Chefs' Warehouse Inc (CHEF) 2016 Q3 法說會逐字稿

Greetings and welcome to the Chefs' Warehouse third quarter 2016 earnings conference call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Aldous, general counsel and corporate secretary for the Chefs' Warehouse. Thank you, Mr. Aldous, you may begin.

Thank you, operator. Good afternoon, everyone. With me on today's call are Chris Pappas, founder, chairman and CEO, and John Austin, CFO. By now you should have access to our third quarter 2016 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 uncertainty 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're going to provide a business update, go over our third quarter results in detail, and review our 2016 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 thank you for joining our third quarter 2016 earnings call. We are pleased with our third quarter results, particularly given the continued softness we are seeing in our broader restaurant space.

We finished the quarter with a very strong organic case growth in our specialty division, even though this was muted by a sequential increase in deflation. We had also made great progress at Del Monte during the quarter, which I will talk about in a minute.

First a few highlights from the quarter, which represent that we continue to take market share from our competitors in this space. We experienced 5.1% organic growth in net sales in our specialty division. This was driven by unique customer growth of approximately 5.2%. Placement growth was approximately 5.6%, and case growth was approximately 7.5% versus the prior year third quarter. Also importantly, our gross margin saw an 11 basis point increase in specialty, which increased 50 basis points in our organic base after excluding MT.

We are also making solid progress in managing margin in our Del Monte business. The team did a great job in managing price and raw product cost. Our ERP conversion at Del Monte is settling down. The team is learning to function more efficiently with the new system. At this point, we only have one small branch left at Del Monte to convert and expect that to be completed by yearend. We are now able to shift our focus to rebuilding sales and rationalizing operating expenses as we deliver superior customer service. We're very pleased with the progress we've made and expect our investments in systems and people to further strengthen our position in Northern California as the leading supplier to that vibrant, independent culinary scene.

As for Allen Brothers, we now feel we have the right team to build long-term profitability that meets our expectations. With a best in class operation, the brand is positioned to add significantly more customers to leverage their existing infrastructure and deliver more gross profit dollars. We remain very excited about our protein division, which now makes up approximately 35% of total sales, and we believe we are well positioned for the long-term growth in that business.

I would also like to give you an update as it relates to our facilities. We began the significant build out of our new facilities more than a year ago, and are beginning to see the benefits of cost efficiencies. Our New York facility continues to do very well and efficiencies are being captured, particularly in our warehousing operations. We have hired 42 new employees to run our Chicago operation in the last year, and continue to be very pleased with the team we have. We continue to expect to move MT Food Service into this new Chicago facility in early 2017 and expect to see many cost and revenue synergies with that move. We now have been in our new San Francisco facility about six months, and expect to see similar operating efficiencies as they grow into that facility.

We believe we are a stronger organization now and are confident in our ability to grow profitably serving our core independent restaurant business whose growth continues to outpace the industry. And 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 September 23rd, 2016 increased approximately 7.8% to $297.9 million from the $276.3 million for the third quarter ended September 25th, 2015. The increase in net sales was the result of organic growth of approximately 2.2%, as well as the contribution of sales from the acquisition of MT Food Service that we closed in fiscal July 2016, which added approximately 5.7 to sales growth for the quarter.

Deflation continued to be a headwind and increased sequentially from the second quarter. Deflation was a little more broad based in our specialty division compared to the second quarter, and also continued, as we expected, in our protein division. Deflation amounted to approximately 2.2%, which increased approximately 98 basis points sequentially compared to the second quarter. While we expected deflation in proteins for the year, our core specialty division turned modestly deflationary in the third quarter. We expect this challenging environment to continue in the near term.

Gross profit increased approximately 6.0% to $74.4 million for the third quarter of 2016, versus $70.2 million for the third quarter of 2015. Gross profit margin decreased approximately 43 basis points to 25.0% from 25.4%. Our gross margins in our specialty business improved 11 basis points, however as Chris mentioned, specialty margins increased 50 basis points, excluding the impact of the MT acquisition.

Gross profit margins decreased 191 basis points in our protein division, as we expected. However, we are encouraged by the sequential improvement we saw at Del Monte compared to the second quarter.

Total operating expense increased approximately 15.3% to $66.1 million for the third quarter of 2016, compared to 57.3 million for the third quarter of 2015. As a percentage of net sales, operating expenses were 22.2% for the third quarter of 2016, compared to 20.7% for the prior year quarter. The increase in the company's operating expense ratio is largely attributable to the company's acquisition of MT Food Service. In addition, warehouse and delivery labor increased $1.3 million and $648,000 respectively. Fleet expenses related to truck rental and freight out increased $738,000, and occupancy costs increased $620,000 compared to the prior year quarter.

G&A expenses, excluding the impact of the MT acquisition, increased to approximately $19.9 million for the third quarter of 2016, compared to $17.1 million for the prior year quarter, due mostly to higher depreciation amortization expense of $1.1 million, professional fees of $450,000, and bad debt expense of $375,000 versus the third quarter of 2015.

Operating income for the third quarter of 2016 was $8.3 million compared to $12.9 million for the third quarter of the prior year. Interest expense increased to $5.9 million versus $3.9 million for the prior year third quarter due to higher levels of debt associated with the refinancing we completed in June.

Income tax expense was $1.0 million for the third quarter of 2016 compared to $3.7 million for the third quarter of 2015, and our effective tax rate remained flat at approximately 41.6%.

Our GAAP net income was $1.3 million, or $0.05 per diluted share, for the third quarter of 2016 compared to $5.2 million or $0.20 per diluted share for the third quarter of 2015.

On a non-GAAP basis, adjusted EBITDA was $14.6 million for the third quarter of 2016 compared to $17.6 million for the third quarter of the prior year. Modified pro forma income was $1.7 million, and modified pro forma EPS was $0.07 for the third quarter of 2016, compared to modified pro forma net income of $5.5 million, or $0.21 cents per share in the third quarter of the prior year.

Based on our third quarter results, as well as what we are seeing right now, we are updating our guidance for the fiscal year of 2016. We estimate that net sales for the full year to be in the range of $1.185 billion to $1.195 billion. Adjusted EBITDA between $57.5 million and $61.0 million. A GAAP net loss between $1.0 million and $2.5 million. A GAAP net loss per diluted share between $0.02 and $0.07 per share. And modified pro forma net income per diluted share between $0.41 and $0.46. This guidance is based on an effective tax rate of approximately 41.5% for 2016, and an estimated diluted share count of approximately 27.25 million shares.

Note that for purposes of calculating the modified pro forma EPS, diluted EPS, the company has assumed that convertible debt will be diluted for the full year, and as such we've added back $537,000 of interest on an after tax basis, and assumed conversion into 1.2 million shares related to the convertible note. And we have included those in our diluted weighted average share numbers.

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

Thank you. We will now be conducting a question and answer session. (Operator instructions) One moment please while we poll for questions. Our first question comes from the line of John Ivankoe with JP Morgan. Please proceed with your question.

Hi, thank you. Two related questions, if I may. Firstly, as you see the Del Monte business and the overall trends and some of the success that you're having there, and obviously being done with ERP I think you said by the end of 2016 or early 2017, how much of a profit opportunity, just for that business alone, which I think had revenues of around $200 million or so, could there be in 2017 over 2016? In other words, how big of an EBITDA swing might be possible in the business based on current trends as you see them?

Yes. You know, John, when we bought the business, again, it had a -- it's a great company. It had a typical entrepreneur type overhead. So we scaled up to do the enterprise system conversion, and now we're obviously trying to get the excess out. And margin has been trending back to normal. So, I mean I could give you a range. I'd hate to give you a number. John, at the end of the day --

I'd say probably incrementally $2 million to $4 million over where our run rate is today.

Okay. Well even that is helpful. Thank you. And the next question is on Chicago. I mean obviously you've hired a bunch of employees. You have facilities. You have a fleet. But I assume that the infrastructure has gone ahead of the revenue. And as you integrate MT into the system now, I mean how much of an opportunity is there for the Chicago facility year-on-year 2017 over 2016, if it's a fair question?

Yes, it's a great question because we're very excited about putting the whole puzzle together. So we'll start to move them in in January and putting them into our building and onto our system. So really we're going to be a little delayed to get the synergies, the total synergies for a year purpose once we're up and running. But we took a big building. Right now that building we're not making any money, so rolling in MT, and really once we get the sales people integrated and we get the synergistic selling, the expectation, I mean we haven't put out guidance again for next year.

Yes.

So it's a moving target.

It is. I think, John, I think the incremental piece that's going to come from consolidating MT is really eliminating their warehouse, their facility cost. It's not a huge number right now. We really needed to retain all their people and things like that because we really didn't have much volume in our existing building. So there's not a lot of consolidation synergies from a people perspective, it's really more just the facility overhead.

Facility, right.

But there's a lot of opportunity for growth as we consolidate those two sales forces and things like that, and that's where the payback is going to come from.

Okay. Thank you. And should we expect deflation in fourth quarter similar to third quarter consolidated?

Given the fact that I was wrong on the last quarterly call, I expected inflation or deflation this quarter to be flattish, and it continued to get sequentially more deflationary in specialty. Where we sit today, I think it's probably similar to what it was this quarter. I hesitate to think it's going to return to an inflationary environment. I think it's more continued deflation in specialty. And I think protein has been pretty consistent with where we expected it to be. It's been in the couple percent range, 3% and some change per quarter, so I think that's probably going to be consistent.

Right. And built into our guidance for the rest of the quarter.

Correct.

Understood. Thank you.

Thank you. Our next question comes from the line of Ryan Gilligan with Barclays. Please proceed with your question.

Hi. Thanks for taking the question. How are service levels trending right now at Del Monte?

So Del Monte is operating and we are back on the offense opening up new customers. So I'm pleased to say that the real difficult part is behind us and margins are trending back to more normalized. They're in the range of where we expected them to be. So not to give you too optimistic of a picture that we're going to be at 120% of where we were, but we are in much, much better shape. We're starting to grow and we're very excited about next year.

Got it. And are the Del Monte service issues connected to why pounds sold were down this quarter, or what's going on with the pound?

Yes, listen it was a very difficult time trying to convert six facilities in the timeframe. We had a certain amount of time to kind of make them SOX compliant. So it was definitely a headwind. Everybody was preoccupied and trying to learn the new system, so now we're optimistic that the team is motivated.

And we did lose part of a very large customer, so that was part of the poundage deterioration, okay. We did keep the customer, we're just sharing them at this point. So really the management team is focused on having a typical type growth next year the way the rest of Chef grows. They're no different. We have the same team. Part of that management team that's managing Chef North Carolina is overseeing and help manage Del Monte. So they basically all have the same goals and we kind of have the same expectations.

And Ryan, one other thing on that larger customer that we exited, that was actually at the beginning of the year, which we just haven't lapped yet.

Okay, got it.

So I think we talk (technical difficulty). Yes.

That's helpful. Thanks. And if you could just comment on the cadence of sales during the quarter and maybe how the fourth quarter has started out so far, if there's been any impact from the election or anything to call out. Thanks.

Maybe some sales. I think we finished third quarter stronger than we probably expected to internally. I think that's unfortunately it's masked a little bit by the deflation that you see in specialty, but case growth was actually pretty stronger in the quarter. It was about 7.5%.

In specialty.

In specialty. I think October was a little choppy. The holidays and how they fell related to the Jewish holidays and things like that I think created a little noise. The election we think is a little bit of noise, so it's hard to pinpoint specifically how much that is.

I think, Ryan, again not having a crystal ball, I'm kind of blending September and October together because the way the holidays fell. September was extremely strong. October was choppy. And last week was a normal week. We saw the kind of growth that we expected, so we were really pleased with how last week came about. So I think without a doubt the election, people watching TV, the debates, kind of threw off part of October. And we were really glad to see there was no debate last week. We do have the World Series, but last week was very strong so it encourages us to believe that it will continue through the fourth quarter.

Got it. That's helpful. Thank you.

(Operator instructions) One moment please while we poll for more questions. Okay. I would now like to turn the call back over to Mr. Pappas for closing remarks.

Great. Well thank you everybody for joining us on our third quarter call. We're excited with the momentum that we finished the third quarter with, and we're very excited to see it continue into the four quarter. Our team fought very hard. Again case growth, I was very pleased on the specialty side with over 7% case growth, so I think that shows that our team is taking market share. And we're very excited to continue and I look forward to speaking to everybody on our next earnings call. Thank you.

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