The Chefs' Warehouse, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Ladies and gentlemen, greetings and welcome to the Chefs’ Warehouse Third Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Thank you. Please go ahead.

[Alex Aldous:]

Thank you, operator. Good afternoon, everyone. With me on today’s call are Chris Pappas, Founder, Chairman and CEO; John Austin, CFO; as well as Jim Leddy, our incoming CFO. By now, you should have access to our third quarter 2017 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 company’s 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’re going to provide a business update, go over our third quarter results in detail and review our 2017 guidance. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

[Chris Pappas:]

Thank you, Alex, and thank you for joining our third quarter 2017 earnings call. We continue our positive momentum in the third quarter despite a number of headwinds including Hurricane Harvey and Irma. Despite these challenges our business recovered relatively quickly and we continue to support those in need in those markets. A few highlights from the third quarter include 7% organic growth in net sales despite the impact of Hurricane Harvey and Irma. Specialty sales were up 9% organically over the prior year. Note that we lapped the acquisition of M.T. Food Service at the end of the second quarter. Our specialty sales growth was driven by unique customer growth of approximately 4%. Placement growth of over 5% and case growth of just under 4% versus the prior year’s third quarter. However, case growth was negatively impacted by approximately 1.5% as a result of planned attrition at our last acquisition of M.T. Food Service. While we’re pleased with these top line results, we saw gross profit margins decrease approximately 8 basis points, driven by a 12 basis point decrease in specialty and a 3 basis point decrease in our protein division. Given the magnitude of inflation we saw this quarter, we are extremely happy with our ability to mitigate that degree of cost pressure. Just as a reminder, we did experience a 50 basis point increase in our specialty gross margins in the third quarter of 2016 and are pleased with our relative performance versus a very strong prior year comp. On the protein side, we continue to see some cost pressures in this business; particularly in the prime category, and we have taken steps to strengthen our inventory management and pricing teams, as well as to continue to diversify our customer base. So as you can see from our sales numbers, our customer base continues to be very healthy in this environment. America continues to embrace the independent chef-driven restaurants, the foundation to Chefs’ Warehouse is built on. Moving on to our infrastructure, our latest Del Monte facility move was completed in the third quarter. We consolidated one of the Del Monte facilities into our new facility in Union City, San Francisco. This will help us better integrate both our sales efforts and logistics over time as we strive for a superior customer service experience leveraging both specialty and protein. On the technology and operation fronts, in the technology arena we continue to enhance our e-commerce sites. We are now at over $650,000 per week run rate going through our platform, which is slightly ahead of our target. Overall, I would like to be at the $100 million annual run rate by the end of 2018. This continues to drive efficiencies as well as improve our customer’s access to information and the overall experience for chefs. In regards to our operation, we are very pleased with the reduction on our OpEx ratio during the quarter. We have been able to use our experience to unify and measure and ultimately improve operations across all of our distribution networks. We’ve made very nice sequential progress through 2017 in improving operating efficiency particularly in our warehouse and distribution functions. Lastly, we added Fells Point to our family of companies, which we acquired on August 25. Fells Point was founded in 1993 and is a specialty protein processor and distributor in the metropolitan Baltimore–Washington area. What really attracted us to this business was that we are looking for a protein business in the Northeast with the expertise to support our nearly 150 sales professionals with over 5,000 customers in the region. Erik and Leo mastered the art of artisan butchering in Europe and honed their craft in the United States. They are truly experts in specialty protein with a focus on quality and service to fine dining establishments, and we feel that the Fells Point is built on principles identical to our own. The integration so far has been pretty seamless. The company is already on the same basic system. So only a few tweaks here and there, and will be fully integrated. In fact, I think we will be able to leverage some of the practices to improve the rest of our protein businesses. We’re very pleased to have Erik and Leo on our team, and truly believe we’ve only begun to scratch the surface with the protein distribution in the mid-Atlantic and Northeast regions. Before I turn the call back over to the operator, I would like to thank John for his five years with us and I would like to welcome Jim as our new CFO. We will miss John, but he has built a great finance team that will be good in the hands with Jim. And with that, I’ll turn it over to John to discuss more detail financial information. John?

[John Austin:]

Great. Good afternoon, everyone, and thank you, Chris, for your comments. The last five years have been quite a ride, and I look forward to watching you and the rest of the team continue to build this company. Our net sales for the quarter ended September 29, 2017 increased approximately 9.1% to $325.1 million from the $297.9 million for the third quarter ended September 23, 2016. The increase in net sales was the result of organic growth of approximately 7.2%, as well as the contribution of sales from the Fells Point acquisition, which added approximately 1.9% to sales growth for the quarter. Inflation continued to increase sequentially during the quarter to approximately 5.2%, consisting of 5.3% inflation in our specialty division and inflation of 5.1% in our protein division versus the prior year quarter. That rate of inflation is a bit ahead of our expectations when we started 2017, particularly in proteins. But that cadence of a sequentially improving inflationary environment is consistent with our overall outlook. Gross profit increased approximately 8.8% to $80.9 million for the third quarter of 2017 versus $74.4 million for the third quarter of 2016. Gross profit margins decreased approximately 8 basis points to 24.9% in large part to the impact of inflation. Gross profit margins on our specialty division decreased approximately 12 basis points and decreased approximately 3 basis points in our protein division. We were able to effectively manage the impact of inflation on our gross margins, although we did see a slight lag in passing that impact through to our customers. Total operating expense increased approximately 6.5% to $70.4 million for the third quarter of 2017 from $66.1 million for the third quarter of 2016. As a percentage of net sales, operating expenses were 21.7% for the third quarter of 2017 compared to 22.2% for the prior year third quarter. The 54 basis point decrease in the company’s operating expense ratio is due largely to better utilization of the company’s warehouse facilities, which decreased approximately 20 basis points, lower warehouse and selling labor costs as a percent of sales, which improved approximately 16 basis points, and lower depreciation and amortization expense, which contributed to a decrease in our OpEx ratio of 22 basis points. All of which were offset in part by higher compensation costs related to the company’s management infrastructure of approximately 25 basis points. Operating income for the third quarter of 2017 was $10.5 million compared to $8.3 million for the third quarter of prior year. The increase in operating income was driven primarily by increased gross profit offset in part by higher operating expenses as discussed above. As a percentage of net sales, operating income was 3.2% in the third quarter of 2017 compared to 2.8% in the third quarter of 2016. Interest expense decreased to $5.6 million versus $5.9 million for the prior year quarter due primarily to a reduction in interest rates charged on the company’s outstanding debt. Income tax expense was $2.0 million for the third quarter of 2017 compared to income tax expense of approximately $1.0 million for the third quarter of 2016. Our effective tax rate was approximately 41.7% during the quarter. Our GAAP income was $2.9 million or $0.11 per diluted share for the third quarter of 2017 compared to net income of $1.3 million or $0.05 per diluted share for the third quarter of 2016. On a non-GAAP basis adjusted EBITDA was $16.4 million for the third quarter of 2017 compared to $14.6 million for the third quarter of the prior year. Modified pro forma net income was $2.9 million and modified pro forma income per share was $0.11 for the third quarter of 2017 compared to a modified pro forma net income of $1.7 million or $0.07 per share for the prior year third quarter. We continue to benefit from strong cash flow and deleveraged our balance sheet nicely during the quarter, despite the typical inventory build heading into our busy holiday season. We finished the quarter with a pro forma adjusted net debt to EBITDA ratio of 4.6 times. And now turning to our guidance for 2017 based upon current trends in the business, which includes the impact of the tragedy in Las Vegas, as well as the California fires, we’re updating our financial guidance as follows; we estimate that net sales for the full year of 2017 will be in the range of $1.29 billion to $1.30 million; gross profit to be between $327 million and $330 million; net income to be between $10.0 million and $10.8 million; GAAP net income per diluted share to be between $0.38 to $0.41 per share; adjusted EBITDA, we expect to be between $64.5 million and $66.5 million; and pro forma net income per diluted share to be between $0.39 and $0.43 per share. This guidance is based on an effective tax rate of approximately 41.6% for the full year 2017. And in addition, our estimated diluted share count of approximately 26.2 million shares. Note that the convertible notes are right on the cusp of being dilutive versus anti-dilutive. Currently we do not expect the outstanding convertible notes to be fully – to be dilutive for the full year and accordingly these convertible notes are not included in the fully diluted share count for your modeling purposes. I would now like to turn the call over to Jim, who will be the company’s new incoming CFO, starting next week for a few comments. Jim?

[Jim Leddy:]

Thank you, John, and good afternoon, everybody. Let me start by saying that I’m very excited to be part of the Chefs’ Warehouse team. I’ve really enjoyed my past two months here and look forward to working closely with Chris and the rest of the management team as we continue to build this great brand and execute the company’s growth strategy. A little bit about my background. I was most recently at JetBlue Airways, where I served as Interim Chief Financial Officer and prior to that served as Senior Vice President and Treasurer. Prior to joining JetBlue, I lead the global treasury team at NBCUniversal, and I also help previous Treasury and Risk Management roles at General Electric and various financial institutions including First Union National Bank and the Dai-Ichi Kangyo Bank. I know we have a few marketing trips and conferences coming up in the next few months. I look forward to meeting most of you during those events. I would really like to thank the entire finance team and especially John for getting me up to speed and making sure the transition is seamless. With that, I’ll turn it over to the operator for questions. Operator?

[Operator:]

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 Ryan Gilligan from Barclays. Please go ahead.

[Ryan Gilligan:]

Hi, thanks for taking the question. Obviously, there are a lot of moving parts in the quarter – in the fourth quarter to-date with the hurricanes, the fire, the shooting. Anyway to quantify what’s the impact on sales was from these events?

[John Austin:]

We estimate, Ryan, that the top line impact in the third quarter was about $1.2 million, maybe a little bit more, so not a huge impact. We don’t have much exposure in Texas. I think our Allen Brothers subsidiary is really the primary subsidiary that had Texas exposure. The bulk of the impact for us was really in Florida and that was both in our specialty division as well as Allen Brothers, and little bit with Michael’s as well.

[Ryan Gilligan:]

And any comment on quarter-to-date trends outside of these areas?

[Chris Pappas:]

Quarter-to-date meaning fourth quarter?

[Ryan Gilligan:]

Yes.

[Chris Pappas:]

I think so far October which is really the only thing that’s completed at this point. It seems to be solid and on track, except for the Napa fires which – I think Vegas recovered fairly quickly. Napa still a little too early to see how quickly that’s going to recover, but it seems to be recovering somewhat, it just has a pretty significant impact to that Napa area. So that’s probably a little bit – a work in process.

[Ryan Gilligan:]

Got it. And then there are also obviously a lot of moving parts to margins right now with all these different events. Can you maybe walk us through the trajectory of growth in operating expense margins that we should expect to see over the next few quarters?

[Chris Pappas:]

Probably can’t give any guidance for 2018 yet. We give guidance for 2018 in early January, I suspect. I think right now I think we’re very happy with the cadence of operating expense leverage that we’re starting to see. If you remember the first quarter we saw adjusted OpEx ratio increased in the first quarter, it was roughly flat in the second quarter, and now we’ve gotten on an adjusted basis about 23 basis points of improvement in the third quarter. I would expect something similar to that or on that same kind of trend in the fourth quarter.

[Ryan Gilligan:]

Got it, that’s helpful. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Chris Mandeville from Jefferies. Please go ahead.

[Chris Mandeville:]

Hey, thanks taking my questions. I guess thinking about the gross margin here on this quarter; you mentioned that you were a bit surprised by – in case of protein inflation. Can you give us a sense of what do you expect in Q4 and then specific to Q3, any ability to call out what Fells Point was on the gross margin?

[John Austin:]

Yes, a couple of things, maybe the last piece of that question. Fells is right in the company average. Obviously, we don’t disclose profitability by subsidiary, but it really didn’t have much of an impact.

[Chris Pappas:]

It performed as expected.

[John Austin:]

Yes, it performed as expected to Chris’ point.

[Chris Pappas:]

It was bumpy. I mean, the protein market all year have been constantly surprising all the buyers. So it was a very hard year to take a position. And 5% inflation actually in both divisions; specialty and protein was a tremendous headwind. It really tested everything that we’ve built in our pricing teams, in our algorithms and our inventory management. So it was a true testament of where we ended up. I mean, I’m ecstatic where our margins ended up for the quarter with all that headwinds and unexpected events that really came out of it. No crystal ball, every expert was kind of wrong. Every time we met to see what kind of position we wanted to take, it was really hard to put your finger in the air and say, who’s right, who’s wrong, because some – it just didn’t make sense overall. The latest news in the beef industry was the way the USDA came out and made a statement on grading, which I won’t go into. But I think a lot of all these events had an effect on the market, and it was hard to really take a position and truly benefit. And I think we did really well. Looking into the fourth quarter, I don’t think anybody really expects a big spike up. I mean, we’ve seen the markets come down, and the markets shoot back up on certain products, especially in the protein sectors. But I’m pretty – I’m comfortable where we sit right now, and again, no crystal ball, but we’re hoping that the fire damage was not as bad in Sonoma, Napa and Marin County, hence we continue – our customer has been doing pretty much what we expected them to do, they’re very healthy, lots of people are going out to eat. And so I remain optimistic.

[Chris Mandeville:]

Okay. And can you give any sense or flavor of some of the other categories, what was going on with them in terms of inflation, deflation side from proteins, maybe what’s going on with dairy products?

[Chris Pappas:]

Yes. Well, you had dairy products, and you had a dollar of that – right now, the dollar seems to be getting stronger again, which is positive for us, makes our imports less expensive. But for most of the year we did have a weaker dollar, so that drove some of the inflation in our imports. And it was mainly driven by the dairy prices, egg prices shot up again, butter prices were high, poultry had increases, lamb, veal, so it was a – I don’t think I’ve ever seen a quarter where all our divisions had this type of inflation.

[John Austin:]

Yes, that’s obvious. Just to add to Chris’ comment, I know in prior quarter as I’ve commented on kind of our top 10 categories and one of my kind of parameter is to look at how many are inflationary versus deflationary. And I think 9 of our top 11 categories in specialty were inflationary this quarter. Some was very pronounced like diary and things like that Chris talked about, but just have 9 out of 11 categories in inflationary was –

[Chris Pappas:]

I think part of it could have been the fuel prices raising as well, of course, the transportation. When I think about it, it wasn’t a bad crop or slow crop or demand. I think transportation could have part of it as well.

[Chris Mandeville:]

Okay. And I guess maybe assuming potentially inflation versus similar levels, beyond even maybe before thinking about it a little bit longer-term. Based on all of the investments you’ve made historically in improving your systems and kind of improving upon you’re supporting staff, how do you feel about your ability to offset potential gross margin compression by capturing some incremental gross profit dollars to leverage your thoughts?

[Chris Pappas:]

You’re saying that if we get a little deflation from the levels that we’re at, we able to keep some of it?

[Chris Mandeville:]

No, more so remain as it is and continues to pressure on your gross margin.

[Chris Pappas:]

Yes. Well, I think what we’ve really excelled at is being a tremendous merchandising company. So I think kind of the reason you sort of hold onto most of our GP is our ability to give customers solutions. So olive oil being the perfect example, our biggest selling categories are private labels and we can move around the source to kind of keep the price. Maybe there is some inflation, but it helps us with our bottom line. And I think we’re developing the same talent in our protein divisions, giving customer solutions with either different cuts or the weight of the products are cut. Even though there is inflation, we’re giving them the ability to menu, merchandise products differently and keep their profitability. So obviously, I would prefer a little bit of volatility and some up and down little deflation, but the pricing teams are doing a tremendous job as the merchandising teams as well.

[Chris Mandeville:]

All right. And then the last one for me and I’ll exit. It may be a bit earlier, but just in terms of your [indiscernible] facility out in San Fran now, any early – are there issues or learnings, or maybe even benefits for that matter that you feel like you’ll be able to expand it to various other markets to help you over longer-term?

[Chris Pappas:]

Are we talking about the move into Union City and consolidating one of our facilities?

[Chris Mandeville:]

Yes, both protein and specialty products group.

[Chris Pappas:]

Yes, extremely optimistic. Way too early, they’re just getting used to their new digs. But I truly believe the model works really well. It’s working tremendously as far as being able to teach, the convenience having everybody in the building, holding sales management meetings, starting to talk about the overlap of accounts. And I’m very optimistic that this was going to be a great model.

[Chris Mandeville:]

All right. Guys, thanks again.

[John Austin:]

Thanks, Chris.

[Operator:]

Thank you. Our next question comes from the line of Kelly Bania from BMO. Please go ahead.

[Kelly Bania:]

Hi, good evening. Just wanted to quickly ask about the guidance. Just changed a little bit to the upside, but how much of that is just underlying core Chefs’ versus just incorporating sales point? And obviously, you’re absorbing some of these headwinds that you’ve talked about as well?

[John Austin:]

Yes, I think our guidance incorporates all of that, I think is the short answer. I think the Napa impact that is a little bit of a moving target right at the moment. Obviously, we’re still dealing with kind of the overall impact on our customer base. And fortunately, we had no property damage and we’re still up and running, but it was a pretty significant impact to that geography. So I think for Fells, the guidance we – if you remember we had spoken about when we announced Fells, it’s really not going to add that much to 2017. I think we do expect it to contribute to 2018, but in the interim, there is a fair amount of integration costs and a lot of moving parts in that regard. So is it marginally positive? Yes, it’s contributing, but it’s a pretty small number.

[Chris Pappas:]

Yes, kind of mitigated with the headwinds between the hurricanes and Las Vegas and now the fires.

[John Austin:]

Fires.

[Chris Pappas:]

Yes, kind of mitigated all the upside.

[John Austin:]

Yes.

[Kelly Bania:]

Okay, that makes sense. And then in terms of I think you said the Fells Point was pretty similar margin profile. I think it added 1.9% to top line. Did it add a similar amount to OpEx? Just trying to understand the kind of underlying core Chefs’ OpEx trends.

[John Austin:]

Yes, I think probably getting a little more granular than we’re willing to talk about –

[Chris Pappas:]

Yes. Talking in general, their OpEx in general is less than our broadline distribution centers, just because the nature of the product being very expensive. So it does flow more in line with our Michael’s business and probably our Del Monte business. So it’s kind of where we expect it to be in their profile.

[John Austin:]

Yes.

[Kelly Bania:]

Got it. And are you expecting any attrition at Fells Point?

[Chris Pappas:]

Fells is standalone and did not have to go through a complete enterprise system conversion. So a much different animal than what we’ve experienced in the past, having converted six facilities. So optimistically, I think that their business is going to hold, it’s strong. We did have some overlap, but we don’t sell a lot of protein in the Mid-Atlantic. So I think that again, being optimistic and – really proud of the management team that is running it and that they are on the same ERP system. We think their business will hold.

[Kelly Bania:]

Great. And you also made a comment about diversifying the customer base. Could you elaborate on that?

[Chris Pappas:]

Sure. Again, I’m really proud of what Chefs’ Warehouse, our culture and what we’ve built, with close to 40,000 independent restaurants. And some of the last few acquisitions we have inherited some concentration in customer base. And obviously, we’d like to sell everybody, but our lessons are that – those customers are a little bit different. We’ve held onto most of them, but we do expect some to cycle out that don’t fit – don’t benefit from our model. And I still think that we are cycling out a few of them especially in the protein. And usually, they’re much lower margin, Kelly, so as they cycle out, some of the volume comes down, but we start to build – we start to add the volume back at a much higher profit margin.

[Kelly Bania:]

Okay. And can you quantify the impact of this quarter or what you expect over the next fiscal years or quarters?

[Chris Pappas:]

Yes, I mean, I can’t –

[John Austin:]

We’ve been talking – since we bought most of those companies, that they had a larger concentration of what we’d consider to be non-core customers than a typical Chefs’ profile. We cycled out some of that. And as we continue to move forward, we’re – I think the comment Chris is really referring to is really about rebuilding some of that customer base with more traditional street, chef-driven restaurants as opposed to these bigger chains.

[Kelly Bania:]

Got it. And then I guess just maybe any thoughts on kind of the longer-term EBITDA margin goals, just any changes in ability or timeline to reach that?

[Chris Pappas:]

Yes. I don’t think anything has changed. I mean, again, hopefully, no more earthquakes and God forbid, another major fire, had enough of the hurricanes. But our margin profile is – I don’t see any reason why it would track differently.

[Kelly Bania:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of John Ivankoe from JPMorgan. Please go ahead.

[John Ivankoe:]

Hi, thank you. Two questions from me. Firstly, Chris, referencing your prepared remarks, where you talked about, you’re focusing on the inventory and the pricing side within your protein division. Could you talk about how centralized your various protein companies are? I mean, is there a wide kind of disparity in performance amongst those protein divisions, I mean, maybe there are some best practices that you can do it to pull up the low performers to the high performers. Just elaborate on what you said in the context of what are some at least from what I understood is some fairly independently operated protein companies?

[Chris Pappas:]

Yes. Well, we operate in different regions in the country. And there is overlap, especially in some of the larger customers that we service, who use the same product, who would like to use the same product in all of their establishments. But we do run local businesses, and yes, we are sharing best practices. And I still think that we have lots of upside as we mature as a management team, and we continue to do acquisitions, we get better and better as far as knowing about the information and how to buy. So I think in my comments about – we have – we’ve recently, and when I say recently, probably in the last six months, really got to start to focus on how to share best practices that we have at Chefs’ as far as how we look at the information and price and start to implement that into our protein programs – in our protein company. So I am hopeful that as we keep maturing and as our management team keeps maturing and our pricing team matures that we do start to get that ability to buy better and price better and manage inventory better. So I would say to you that it’s all happening and it should continue to improve as we improve.

[John Ivankoe:]

Okay. Fair enough. And then secondly, on the expectation that your e-commerce platform gets to – I think $100 million run rate by the end of fiscal 2018, if I wrote that down correctly. What does that mean for your business? Whether making the current sales force more efficient and effective, so maybe your total selling costs, product count can time down or maybe Chefs’ can start selling a certain lower touch type of accounts that you could…

[John Austin:]

John, did we lose John?

[Operator:]

Sir, it appears his line has disconnected. We will move on to the next. Our next question comes from the line of Andrew Wolf from Loop Capital Markets. Please go ahead.

[Andrew Wolf:]

Hi, good evening. I had to drop off to get back in the queue, so I kind of missed that, you might have said that’s been just indulging. On the – I think I understand the meat markets are kind of choppy, but on the specialty side, why did the margin contract, was it just rapid inflation in some of the categories, or you managing to kind of preserve gross profit for phase like –

[John Austin:]

Obviously, Andy, we were trying to capture as much gross profit as we could. I will tell you that having 5%, 5.3% inflation in specialty, we were pretty happy with how we performed from a gross margin perspective. So the 12 basis point, dip off of a very, very strong comp last year, it was not so bad. But we had 14% inflation in dairy, specialty pastry was at 10.2% there were just a lot of categories that had a lot of inflation. Put some pressure on being able to pass it through quick enough. And hopefully we will get that pass through and recover that margin. But we were not unhappy at that 12 basis point.

[Chris Pappas:]

We are not unhappy, Andy I think as much of a headwind that we had this year, we probably had a tailwind last year. So we were really up against a tough comp. On top of everything but you know 5% inflation in a quarter, again, the team did a phenomenal job passing on most of it. So I feel good about it, and I feel good about some normalization with inflation of what we’ve seen. And you’ve been in the business long enough to know that – hopefully we got a little volatility and some deflation and you’re able to keep part of it and that’s always the goal.

[Andrew Wolf:]

Yes. Thank you. That was really helpful. The headwinds you spoke of are obviously pretty tragic but on a business sense did you talk about how the markets like New York, Boston and LA the market that weren’t affected. Did they perform lot better? What’s the pro forma look on the business that people can sort of take away on how the quarter and come out not for this confluence of natural disaster.

[Chris Pappas:]

Well, the quarter again, I keep reiterating that I’m always – I’m pleasantly satisfied with how our customer’s customer is performing, people are spending money and it seems like we have a great – all the cities. We’re in a lot of business cities, a lot of tourist cities. The summer was really good overall except for – we had a weird week and the holiday week just the way the week fell. And we had a squarely end of summer – end of August for some reason did not track like the rest of our weeks track. If I take out the holiday week and I take out the squarely last week of August, I was really happy with the quarter. Unfortunately, yes, you had the hurricanes come and then at the end of the quarter we had the craziness in Vegas. But I would say I am pleased with how our customers seem to be doing and the kind of reward that they’re rewarding us with what they’re buying from us and continue to buy and continue to buy more. And we’re adding penetration, and we’re adding categories. And I think the Chefs’ platform, the Chefs’ business plan is performing as we expect.

[John Austin:]

Our underlying case growth, Andy particularly when you exclude the 0.5 of planned attrition from M.T. the adjusted number was 5.2% case growth, which is very solid.

[Andrew Wolf:]

Got it. And I just wanted to ask because you filed the financials on Fell. The business, their margins are down, they’re still really good but they’re down their operating margin. Can you just explain to us, what’s going on with their business and is the newer margin around 7% to 8% is that kind of the run rate rather than one that’s double digit, low double digit?

[John Austin:]

Yes. They had their high watermark in 2016, so we did not go into that deal expecting that kind of performance. I’d say the current run rate that you see in those pro forma – and include some integration costs and will need to add a little bit of costs is probably more indicative of where we expect it to be.

[Andrew Wolf:]

Okay. And just lastly, I’m sure you’re really into the 2018 planning process, I’m trying to get you to trick in or try to tip your hand on guidance or anything like how are these – are you sort of assuming away these headwinds that they kind of get resolved in the fourth quarter it can impact the planning, the business and all your markets being fairly normal.

[Chris Pappas:]

It depends on what kind of headwinds you’re talking about. I mean, fires we hope so. Hurricanes hope no more, shootings God forbid. So it’s really if you’re referring to inflation, we’ve been talking for a while and I think, I sound like a broken record I think from the first call we had gone public. We have to learn on a national level how to help all our local businesses with inventory controlled and pricing. And I would say, we’ve made tremendous advances and we’ve built a great team. I think, spending the money and building the platform and building the departments was the right thing to do. So we’ve built the talent and the team to really grow. I think when I first met you it was like $300 million and today we’re talking about how do we get to $2 billion and $3 million. So really excited where we are and I think headwinds are always headwinds and it’s always great to get 150-mile an hour tailwind for sure. We’ve built it to manage through the headwinds.

[John Austin:]

Yes. I think one thing Andy, maybe to kind of put in perspective. I mean there’s you’re not the only one has asked about these headwinds and all the stuff. I think, the tone I’m getting or the sense that I’m getting from most of the questions is gosh the headwinds we’re really a problem and we certainly rather not have the headwinds. But when you think about the impact of the hurricanes in total on the business it was $1.2 million, $1.3 million, it’s not that big. Primarily in the protein segment, we’re relatively small in Florida. So it’s really more in the protein segment than that the specialty business. I know we talk about the Las Vegas shootings and fire things like that. I mean Vegas is back very quickly the fire there’s probably still a little bit of uncertainty around how quickly that business will come back. Good positive signs, positive signs that is rebounding. I think it’s baked into our fourth quarter forecast. I know you want some 2018 guidance. We’ll just leave it there.

[Andrew Wolf:]

That was a good explanation actually that’s exactly what I was looking for. I’m reading stuff and whatever.

[John Austin:]

Right, right.

[Andrew Wolf:]

California papers about places getting burnt down…

[John Austin:]

Sure. I got it.

[Andrew Wolf:]

Your business is national, you have a fair – a little bit more concentration in these markets…

[Chris Pappas:]

I think you could say, I think you can take away from our guidance that the business is good and if you had a tailwind business can be even better.

[Andrew Wolf:]

Okay. Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of John Ivankoe from JPMorgan. Please go ahead.

[John Ivankoe:]

Thank you. Technical difficulty passed on – it turn into a fast busy signal and then as I was [indiscernible] I don’t know what the hell happened. So I apologize for that.

[Chris Pappas:]

I was worried you were in bad place where a natural disaster was coming about.

[John Ivankoe:]

Don’t say that because I definitely it proven a prone area, so we’ll talk about that later. Okay, so the question was on moving the business $100 million of e-commerce making the sales force more efficient or effective. There was lowering the selling cost and also – whether developing more e-commerce allows you to maybe serve some customers that you currently can’t serve to a lower touch model that would necessarily be profitable in the current way of doing business. So can you just talk about the importations of that $100 million of sales outside are just convenience for your customer.

[Chris Pappas:]

Yes. John, I think you’ve hit on some really important pieces of why I’m so excited. A lot of the sales staff and people are worried how it changes your job. And to me it’s really the most unbelievable tool that I’ve seen be in this business for over 30 years. So we’re seeing everything, we’re seeing customers come on and order more products, we’re seeing customers sign themselves up and become customers that we would never call on and order products. We’re seeing customers starting to input their own orders and allowing salespeople to have more time to spend on going out and actually showing products and trying to further penetrate their customers. We’re seeing customer service people have more time to actually perform customer service then more of the mundane process of taking an order. So I think it’s going to transform the way this business takes place. We still have to get the order, we still have to put it on a truck and we still have to deliver it on a very tough time slot, which is one of the keys of Chefs’ and how it does it with a high touch model and a high service model. But I’m very optimistic there’s also an inflection point where everybody starts to come online. I think now it’s more the younger generation. Before we gave them the opportunity to place their own order on Internet, what we found was a large percentage of customers were already texting the order or emailing it to the sales person, which now creates a double process of having to take it and then actually keypunch it. So it’s really – the goal is to create more time for sale staff to actually go out and sell more products and the hope is that you need less people to do that. So as we go from $1.3 billion, $1.4 billion to $2 billion you don’t need as many sales people as the old model and you get leverage on your sales cost. Go ahead.

[John Ivankoe:]

No please.

[Chris Pappas:]

Yes. I think it also – you’re going to improve customer service, the way you communicate, there’s no waiting for somebody to pick up the phone all the time during the busy time. You get to – communicate your customer constantly and send the messages, verifying their order, double checking their order and also machine learning. The machine, it’s learning the patterns of the customer, we’re creating their frequent item order list and then we’re able to also offer the more products, which sometimes they’re too busy and don’t have the time to listen. When it’s busy time and now actually they can say, hey, you know what, that’s a great item, I just saw on your list I’m going to add it to the order. So I am really excited about this.

[John Ivankoe:]

And is there a tipping point, and I don’t what that would be 10%, 20%, 30% of sales whatever it is to where you actually can start to see much more efficiency of the sales force?

[Chris Pappas:]

I’m optimistic and I’m really optimistic that the new phone app, it’s going to bring that inflection point a lot quicker. I think especially the younger generation, when we did our surveys and asked customers what do they want, number one request was, give us the phone app especially in places like New York City where a lot of chefs purchases they actually place their order on the way home. So, they get on the train and get on their phone and they’ve got their list and boom, boom, boom. It’s really easy and they’re used to it. That’s the way they’re doing commerce in their personal lives. And I think it’s just going to transfer over and we’re starting to see that. I think the phone app is going to be huge.

[John Ivankoe:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I’d like to turn the floor back over to Chris Pappas for closing comments.

[Chris Pappas:]

Yes. I’d like to thank everybody for joining us at the third call. I’d like to again thank Mr. John Austin for giving me five years of his life and helping us transform a small family business into a over $1 billion public company. It was a Yeoman’s job and we had a lot of fun, we really enjoyed John and we wish him the best in his next endeavor. And we welcome Jim for the team and excited Jim will do great things in the next chapter of Chefs’. I also like to – again, we did our best to assist in with really where natural disasters and some unfortunate happenings. We started food drives and we donate as much food as we could to all the people that were helping out in the fires and in the hurricanes and the relief efforts in Puerto Rico. So really tragic and our hearts and prayers go out to all those affected and very proud of our team who participated and continues to support those relief efforts. So look forward to a great fourth quarter and being on the next call. And thank everybody again. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for participation. And have a wonderful day.