into that number.

Got it. Okay, that's helpful. One more was -- so your 10.7% addition on unique customer base, that looked pretty strong this past quarter. Could you provide any further color on where you're seeing the growth specifically, and if you had any surprises there?

It's pretty broad. We've been investing in sales people and sales management. I think we're getting the return on what we've invested. The strategy has always been since we do have a certain amount of attrition every year due to just the nature of the business, putting out a continuous -- in the sales force, our strategy has always been to continue to open new restaurants. Obviously adding new territories gives us the opportunity for more customers. As we add new categories, that adds to that process of opening up the new customer base. I think we're where we expected to be.

Okay, thanks.

Thank you.

(Operator Instructions)

Thank you. We have no other questions in the queue at this time. We would now like to turn the call back over to Management for any closing remarks.

Okay. Well, we thank everybody for joining us, especially on the snowy East Coast who was able to make it. We look forward to much better weather here in the East Coast, and look forward to speaking with you again in our next earnings call. Thank you very much.

Thank you. This concludes our teleconference at this time. You may disconnect your lines now. You may have a great day, thank you.