The Chefs' Warehouse, Inc. (CHEF) Q1 2013 Earnings Report, Transcript and Summary

Greetings and welcome to The Chefs’ Warehouse First Quarter 2013 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, Alex Aldous, General Counsel and Corporate Secretary for the Chefs’ Warehouse. Thank you, Mr. Alex. 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 first quarter 2013 earnings press release. It can also be found at www.chefswarehouse.com and to the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures including among others historical and projected EBITDA and adjusted EBITDA as well as both historical and projected modified pro forma net income and modified pro forma earnings per share. These measures are not calculated in accordance with GAAP and may be calculated differently than 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 projected 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 in Form 10-Q, which are available at www.sec.com. Today, we’re going to provide a business update and go over our first quarters results in detail. Then we will open the call for questions. With that, now I would like to turn the call over to Chris Pappas. Chris?

Thanks, Alex. Welcome to all who are listening today. We are very pleased with our first quarter results. a few highlights for the quarter include the following: an increase in net sales of approximately 42% over the first quarter of 2012; a gross profit increase of approximately 35% over the first quarter of 2012 and an adjusted EBITDA increase of approximately 40% over the first quarter of 2012. During the quarter, same-store order patterns amongst our customers grew in the mid single-digit, consistent with our expectations. As we previously mentioned, we are seeing modest improvements in our key indicators. We are encouraged by this trend, although we think this would be a slow steady process throughout 2013. As for commodities, total inflation went from 1.4% during the fourth quarter to 3.1% this quarter. Cheese deflation continued to moderate during the quarter as we expected, although the dairy categories showed much more inflation quarter-over-quarter with somewhat impact gross margin. Our number of unique customers, placements and cases all grew in the mid single-digit during the quarter after you adjust for the estimated impact of acquisitions. Each of these KPIs showed sequential improvement from the fourth quarter. We continue to focus on growing in our current markets through increased penetration of our existing customers and the addition of new customers. We also continue to identify new markets that we believe present opportunities for future expansion. We have now rolled out depo in Seattle and are excited about the long-term potential of that market. Another example of that is our recently announced acquisition of Qzina Specialty Foods North America. Qzina was founded in 1982 and is based in Pompano Beach, Florida. It is a leading supplier of gourmet chocolates, desserts and pastry products dedicated to the pastry professional. They currently supply more than…

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended March 29, 2013 increased approximately 42.2% to $139.4 million from $98.1 million for the first quarter ended March 30, 2012. The increase in net sales was due largely to the acquisitions of Praml in April 2012, Michael's Finer Meats in August 2012, and Queensgate Foodservice at the end of December 2012, which all added approximately $35.7 million or 36.4% of total sales growth for the quarter. Organic growth accounted for the remaining $5.6 million of our sales growth or 5.7% growth. Inflation was approximately 3.1% for the quarter. As Chris mentioned, deflation in the cheese category continued to moderate in the first quarter year-over-year. However, we did see a pickup in inflation in the dairy categories. Gross profit increased approximately 35.0% to $35.2 million for the first quarter of 2013 versus 26.0% million for the first quarter of 2012. Gross profit margins decreased approximately 135 basis points to 25.2% from 26.6% due in large part of the impact of the mix of Michael's and Praml in Queensgate on our overall mix and as well as the pricing impact of dairy and cheese inflation. A little more granular information as we relate to expenses; warehouse distribution and selling cost increased approximately $5.8 million, which includes $347,000 of duplicate occupancy costs related to the Bronx facility. A decreased 33 basis points as a percentage of sales primarily related to those transportation efficiencies. G&A costs increased approximately $2.5 million compared to the prior year quarter, but decreased as a percentage of sales by 9 basis points to 6.3%. Overall, G&A cost increased primarily due to the amortization expense on the company’s acquisitions as well as increased compensation costs. As a result, operating income for the first quarter of 2013…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Karen Short with BMO. Please proceed with your question. Karen F. Short – BMO Capital Markets: Hi, guys

Hi, Karen.

Hi, Karen. Karen F. Short – BMO Capital Markets: Hey, just a couple of questions, and you – many retailers have kind of echoed what you said regarding business trends improving for the quarter. Just wondering if you saw the strength hold into April?

Yes, we did Karen. We saw it up about 1 percentage point. Karen F. Short – BMO Capital Markets: It sounds great. And then with the acquisition of (inaudible) the $50 million to $65 million in annual revenues, is that embed any cross-selling or is that the actual run rate now?

That’s your actual run rate now. Karen F. Short – BMO Capital Markets: Okay.

Your forecasted run rate for 2013, right. Karen F. Short – BMO Capital Markets: Got it, okay. I mean obviously there will be cross-selling capabilities, I would assume that. But I guess so many, so clarify that and then I assume you all also have ability to cross sell in Canada now is that fair?

Well obviously that was one of the attractive pieces in acquiring them, but it’s long-term. We are going to formulate a great plans for Canada, we see chef wear about obviously entering those markets and becoming a specialty broad line besides being a pastry specialist so that is plan for probably more into 2014. Karen F. Short – BMO Capital Markets: Okay and then just looking to your guidance obviously you have higher EBITDA and revenue guidance but your EPS guidance wasn’t changed. I am assuming that’s because interest at expect expectation come up.

Correct yeah we’ve factored to account all the trends in the business, higher interest on our debt facility and then the contribution from Cucina. Karen F. Short – BMO Capital Markets: Okay and so where it is adding another $100 million on to your net debt from this balance sheet data as we’re looking at a fair value.

It actually ends up being yet some net cash up until the point and time we ended up closing on Cucina. So we paid down a little bit, I’d encourage you to look at our balance sheet and our earnings release and you will get a good picture. Karen F. Short – BMO Capital Markets: Okay and then just last question is I guess those embedded in your top line expectation or early translations for the full year.

We originally guided and thought it would be somewhere in the 2% to 3% range. I don’t think that’s meaningfully changed as I mention we have a little bit of hiring in place than anticipated in daily, whether that’s regulate itself or moderates a little bit, every things else overall is kind of been in line with what we’ve expected.

Yeah, it looks it’s kind of moderator at this point. Karen F. Short – BMO Capital Markets: Okay, great. I will get back into queue. Thanks.

Thank you. Our next question comes from lines of John Marrin with Jefferies. Please proceed with your question. John Marrin – Jefferies: Hi, Chris, John. How are you doing?

Hey, John. How are you?

Hey, John. How are you? John Marrin – Jefferies: Good, good. So congrats on the Qzina acquisition and…

Thank you. John Marrin – Jefferies: A very quarterly performance there. Just a couple more questions about Qzina. So it sounds like the deal takes you into four new markets. You’re not necessarily baking any synergies into your outlook at this point. But that sounds like there might some overlap in existing markets. Are you looking at cost synergies occurring this year and take that you just think it’s just going to be $0.05 to $0.06 accretive next year is that, is it top line synergies or cost synergies? And just also can you just speak to whether it’s accretive on gross margin?

Yeah, I think a couple of things, John, as you’d mentioned. Yes, we do expect a lot of cost synergies that is baked into our guidance for 2014. They currently operate in eight markets, so four of them are overlapping markets. We’ll look to rationalizing routes and things like that and just give more efficient. I think it will take us a little bit longer from a facility perspective just because we need to look at capacity constraints and things like that. But over the course of time, we think it will be – there will be some nice synergies there. We haven’t baked a lot of top line synergies into our model at this point. To Chris’s point, (inaudible) 2014 and 2015 absolutely way to do that.

We’re looking at them, John, obviously they compliment, we already in the Phase III business, the Phase III ingredient business but they’re really specialist. So we look at them predominantly as a standalone at this point, we think they have a great runway to grow. And I think what we bring to the table, yes, cross-pollination, we got to sell each others accounts. So we’re really optimistic that they can grow on their own and then they can complement our ingredient sales to our customers and help us both grow. John Marrin – Jefferies: Okay. Great and just a follow on Terrance question about trends earlier in the second quarter here he said it was up 1% but is that organic growth or?

Yeah that’s organic growth. John Marrin – Jefferies: Okay. And so inflation has so to be is back it sounds like a bit?

I think it’s we haven’t seen it change much, I think quarter to quarter. John Marrin – Jefferies: Okay. All right, thanks guys.

Got it.

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Genuity. Please proceed with your question. Scott Van Winkle – Canaccord Genuity: Hi thanks. Congrats on the acquisition.

Thanks Scott. Scott Van Winkle – Canaccord Genuity: Right. A little more on (inaudible) I was searching a few of the markets that we are in, I didn’t see all the detail, what kind of four markets that they overlap with you?

They are currently in the New York Metro area they are actually in New Jersey, Miami, LA and San Francisco. Scott Van Winkle – Canaccord Genuity: Okay, is the model similar and obviously the product assortment is different but as far as the delivery model the sales process is it similar to what is the practice?.

It is very similar, they are very customer centric like we are, they have a phenomenal chance of sales people, a lot of them experts in ingredients, they do a lot of training, there is a lot of expertise in knowing the products, chose of them. So we were very excited to get a highly trained sales force to complement ours and we think we could do a lot of cross selling as we get into it and everybody gets comfortable, obviously they introduce us to new markets that the very long-term play and in the markets we’re in that we are going to complement each other very well. Scott Van Winkle – Canaccord Genuity: Now, I have a different customer book saying in existing markets than you do, did they open you up to any new type of customer, they are Phase III deserve focused?

They do, they take us into some new channels, new set of customers, so we think it’s going to take some time, but I think once we figure it all out we’ll be able to go to their customers that they go out a cruise ship lines which we don’t, they do some high end super market chains specially in Canada, so they do bring us a new customer and obviously we bring them thousands of customers that their products we think will fit into. Scott Van Winkle – Canaccord Genuity: Right, and no difference in your kind of formula for integrating businesses for this one than any others?

Yeah, one of the good things we’re leaving this on alone for at least a year, so at this point, we have enough on our plates that we thought since, we’re keeping their facilities and we’re keeping management intact, we are going to let them run for a while.

Yeah, I think there is a couple of things Scott, on that front as I mentioned, there’s some opportunities logistically and capturing some operating synergies and cost efficiencies to Chris point we probably will not convert systems until sometime in 2014 we are actually working on upgrade of our existing JD and those platform to later release, so I think we’re going wait until after that’s complete before we convert systems. Scott Van Winkle – Canaccord Genuity: Great, and any update on progress timing plans for the New York facility and relocation?

I don’t think there’s any new news, it’s pretty much on track for end of second quarter next year and nothing really new to report. Scott Van Winkle – Canaccord Genuity: Okay. And then just to clarify there is the question about April sales, I'm sorry to make the third question about it, and I think I confuse myself a little bit. I though you said when you said it was up one point, it was one point stronger than what you would seen in the March quarter?

That's correct. Scott Van Winkle – Canaccord Genuity: So with an acceleration of 100 basis points...

From margin improvement, yeah.

Yeah, right, we saw a nice total uptick. Scott Van Winkle – Canaccord Genuity: Excellent. Thank you very much.

Thank you. Our next question comes from the line of Andrew Wolf with BB&T Capital Markets. Please proceed with your question. Andrew Wolf – BB&T Capital Markets: Hi, thanks, and good afternoon. Chris I was wondering if you could update us on some of the decentralized operating structure, realignment there, how that's going and is that part of the driver of your sales improvement or did you think it's more than just the market itself getting stronger?

Well, if you know again when the market really picks up make our jobs much easier, but I think you raised a good point, Andy, we put a good amount of talent back into the street closer to our customers as we were talking about. And obviously we expect to get a return on that investment, so better training more face time with customers, with salespeople, we've invested and we'll keep investing to be able to continue to do these great acquisitions and obviously drive organic growth. Andrew Wolf – BB&T Capital Markets: Great. So right now it sounds like when you invest in sales is little bit leveraging on the sales commission line which is, but then it drives earnings right?

I'm not sure I understand your question Andy repeat that? Andrew Wolf – BB&T Capital Markets: I mean the original investment in the upfront investment in the sales folks, some might guarantee them instead of putting them on straight commission. So, until they become productive there is a little deleveraging there. So I’m just saying your results for this quarter and until your ramp in the – if we – it sounds like I interoperate right, that you are ramping up the amount, your sales coverage. There is going to be some deleveraging on that until the increased rate of sales coverage on the street. Yeah, that’s what I was getting on.

I want to make sure I’m clear on your point. I guess the investment we’ve been talking about making has really been more of a management infrastructure and getting those closer to the field that I’m not sure that I correlate that to sales commissions or deleveraging around that. So… Andrew Wolf – BB&T Capital Markets: Okay. Well, that’s all I wanted to know. So you are not – your sales expense line is not deleveraging as you had bodies which sometimes going to happen upfront, because new sales people…

Yeah, that’s actually part of more part of G&A than it is sales, those regional managements. I mean, obviously when you start adding people, it’s cost until you start getting a return on it. Your percentage of sales cost does go up and we have been adding people, sometimes we are trading people, but the investment – yes, we are all making investment in sales and we continue to make an investment.

We are and we’ll continue, but we’re also seeing some better leveraging of SG&A costs. So… Andrew Wolf – BB&T Capital Markets: Sure Now, I’m going to (inaudible) adding of just food distributors, food serves distribution…

Yeah. Andrew Wolf – BB&T Capital Markets: People on the street. So, I’m not going to, before I go, I’m just trying to understand where you are at and it’s not that operating structure, I think you’re more comfortable with and when the centralized one as you become more natural in the business.

So we started to – we are starting to get leverage to you see that in RR we’re down about 42 basis points in our operating expense. So we are starting to get some of that leverage we always talked about. Andrew Wolf – BB&T Capital Markets: Sure. I see, I’m just talking about this one wine. So that’s going to get – just the sales line itself going to get better hypothetically as long as the higher rate, your regional management structure takes them. Anyway that’s a way of getting to in it.

Got you. Andrew Wolf – BB&T Capital Markets: Good to see you. Good quarter and a good acquisition. So good development.

Thank you.

Thanks, Andy.

Thank you. (Operator Instructions) Our next question comes from the line of Brett Hendrickson with Nokomis Capital. Please proceed your question. Brett A. Hendrickson – Nokomis Capital LLC: My question was answered, but congrats on the acquisition and then I’ll talk to you guys offline. Thank you.

Thank you.

That’s great. Thank you, Brett.

Thank you. Ladies and gentlemen, at this time I would like to turn the conference back over to management for any closing comments.

We think the quarter actually was pretty good. We did not have great weather. And even despite the weather not being so kind to us, I think the management team did a great job. I’m really proud of them, and we expect more good news for next quarter. So thank you or joining us and have a good day.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.