Chefs' Warehouse Inc (CHEF) 2015 Q2 法說會逐字稿

Greetings and welcome to The Chefs' Warehouse Second Quarter 2015 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.

It is now my pleasure to introduce your host, Mr. Alex Aldous, General Counsel and Corporate Secretary. Thank you. 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 2015 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 guarantee the 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.gov.

Today, we are going to provide a business update, go over our second quarter results in detail, and review our 2015 guidance. Then we will open up 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. We are pleased with our results for the second quarter. During the quarter, we grew net sales of approximately 6% organically. This was driven by unique customer growth of approximately 8%, placement growth of approximately 6% and case growth of approximately 6% in our core specialty business versus the prior year's second quarter. We also continue to experience high inflationary pressure in certain of our key categories, particularly in protein and chocolate which was offset in part by moderating trends in dairy and cheese.

However, we continue to be very pleased with our ability to manage that inflation during the second quarter as evidenced by our 79 basis point increase in gross margins. In our core specialty business, we saw 75 basis point increase in gross margins and we realized 373 basis point increase in our protein business, driven in large part by the improving operating performance of Allen Brothers, so making excellent progress there.

Moving on to a few specific business updates. The integration of Del Monte is going to plan. Our integration team is in the midst of converting our IT systems and expect that process to be completed by the end of 2015. Also importantly, with the John DeBenedetti, our Executive Vice President of our protein division who came over along with the Del Monte acquisition has been having a very positive impact on our existing protein businesses, especially with purchasing improvements and the efficiency of the cut shop at Allen Brothers, which you can see from our results this quarter.

From our Allen Brothers business specifically, we brought on a new plant manager who is working on bringing our yields and efficiencies more in line with the rest of our businesses and is having great success, so great progress there but still some work to be done. Finally, for Allen Brothers during the quarter, we transitioned out some lower margin business, which negatively impacted our topline.

However, Allen Brothers is right on track with where we expected to be at this point from a profitability perspective, as our sales and management teams continue to successfully add more core traditional Chef Warehouse Chef-driven restaurants in groups to the Allen Brothers customer list, then you are closer and close to our long term strategy.

Moving on to facilities. We continue to focus on building our team and customer base in Chicago and having great success making progress so far. We continue to believe that the Chicago market has a long-term potential to be one of our largest markets.

In our Bronx facility, it's officially open and operational. As a reminder, we consolidated three operating facilities in the metro New York area into one location. We continue to work through the integration process and are looking forward for the long-term operational efficiencies and growth capacity this new facility provides. Our (inaudible) facility and Las Vegas facility is also finally open. We closed on the sale leaseback financing for that facility in early July, which John will touch on in a minute.

Development of our San Francisco warehouse is going well and is set to open by the end of 2015. This will allow us to consolidate one more of our Qzina facilities leaving only two remaining to (inaudible) warehouses in the US. We also continue to be presented with many acquisition opportunities and are actively looking at those that meet our criteria. We believe that there are meaningful additional attractive opportunities for us to capitalize on.

With our core business is performing well, the integration of Del Monte going to plan and the turnaround we're seeing at Allen Brothers, many new facilities either up and running or close to being completed in the right people and process in place, we feel that we are positioned very well for the future.

With that, I will turn it over to Mr. John Austin to discuss more detailed financial information. Thank you. John?

Thanks, Chris, and good afternoon everyone. Our net sales for the quarter ended June 26, 2015 increased approximately 32.7% to $282.9 million from the $213.1 million for the second quarter ended June 27 of 2014. The increase in net sales was the result of organic growth, the acquisition of Del Monte and to a much lesser degree the acquisition of Euro Gourmet last October. These acquisitions accounted for approximately $56.9 million in sales or 26.7% of our net sales growth for the quarter, while organic growth contributed the remaining $12.9 million or 6.0% growth over the prior year quarter.

Inflation decreased approximately 70 basis points sequentially and was approximately 3.3% for the quarter. Inflation in the protein category continue to be very high year-over-year and choco was also up significantly versus the prior year. These inflationary pressures were offset by modest deflationary trends in the dairy and cheese categories. While our overall outlook for inflation for 2015 continues to be in the 3.5% range, we do expect protein prices to remain high in the near term.

Gross profit increased approximately 37.0% to $71.8 million for the second quarter of 2015 versus $52.4 million for the second quarter of 2014. As Chris mentioned previously, gross profit margins increased approximately 79 basis points to 25.4% from 24.6%. This was due in large part to increase margins in our core specialty categories and the year-over-year improvement at our Allen Brothers subsidiary.

Total operating expense increased approximately 42.5% to $62.5 million for the second quarter of 2015 from $43.8 million in the second quarter of 2014. As a percentage of net sales, operating expenses were 22.1% for the second quarter of 2015 compared to 20.6% for the prior year quarter. However, this includes the impact of transaction-related expenses associated with the Del Monte acquisition and facility consolidation costs. Excluding these unusual costs, the increase in our operating expense ratio primarily increased related to increased labor cost and amortization expense offset in part by lower fuel and freight cost.

More specifically, G&A expenses increased to approximately $22.5 million for the second quarter of 2015 compared to $14.0 million for the prior year quarter. Excluding the transaction cost and depreciation and amortization, G&A expenses as a percent of net sales were down three basis points versus the prior year quarter.

Operating income for the second quarter of 2015 was $9.3 million compared to $8.6 million for the second quarter of the prior year. Interest expense increased to $3.6 million versus $2.1 million for the prior year second quarter due to the incremental debt incurred to finance the Del Monte acquisition. Income tax expense was $2.4 million in the second quarter of 2015 compared to $2.6 million in second quarter of 2014. Net income was $3.4 million or $0.13 per diluted share for the second quarter of 2015 compared to $3.8 million or $0.15 per diluted share for the second quarter of 2014.

On a non-GAAP basis, adjusted EBITDA was $18.5 million for the second quarter of 2013 compared to $12.2 million for the second quarter of the prior year. Modified pro forma net income was $5.6 million and modified pro forma earnings per share was $0.21 per diluted share for the second quarter of 2015 compared to modified pro forma net income of $4.5 million or $0.18 per diluted share for the second quarter of the prior year.

As Chris mentioned in early July, we entered into a sale leaseback for that transaction to finance our Las Vegas facility. The net effect of this transaction that we received $14.6 million in proceeds and entered into a long-term operating lease for that facility. In regard to our outlook for the remainder of 2015, we're adjusting our expectations to incorporate our year-to-date results, as well as the trends we're currently seeing in the business. We are seeing solid progress in gross margin improvements for our protein business, however, we were also starting to see some increased pricing pressure with certain non-core customers. We have factored that into our guidance.

As a result, we estimate that our net sales for the full year of 2015 will be in the range of $1.0 billion to $1.1 billion. Adjusted EBITDA will be between $64.0 million and $67.0 million, net income to be between $14.5 million and $16.6 million, net income per diluted share to be between $0.55 and $0.62 per share and modified pro forma EPS to be between $0.67 and $0.74 per share. This guidance is based on an effective tax rate of approximately 41.5% and an estimated diluted share count of approximately 27.0 million shares.

As a reminder, our long-term guidance is based upon the following. We expect to achieve 26% gross margins, operating expenses as a percentage of net sales to be approximately 19% of revenue on an EBITDA basis meaning excluding DNA, leaving an EBITDA margin of about 7%. In addition, CapEx has been a significant drain for us over the last year or two with the opening of our new facilities. Once all of these facilities are up and operational, we expect normalized CapEx to be between $5 million and $8 million per year.

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

Thank you. (Operator Instructions) Andrew Wolf, BB&T Capital Markets.

Thank you, and good afternoon. Just on the pricing pressure with some customers. First, is that just for the protein businesses or is that more broadly also core specialty and just to understand what you're talking about, could you maybe elaborate a little bit on -- these customers non-core versus core?

Yes. Well, as you can see our margins, we had a great quarter of margins were very healthy up across the board. So, basically our core businesses, margin is looking really good. Over the past few years, some of the companies (technical difficulty).

You are now re-joining the main conference.

Traditional competitors out there. So, it doesn't make up a huge portion of our business. I don't know if I could quantify, it's a small amount, percentage of our business, but we look at them, we take a conservative stance on and then say, there is pressure on those type of account and it's just normal. So --

And we are seeing some pressure currently in a few of those accounts. So that's factored in our guidance.

So, just to follow-up, so I would maybe take away those would be more maybe casual dining or something away -- more away from the like table class that I consider more core for you guys and just kind of customer --?

Most part of the big group that we've inherited.

And this segues into my other question and then I'll get back in queue. It sounds like that -- I was going to ask you even were you guys operate higher end, are you seeing some pressure from US Foods and Sysco --

Well, margins look pretty good, organic growth looks pretty good. So, there is always competition, but I think we're executing very well.

So, it's more on the margin with some of these non-core folks if that's maybe part of the reason, certainly not in the core business, is that your takeaway for us?

Yes, correct.

Scott Van Winkle, Canaccord Genuity.

Chris, can we talk about -- now that the Bronx facility is opened, can we talk about kind of the timing of what happens now from standpoint of -- things like duplicative rent, you're going through the integration today, I'm sure you still have some offsite storage as that flows off, when can the product assortment expand? I'm wondering what's the timeframe for where you see this to be what you really thought it was going to be a year-and-a-half-ago when you guys kind of came up with the plan and started putting it to pen to paper, how does it play out from here?

I think that there is still a lot of wood to chop and once we start, everybody gets comfortable, it's like moving your baseball team from 5,000 seat stadium into a 50,000 stadium. Everybody's got to learn the field. So we're still going through that period of learning how to operate in a completely different building. New categories we're still starting to place them and see where they're going to fit. So I would say, 2016 just starting to get the benefit, 2017 it gets even better, 2018 it's great. So I would say, the rest of this year we're still getting into the building and getting a feel for it. So I would be conservative.

And what are we going to see in the financial results in 2016 relative to what we're seeing today and that obviously very important New York City market, we're going to see incremental revenue as much as we're going to see maybe some more efficiency in margin?

Well, our goal is high single digits of organic growth. So I think the building allows us to achieve that, it also allows us to do some tuck-ins which are highly accretive. It also allows us to go into the high-end specialty protein business that we're getting better and better at. So we're going to bring that business into New York. So it allows us to grow categorically, more efficiently, obviously service our customers better, less mistakes, less injuries. So I can go across the board, the reason we built it. So give you an exact percentage that would be impossible at this point but you could use your imagination every department should get better and the tuck-in should come, which would be great.

And I think, Scott, to tag on to that the duplicative rent that should start to pace out in the second half. We still do have our office facilities, so our office people are not in the new facility and we're building that out, but all of the operating people and the operations are consolidated. So there will be a little bit if duplicate rent, but not a huge amount in the second half. That new facility does have a significantly higher occupancy cost than our old facility, but we've consolidated a couple facilities which helped mitigate that. And then to Chris's point some of that productivity and reduced damage and all those kind of things should start to flow through. So I think all of those things help mitigate that higher occupancy cost, but as we build the scale that's where you're really going to start to see it. So I think that's going to probably start to manifest itself more in 2016 and 2017.

Thanks. And John if I could squeeze one more in, and Chris talks about lots of acquisition opportunities. How big is the war chest that you can provide former the comfort level with where you stand today?

I think our comfort level is good. Our debt is a little bit higher, our leverage ratio is a little bit higher than our long-term strategy right now given the Del Monte acquisition. As we kind of work through that and delever from that acquisition, I think it'll give us more capacity. One thing you might have seen, we did tweak our covenants just recently where if we found a deal that we particularly like, it allows us to stretch out our step down to those covenants a little bit longer. So, I think we've got enough capacity to do some reasonable deals. Obviously, we don't have the capacity to do another Del Monte or something like that.

And as we execute, we start paying down our debt. So obviously that gives us more flexibility as well.

John Ivankoe, JP Morgan.

I guess, Chris, the question is how you view the overall food service distribution industry at this point? I think, it made a lot of sense to think about the combination of Sysco in US Foods as a big opportunity for you guys in terms of may be customer disruption and some of the human resource fallout that would come out of the Company. So that now not in the cards, I mean, going forward, you probably did benefit that over the last 12 months. But with that's not in the cards going forward like, how do you kind of envision the big three is competitors to Chef? And I asked that in a question that when you listen to these companies talk about their businesses, they talk about growth opportunities in ethnic and more locally sourcing and more natural, which isn't exactly specialty, but maybe going outside of, maybe some of the commodity products that some of them have been known for in the past. So could you -- I mean, if you don't mind on a public conference call just kind of view, view your competitive positioning in terms of that big merger being called off?

Yes. It's a great question. Again, we've been in business for 30 years. So, I think we're pretty good -- it's a very experienced team, we understand who our customer is and I think in our call we said that -- we have non-core customers and we will always be picking some up and giving some out. I mean, we are very committed to continuing our strategy. We have over 20,000 individual restaurants, caterers, country clubs and that's really as we expand our territory though that's who we're focused on, because it's a different service level. So we're not going after giant chains. I mean, these guys are really good at executing these big deals, big groups, low margin, they are very efficient. We obviously want to be more and more efficient and we have been getting more efficient, but we are just completely different mindset of how we go to the market, the customers that we chase. And I think we can live alongside the real big guys very well. It's really not who we're focusing on. And we have picked up some really good talent and we're developing a lot talent. Again, our typical a person who comes to work for Chef is really somebody who's got to be some sort of foodie, right. And obviously we want them to have skill sets our executives, our managers, but they're going to the market completely different. It's not just the price and the drop and all that, you really got to know, you got to know local, you got -- we have over a thousand suppliers in 40 countries, it's very complex, it sounds simple, but what we do and execute every day is very complex, and you throw on top of it now while protein expertise, we think we own some of the top brands in the country. We are a billion we could see ourselves going through a few billion, these guys are [$30 billion, $40 billion, $50 billion] they got to move the needle in big chunks and we don't have that issue. So I think we're extremely focused and happy where we sit.

Certainly, Chris, nobody thinks it's easy. I mean that goes without saying, but when we hear obviously from the outside looking in to hear that big growth opportunities or ethnic and local and natural for the big broad liners, I mean your point of view as the service levels are different from you, the products or different, your care of the individual customers are different. Is there any way that that can become addressable competitive threat at this point or (multiple speakers) are just too different?

I think the companies are too different, I think everybody wants to sell products, but we carry local, we carry ethnic, we're not going after a ethnic chain of 400 stores with all the top ethnic restaurants in the city, different service levels, different expectation, it's an apple or an orange. So I think they'll do very well chasing these new opportunities. And we'll stick to what we do well and we'll knock them off one by one.

Thank you.

Thank you. (Operator Instructions) Karen Short, Deutsche Bank.

Hi, it's actually Ryan Gilligan on for Kerry. My first question is, what was the impact on gross margins from dairy and cheese deflation. I guess, we're just try to figure out how much of the 75 basis point improvement in the core specialty business was from deflation?

A meaningful piece. So when you look at our top 10 categories, we had about 3.3% total inflation. We saw some nice margin lift in those categories that were depleting slightly, but what we also did was managed the inflationary product categories very well. So we had very little negative impact on gross margins from the highly inflationary categories. That's really the art right is to make sure we're getting ahead of the cost increase or as much as you can or keeping up with passing through, and then as things are depleting a little bit, try to retain a little bit of that pricing. So, a good chunk of our increase was in those deflationary categories, but we saw two categories that were slightly negative on the gross margin side and that was dairy and cheese, I'm sorry, that was meat and choco, which were the two highly inflationary, right, but dairy and cheese both were nice contributions to margin.

Got it. That's helpful. Thanks. And maybe could you give some color on how sales trended throughout the quarter and into the third quarter?

Yes, I think for the second quarter, I think April -- May was up slightly from April and June was slightly softer than May. So it was really kind of choppy, but basically flattish, cadence throughout the second quarter. I think, July is okay so far, I think we're seeing a little bit more softening inflation in protein in July. So, I think that's probably going to have some impact on sales volume on topline.

Impact on topline but should be healthier for bottomline.

Hopefully, it's healthy on the gross margin and bottomline.

That makes sense. And just a quick clarification on guidance, just confirming the non-core pricing pressure was the only reason guidance for the rest of the year came down, right?

It's every trend that's going on in the business. So that's our current view of the business.

Got it. I guess, we're just trying to see if there is any other factor that would have caused the back half to come down?

That's our current view of the business.

Mark Wiltamuth, Jefferies.

I wanted to get some thoughts on gross margin trends for the second half? You're still lapping a 140 basis point decline in gross margin in the third quarter and then a 55 basis point decline in the fourth quarter, here you're showing 70 to 75 basis point gains here in the first half. What can we be thinking about for the second half for gross margin?

Yes. Mark, I think you're thinking about it right from the perspective that third quarter was still a very challenging quarter for Allen Brothers. So, I think that will be a positive year-over-year impact in the third quarter, where we have as positive a gross margin impact from the deflationary categories. I'm not sure I bank on that, but I think we feel good about where our current margin trends are in the specialty. So overall, will it be as strong gross margin year-over-year improvement. I'm not quite sure, but you should see a positive impact from Allen Brothers for sure.

Yes. And I think that we've talked about this last time, Mark, I mean we're a different company than we were [3.5 years ago] when we went public. We've never seen the ups and downs that we've seen in the last two years. So we kind of encourage us to build the margin team. So I think we've gotten a lot better now we're really focusing and managing on a day-to-day basis. And I think that's also really helping us improve and I think it's showing how we're management inflation, deflation and able to hold our margins.

And if you could maybe give us a measure on how far Allen Brothers is on a turnaround there?

Well, again it's I think we said in the earnings script, they're doing, they're tracking the plan, which is a remarkable comeback. I mean last year, as you know it was -- we had a really tough time and I think it's playing out with our acquisition of Del Monte and with the adding of the Mr. DeBenedetti and the adding of our new plant manager. We were able to run the plant now, it's much more efficiently. And as we continue to add new customers we have a great vision for this Company, it's a great brand. And I think it's remarkable comeback, how we turned it around now. And I think we just need to continue now that it's operating efficiently to continue to add customers and we're happy that it's tracking to plan. So we're very excited about it.

And how do you stand on broad line sales out of Chicago, Now you've got the sales force, you're putting in place, what kind of numbers (multiple speakers).

We're tracking to expectation. So again we have a great vision and great strategy for that market, we think if it can be one of our best market. So right now, we've been hiring people and pretty much we are tracking to where we expect it to be.

Okay, thank you.

Thank you.

Kelly Bania, BMO Capital.

Hi, good evening, thanks for taking my question. Just curious if we could go back to the margin pressure for the non-core customers and just from (inaudible) perspective, I mean, how often do you see this kind of competitive activity kind of spike up when did you see it, how long is it typically lasts and as you think about that long-term kind of 7% EBITDA margin getting back to that, what do you assume long-term from that group of customers in your business?

Yes. Well, I think the competitiveness in -- I call it more of the commodity-type business is has always been there and it always will be there. So, I think we're still too small where that becomes a non-issue. So, I think as we grow -- we are not targeting what we call non-core customers. So, I think as -- all our companies continue to grow with the typical Chef Warehouse customer base. The 7% right now is our first target and I think it's very realistic and we've been tracking, obviously, we've had the improvements. And we said we are growing into our overhead at this point. We added a lot of overhead, we added a lot of new facilities. So, as we grow into that the 7% number looks really good. And I wouldn't focus too much on what we call the non-core customers because as a percentage of our business, it's pretty small. Unfortunately, it still impacts us because we are small. So, as you can imagine as we continue to grow that becomes a smaller piece. I think it becomes more of a less impactful. I hope that answered your question.

And then just as you think about your acquisition opportunities, it sounds like there's a lot out there. How do you prioritize that at this point? I mean, if in your perfect world, what would be next, what would be ideally next in the plan? Where would you like to fit something in either geographically or product-wise?

Yes. Well, perfect world would be few tuck-ins to where we have capacity, right. So New York now will have capacity, San Francisco will have capacity, Chicago has capacity. So you can envision those market that would be great. We are executing now a parallel strategy the specialty broad-line and specialty protein. So, adding to any of those businesses would be great because we're building the infrastructure and we already have lot of the executive team in the overhead. So, we would expect that to be creative. We still love Texas, we'd love to get to Texas, love to get to Atlanta, the Carolinas, love to expand Florida. So, Seattle is great, we'd love to do more there. We have entered Arizona, we'd love to grow that. So that would be on the top of the list.

Okay, that narrows it down. Thanks. And then just on the labor cost you highlighted, is that just the acquisition or is that kind of in the core specialty business maybe just could you elaborate there?

Yes. We're actually seeing that across the board. We try to get ahead of labor costs. So, obviously there's a lot of wage pressure, I think, everywhere in industry. So, we're seeing some of that, but it's in dry version warehouse workers and it's more across the board than just any of the acquisitions.

Got it, thank you.

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

Okay. Well, we thank everybody for joining us on this call today. And we're proud of our quarter and we're really proud of the Company and platform we're building. And we're very excited to speak to you again on our next earnings call. Thank you very much for joining.

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