The Chefs' Warehouse, Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Greetings, and welcome to The Chefs' Warehouse Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'm now going 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.

[Alex Aldous:]

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 will turn the call over to Chris Pappas. Chris?

[Chris Pappas:]

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 today. We continue to demonstrate our ability to grow sales and profitability at a very healthy pace. We experienced 11.5% organic growth in net sales which included the contribution of a 14-week in our fiscal fourth quarter. Adjusted for the impact of the extra week, organic growth and 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've 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's the leading brand and high end protein in the country both on the street and with their B-to-C 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 is continuing to make improvements as it quickly build towards its $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 improvements there was much satisfaction and the great execution in all 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 the 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 that we have built in many of our key markets. We are 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 with both help drive efficiencies, as well as improve our customers' access to information in the overall experience with Chefs'. And with that, I will turn it over to Mr. John Austin to discuss more detailed financial information. John?

[John Austin:]

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 of this quarter which added approximately $24.1 million of net sales for the quarter. Deflation continue 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 full-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 very difficult comps in the fourth quarter of last year, as well as from the impact of the M&T acquisitions. 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 increase 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 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 of 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 the prior year. And turning to our guidance for 2017, we're providing the following financial guidance. We estimate the net sales for the full year of 2017 would 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 and $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 and $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 that for purposes of calculating the GAAP and modified pro forma diluted EPS, the companies assume the convertible debt will not be diluted for the full year and as such we are not including the 1.2 million shares related to that convertible note in the diluted weighted average share count. With that Operator, we'll turn it over for questions.

[Operator:]

[Operator Instructions] And our first question comes from Kelly Bania from BMO Capital Markets. Please go ahead.

[Kelly Bania:]

Hi, good evening. Thanks for taking my questions. Wanted to ask just about interest expense first, I guess is this quarter kind of a good run rate to you for next year, it seems like maybe the street was a little bit off and thinking about that because your EBITDA is basically inline, is that the right way to think about it?

[Chris Pappas:]

Yes, I think there are two things Kelly, one I think the street was probably a little bit light on interest expense. This quarter is - obviously has an extra week in it so, you just have to normalize for that. As for the guidance I think 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 I pointed out the other thing where maybe the street was a little off was in depreciation and amortization. I think consensus look like was a little bit light on that front by about $3 million on DNA. So that was probably the other thing delta but you're exactly right, I think we're right in line with consensus EBITDA numbers.

[Kelly Bania:]

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

[Chris Pappas:]

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

[Kelly Bania:]

Got it. And then - so if I think about the EBTIDA guidance this year was around 60, I think you're 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?

[Chris Pappas:]

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

[Kelly Bania:]

I guess I'm just trying to figure out what does this imply for kind of the core specialty business in 2017.

[John Austin:]

I think Kelly again we took an approach - if you look at the earnings you could see that, we got great growth in specialty, I mean case growth was - I believe over 7%. So our businesses are all growing and our margins in protein we stated were - we’re starting to come up to expectations, so we’re starting to fire on all pistons. Now it’s really we have to grow into our platform really get our expenses under control and I think we'll do that, we’ll start to - 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 tuck-ins of $100 million really layered in on top of the platform that we built. We really start to get the leverage that we’re looking for and the streets looking for, and I think you’re starting to see that now more normal - margins to expectations in protein, we think we got a great team now in place and it’s starting to perform to where we’re expecting, obviously more as better but in specialties really it’s got a healthy growth, the margins are good, customer growth is excellent and we really think we're starting to put it all together, I think you’re starting to see that.

[Kelly Bania:]

Great. And then can I just ask one more about e-commerce, it sounds like you're making for more investments there, you talked about it little in the past.

[Chris Pappas:]

Sure.

[Kelly Bania:]

I'm just curious what are you hearing from your customers and what they're looking for on e-commerce and how do you feel relative to your kind of specialty competitors and relative to what they're offering. Do you think you're ahead of the game there or in line, I'm just curious how you would compare especially as you get these tools in place. And I guess another question related to that is, how do you think this shift to e-commerce ordering impacts price transparency for your industry?

[Chris Pappas:]

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 to anybody - one person to really know all the products and our customers Chefs' driven restaurants constantly changing the menus. So they want information and we are 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 sites to place their orders is really - it's the ability that we're giving them now and improving information flow and then allow 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 our sales people more consultants, many of them have chef backgrounds, so it's really freeing up our people to be more of - to go visit their customers more and be more of a consultant and sell them new products where we think the strategy is a win-win.

[Kelly Bania:]

Great. Thank you.

[Operator:]

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

[Brian Gillian:]

Hi, thanks for taking the question. First question is how much was the extra week to EBITDA in the fourth quarter?

[Chris Pappas:]

We don’t drill it down that far, it's - 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.

[Brian Gillian:]

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?

[John Austin:]

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

[Brian Gillian:]

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

[John Austin:]

Yes so, last year we lost that customer, I guess when you look at the pounds, as we start to lap it, we hadn’t lapped it yet. I think that the pound start to look more favorable. Our protein division we're really excited about what we're 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 experiencing really good growth and we expect it to continue.

[Chris Pappas:]

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

[Brian Gillian:]

Great, that's helpful. Thanks.

[Operator:]

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

[Chris Mandeville:]

Hi guys, nice quarter. So Chris, if I can just ask as we expect a return of inflation at least in specialty and then some moderating deflation in protein, how should we think about this and how it plays out with your ability to pass on that price to your end customer, how would you characterize really the customers willingness to take that the price increase at this point.

[Chris Pappas:]

Yes, I think as we’ve said many times in the past, moderate inflation, 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 since the market kind of crazy and everybody scrambling and trying to change menus and figure out really, what to do with their menus so, 1% or 2% inflation with volatility would be a wonderful year for us.

[Chris Mandeville:]

Okay. And then just looking at your margins on the specialty side anyway if I’m doing my math correctly here, even want to exclude MT, it looks like the margins kind of deteriorated a little bit sequentially any color you can provide there?

[Chris Pappas:]

Yes, well MT definitely had a 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 drag down our margin. Last year in the fourth quarter we just had an exceptionally high margin, the way the market spell and some products deflated, so margins - 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.

[Chris Mandeville:]

Got it. And then just kind of the last one from me as it relates to - I guess what you 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?

[Chris Pappas:]

Yes. We speak to - in 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’re 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.

[Chris Mandeville:]

Thanks guys.

[Operator:]

[Operator Instructions] And if there are no further questions, I'd like to turn the floor back over to Mr. Pappas for any closing comments.

[Chris Pappas:]

Sure. Thank you everybody for joining us. We're proud of our fourth quarter. We thought we made a lot of headway, 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 earning call. Thank you very much.

[Operator:]

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