Chefs' Warehouse Inc (CHEF) 2016 Q4 法說會逐字稿

Greetings and welcome to the Chefs' Warehouse fourth quarter 2016 earnings conference call. At this time all participants are in a listen only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. 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 fourth 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 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 on the SEC website.

Today we are going to provide a business update, go over our fourth quarter results in detail, and review our 2017 guidance. Then we will open the call up for questions. With that, I would turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you for joining our fourth quarter 2016 earnings call. We continue to show very stable and consistent growth in our base business during the fourth quarter as well as for the full year. First I want to review a few highlights from the quarter, which represents our largest quarter to date.

We continue to demonstrate our ability to grow sales profitability at a very healthy pace. We experienced 11.5% organic growth in net sales, which included the contribution of a 14th week in our fiscal fourth quarter. Adjusted for the impact of the extra week, organic growth in net sales was 3.3%.

Specialty sales adjusted for the extra week and the exclusion of the contribution from MT were up 7.4% over the prior year. This was driven by unique customer growth of approximately 6.6%, placement growth was approximately 6.1%, and case growth was approximately 7.3% versus the prior year fourth quarter. Adjusted for the impact of the extra week. Gross margins in our protein division improved approximately 84 basis points.

During the fourth quarter, margins returned to more historical levels in our Del Monte business. Compared to the third quarter, our gross margins improved 28 basis points sequentially. The challenges from our ERP conversion continue to dissipate during the quarter, and we have been able to shift our focus to rebuilding sales and start rationalizing operating expenses as we still deliver superior customer service.

Later this year we will be moving one of our Del Monte facilities into our CW new facility in Union City San Francisco. San Francisco is one of our fastest-growing Chefs' Warehouse markets for our specialty division. Consolidating these businesses into this new facility will create our first true hybrid branch, with both specialty and protein located under one roof. We are very excited about that and believe that this is our model going forward.

Allen Brothers performance also continued to improve in the fourth quarter and we are pleased to say that the business ended up being profitable by approximately $500,000 in 2016. We now have a fantastic team in place, and we believe the business is positioned well for the long-term profitability. We have great expectations for the brand and believe it is the leading brand in high-end protein in the country, both on the street and with the B2C presence.

With the consolidation of our MT Food Service acquisition into our Chicago operation complete, we now look forward to creating the cross-selling opportunities for which we have invested in the Chicago market. The team has continued to make improvements as it quickly builds toward it's $100 million goals for the CW business.

We are really excited about the incredible opportunities we have in the Chicago market. Though we will always strive for improvement, there was much satisfaction in the great execution in all of our businesses, especially in our ability to better manage margins in our protein division. As we mature as a much more cohesive team running a larger business with world-class technology, I look forward to the continued success.

The continued rollout of our e-commerce platform has enabled us the ability to interact with our customers more efficiently and to deliver product information with enhanced accuracy. This will allow Chefs' Warehouse to more effectively engage in cross-selling opportunities in all our markets.

2017, we expect to continue to build on the outstanding performance of our specialty division and continue the positive momentum in our protein businesses. Building out the Chicago market will be the primary focus, as well as looking for opportunities to leverage the infrastructure we have built and many of our key markets.

We're also continuing to invest in people and technology, particularly related to our e-commerce platform, rolling it out, which we intend to accelerate this year. We believe this technology will both help drive efficiencies as well as improve our customers' access to information and the overall experience with Chefs'. 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 December 30, 2016 increased approximately 17.0% to $342.9 million from the $293.1 million for the fourth quarter ended December 25, 2015. The increase in net sales was the result of organic growth of approximately 11.5% as well as the contribution of sales from the acquisition of MT Food Service, which added approximately 5.5% to sales growth for the quarter. Note that there was an extra week in our fiscal calendar this quarter, which added approximately $24.1 million of net sales for the quarter.

Deflation continued to be a headwind and amounted to approximately 1.8%, which decreased sequentially by approximately 40 basis points from the third quarter. Deflation continued to be fairly broad-based in our specialty division similar to the third quarter, although as expected, moderated somewhat in our protein division. Our expectations for 2017 are that our specialty category will turn modestly inflationary for the year while proteins will continue to moderate, but remain deflationary for the year.

Gross profit increased approximately 15.6% to $89.1 million for the fourth quarter of 2016, versus $77.1 million for the fourth quarter of 2015. Gross profit margin decreased approximately 33 basis points to 26.0% from 26.3%.

Our gross margins in our specialty division decreased approximately 106 basis points, compared to the very difficult comps in the fourth quarter of last year, as well as from the impact of the M&T acquisition. Gross profit margins increased 84 basis points in our protein division as we expected. Overall we are encouraged by the improvement we are seeing in that segment of our business.

Total operating expense increased approximately 7.5% to $66.7 million for the fourth quarter of 2016 from $62.0 million for the fourth quarter 2015. As a percentage of net sales, operating expenses were 19.4% for the fourth quarter of 2016 compared to 21.2% for the prior year fourth quarter.

The decrease in the company's operating expense ratio is attributable to the $8.4 million gain from the reduction in estimated earn out liability related to the Del Monte acquisition. Offset in part by increases in warehouse and delivery labor of approximately $4.4 million, occupancy costs increases of $1.1 million and investments in management personnel of $2.8 million compared to the prior year quarter.

Operating income for the fourth quarter of 2016 was $22.4 million, compared to $15.1 million for the fourth quarter of the prior year. Interest expense increased to $6.4 million versus $3.7 million for the prior-year fourth quarter as a result of the higher levels of debt and related financing costs associated with the refinancing we completed in June.

Income tax expense was $7.0 million for the fourth quarter 2016 compared to $4.7 million for the fourth quarter of 2015, and our effective tax rate was approximately 43.4% during the quarter. Our GAAP net income was $9.1 million, or $0.34 per diluted share for the fourth quarter 2016, compared to $6.7 million or $0.25 per diluted share for the fourth quarter of 2015.

On a non-GAAP basis, adjusted EBITDA was $19.9 million for the fourth quarter of 2016 compared to $20.8 million for the prior-year fourth quarter. Modified pro forma net income was $4.7 million and modified pro forma EPS was $0.18 for the fourth quarter 2016. Compared to modified pro forma net income of $7.0 million or $0.26 per share for the fourth quarter of the prior year.

In turning to our guidance for 2017, we're providing the following financial guidance. We estimate that net sales for the full year 2017 will be in the range of $1.25 billion to $1.28 billion. Gross profit to be between $320 million and $330 million. Net income to be between $9 million and $10.5 million. GAAP net income per diluted share will be between $0.34 of $0.40 per share. Adjusted EBITDA we expect to be between $62.0 million and $66.0 million and pro forma net income per diluted share to be between $0.34 of $0.41 per share.

This guidance is based on an effective tax rate of approximately 41.5% to 42.0% for 2017, and an estimated diluted share count of approximately 26.5 million shares. Note for purposes of calculating GAAP and modified pro forma diluted EPS, the Company has assumed the convertible debt will not be dilutive for the full year, and as such are not including the 1.2 million shares related to that convertible note in the diluted weighted average share count. With that, operator, we will turn it over for questions.

Thank you.

(Operator Instructions)

One moment please only poll for questions. Our first question comes from Kelly Bania from BMO Capital Markets. Please go ahead.

Hi. Good evening. Thanks for taking my questions. Good evening.

Wanted to ask just about interest expense first, is this quarter a good run rate to use for next year? It seems like maybe the Street was a little bit off in thinking about that because your EBITDA is basically in line. Is that the right way to think about it?

Yes. I think there are two things, Kelly. One, I think the Street was probably a little bit light on interest expense. This quarter, obviously, has an extra week in it, so you have to normalize for that. So the guidance -- if you look in the back of our press release, we've guided to roughly $22 million to $22.5 million of interest expense for full-year 2017.

Maybe to point out the other thing where maybe the Street was a little off was in depreciation and amortization. I think -- consensus it looked like it was a little bit light on that front by about $3 million on D&A, so that was probably the other big delta. Because you're exactly right, I think we're riding the line with consensus EBITDA numbers.

Got it, and maybe I just didn't see this in the press release, but did you provide CapEx guidance?

We didn't. We expect CapEx to be in line with what we have historically guided to, which is roughly $12 million in CapEx.

Got it. And so if I think about the EBITDA guidance, this year was around 60, I think you are saying 62 to 66. How should we think about what's driving that in terms of how much is coming from the protein division, continuing to rebound in profitability. Is that the main driver here?

I don't think it's the main driver, obviously that is a contributing factor. I think you have a lot of things. Organic growth across all of our businesses, I think Chicago being where we now have the consolidation of MT behind us, that is helpful. I think we will see some improvement in proteins, so that is a piece of the puzzle. Obviously we don't report separately in each of those divisions, but I think they are all contributing factors.

I'm just trying to figure out what does this imply for the core specialty business in 2017?

I think, Kelly, again, we took an approach -- if you looked at the earnings, you can see that we've got rate growth in specialty. Case growth was I believe over 7%. So our businesses are all growing, and our margins in protein, we stated, we are starting to come up to expectations, so we are starting to fire on all pistons. Now it is really, we have to grow into our platform and really get our expenses under control and I think we will do that.

Second half of the year, we'll start to really get more leverage as we start to grow into these buildings that we built and over the 24-month period, we really think we can get a lot of leverage as we organically grow and do some tuckins of $100 million really layered in on top of the platform that we built. We really start to get the leverage that we are looking for and the Street is looking for, and I think you are starting to see that now. More normal -- I would call them normal margins to expectations in protein.

We think we've got a great team now in place and it's starting to perform to where we were expecting. Obviously more is better, but specialty's really -- it's got a healthy growth, the margins are good, customer growth is excellent and we really think we are starting to put it all together, and I think you are starting to see that.

Great, and they can I just ask one more about e-commerce? It sounds like you are making some more investments there, you have talked about a little in the past.

Sure.

I'm just curious, what are you hearing from your customers in what they are looking for on e-commerce, and how do you feel relative to your specialty competitors relative to what they're offering? Do you think you are ahead of the game there or in line?

I'm just curious how you would compare, especially as we get these tools in place. And another question related to that is, how do you think this shift to e-commerce ordering impacts price transparency for your industry?

Yes. We are listening to our customers. They have been asking us for a bit of time right now that they want more information. With over 30,000 products that flow through our system, it's kind of impossible for one person to know all the products.

Our customers, chef driven restaurants, constantly changing the menus, so they want information and we being able to put it more online is what we are doing. And allowing them to order when they want without having to get somebody on the phone, say, to place their order is really -- it's ability that we are giving them now. And improving information flow and allowing them to interact, leave questions, ask questions, browse through the system.

The transparency -- the price is the price. What we sell -- our average customer buys one piece, one case, and they buy almost every day in many of the metropolitan markets.

We want to free up our people. We always consider ourselves salespeople more consultants, many of them have chef backgrounds. So it is really freeing up our people to go visit their customers more and be more of a consultant and show them new products where we think the strategy is a win-win.

Great. Thank you.

Our next question comes from Brian Gilligan from Barclays. Please go ahead.

Hi. Thanks for taking my question. First question is how much was the extra week to EBITDA in the first quarter?

We don't drill it down that far. As we mentioned it was $24.1 million in revenue. The weeks get a little funky right at year-end with holidays and timing of all of that kind of stuff, but I think if you took an average margin you could probably come pretty close.

Got it, that's helpful. And obviously overall case volumes were pretty strong. But can you comment on the cadence of sales in the quarter and trends in the first quarter so far?

Yes. Again, we found it to be a pretty good fourth quarter. It met our expectations. Cadence going into January, we're in the middle of February, so between all the crazy weather on the West Coast and January is January, so I would say it is tracking to expectation.

Okay, and can you just touch on maybe the pounds sold metric and why it continues to deteriorate? I know you guys lost a big customer in the beginning of the year, but if you could provide any color there, that would be helpful.

Yes, so last year we lost that customer. When you look at the pounds, as we start to lap it, we have not lapped it yet, I think that the pounds start to look more favorable.

Our protein division, we are really excited about what we are seeing, customer growth, pound growth in new customers, our ability now to get to the margins that we were expecting. Obviously more is better, but I think once we lap that big customer, we will start to see whether we are expecting really good growth and we expected it to continue.

We will lap that customer, Ryan, in the first quarter. So by second quarter it should be a much cleaner number.

Great. That's helpful. Thanks.

Our next question comes from Chris Mandeville from Jefferies. Please go ahead.

Hey, guys. Nice quarter.

Thanks.

Chris, if I could just ask, as we expect a return of inflation that weakens speciality, and then some moderating deflation in protein, how should we think about this in how it plays out with your ability to pass on that price to your end customer? How would you characterize really the customer's willingness to accept the price increase at this point?

Yes, well I think as we've said many times in the past, moderate inflation and deflation is never really a problem, especially 1%, 2%, little volatility is actually really good for us. It's when you have that hockey stick type of inflation or deflation that sends the markets kind of crazy and everybody scrambling and trying to change menus and figure out really what to do with their menus. So 1%, 2% inflation with volatility would be a wonderful year for us.

Okay, and then just looking at the margins on the specialty side anyways, if I'm doing my math correctly here, even once you exclude MT, it looks like the margins kind of deteriorated a little bit sequentially. Any color you can provide there?

Yes, MT had an influence. They were a lower margin company. One of the things that attracted them to us was giving us all those customers in Chicago and having the ability now to sell specialty. Our belief is they will look more like every other Chefs' Warehouse given a little time, but it absolutely dragged down our margins.

The other thing is that last year in the fourth quarter, we just had an exceptionally high margin; the way the markets fell and some products deflated. So our margins were really healthy in the fourth quarter in specialty. They met expectations, so we weren't expecting last year's margin, especially with the MT integration.

Got it, and then the last one for me as it relates to -- I guess what you would call an active shareholder for you guys, have you spoken to those folks at all yet and have they informed you at all of what their intentions are?

Yes, so we speak to open windows, we speak to all shareholders who are looking for information, Chris. So our expectation really is shareholders, we listen to what they have to say and we take it back and we are going to do the best thing for our shareholders long-term and run the business the way I think long-term is going to create the greatest value.

Thanks, guys.

Thanks, Chris.

(Operator Instructions)

And if there are no further questions, I would like to turn the floor back over to Mr. Pappas for any closing comments.

Sure. Thank you everybody for joining us. We are proud of our fourth quarter. We thought we made a lot of headway and a lot of progress running all our businesses, and we're looking forward to a great 2017 and we look forward to talking to everybody on our next earnings call. Thank you very much.

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