The Chefs' Warehouse, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Greetings, and welcome to the Chefs’ Warehouse Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, 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 third quarter 2014 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 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 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 at www.sec.com. Today, we’re going to provide a business update, go over our second quarter results in detail and review our updated 2014 guidance. Then we will open the call for questions. With that, I would like to turn the call over to Chris Pappas. Chris?

[Christopher Pappas:]

Thanks Alex, and welcome to all who are listening today. The third quarter was another successful quarter for our specialty distribution businesses. The net sales [for] which were up almost 11% organically over Q3 of 2013. While we are very encouraged by those results, we continue to work through a few kinks related to our Allen Brothers business, which I will go over in a few moments. First a few highlights for the quarter include the following. An increase in net sales of approximately 22% over the third quarter in 2013, a gross profit dollar increase of approximately 15% over the third quarter of 2013. Since the quarter ended, we completed another tuck-in acquisition, this time in the Maryland market with the addition of Euro Gourmet adding it to our portfolio. Now I’ll go into the results in a little more detail. As I said before, we were very encouraged by net sales growth in our core specialty distribution business units for the third quarter. During the third quarter, our number of cases grew in excess of 5% organically over the third quarter of 2013. In addition, our number of unique customers grew 10% and placements grew nearly 6% versus the prior year third quarter in our core business, all adjusted for acquisitions. This growth was relatively broad based, with double digit growth continuing in the western and southern regions of the country. We are looking forward to having additional capacity for growth in our core New York market once we complete our move to the new distribution facility in the Bronx. So, very good progress there and the good news is that our success in topline growth in our core specialty business appears to be continuing into the fourth quarter. As for inflation, we continue to see pressure in dairy, cheese and protein, [both meat] and seafood categories in our core businesses, which John will touch on a little later. We also experienced inflationary pressure on margins in our protein specialty businesses, particularly at Allen Brothers. We continue to successfully build Allen Brothers as the most prestigious national high-end brand in protein and started to see significant traction in our other markets with Allen Brother’s product lines. The escalated beef prices and a lag in passing those rising prices on to customers continues to be a headwind at our Allen Brother’s division. We continue to add top industry talent and implement new technology to improve sales, productivity and procurement in the Chicago facility. We are confident with our move into our new Chicago facility, the addition of top industry talent and the continued rollout of exciting product lines nationally; we expect that Allen Brothers will pay big dividends over the long-term, especially as the beef inflation cycle runs its course. Moving on to our facilities, we still expect to open our Chicago warehouse by the first of the year and believe that Chicago market has the long-term potential to be one of our largest markets for Chefs' Warehouse. In addition, our move into the new Bronx facility is progressing and we continue to expect to be fully operational in the first quarter of 2015. I would now like to spend moment discussing our most recent acquisition of Euro Gourmet which is based in Beltsville, Maryland. The company is a wholesale specialty distributor of import and domestic products along the east coast, with annual sales of approximately $5 million. We believe that this acquisition both complements our already extensive mid-Atlantic product selection and expands our customer base in that market. While not a particularly large acquisition for us, we continue to look to look for complementary fold-in opportunities like this. There continues to be many options presented for us for acquisitions. We are actively looking at those that meet our criteria and believe that there are meaningful additional attractive opportunities for us to capitalize in the coming months. With our core business units performing well, the Allen Brothers business is starting to move in the right direction and the right people and process in place, we feel that we are positioned well for the future. With that, I will turn it over to John Austin to discuss more detailed financial information. John?

[John Austin:]

Thank you, Chris and good afternoon everyone. Our net sales for the quarter ended September 26, 2014 increased approximately 22.0% to $208.1 million from $170.6 million for the third quarter ended September 27, 2013. The increase in net sales was the result of the acquisition of Allen brothers during late 2013, as well as organic growth. Allen Brothers accounted for approximately $19.5 million of our net sales growth for the quarter. Organic growth contributed the remaining $18.0 million or 10.5% of our growth over the prior year third quarter. As Chris noted earlier, our organic case growth adjusted for the impact of acquisitions improved sequentially to 5.1% for the third quarter. In addition, our unique customer count and placements grew 10.0% and 5.6% respectively versus the prior year quarter, all adjusted to exclude the impact of acquisitions. Inflation increased 26 basis points sequentially and was approximately 5.6% for the quarter. We particularly felt the uptick in inflation in the dairy category as well as in cheese, meat and seafood. For instance dairy as measured by revenue per case, was up approximately 30% over the prior year quarter. Gross profit increased approximately 15.3% to $50.7 million for the third quarter of 2014 versus $44.0 million for the third quarter of 2013. Gross profit margins decreased 143 basis points to 24.4% from 25.8%. A continued uptick in inflation and the challenge of passing those increases on to customers pressured margins in our core specialty businesses slightly, which contributed approximately 40 basis points of gross margin compression, again primarily in the dairy, cheese and protein categories. In addition, the increased mix of protein sales contributed approximately 30 basis points of margin decline as a result of the acquisition of Allen Brothers, while the balance was attributable to the performance of Allen Brothers. Total operating expenses increased approximately 20.7% to $41.7 million for the third quarter of 2014 from $34.5 million for the third quarter of 2013. The increase in operating expenses was primarily due to the addition of Allen Brothers as well as our continuing investment in infrastructure. As a percentage of net sales, operating expenses were 20.0% for the third quarter of 2014 compared to 20.2% for the prior year quarter. The decrease in our operating expense ratio is attributable to the $1.5 million settlement we receive from the former owners of Michael’s Finer Meats related to the previously disclosed inventory accounting issue and the related investigation, which were offset in part per higher net freight cost and catalogue advertising costs at Allen Brothers and increased investments, primarily in IT infrastructure. A little more granular detail of warehouse distribution and selling costs increased approximately 21.6% due to the company’s acquisition of Allen Brothers and the investments in management infrastructure, as well as the higher freight and promotional spending in Allen Brothers. This also includes approximately $412,000 of duplicate occupancy costs related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling costs decreased 5 basis points as a result of the increased spend mentioned above, offset by the efficiencies of scale. G&A expense increased approximately 18.3% to $11.2 million for the third quarter of 2014 compared to $9.5 million in the prior year quarter, due in large part to the company’s acquisition of Allen Brothers and investment in IT I mentioned earlier. These were offset in part by the $1.5 million settlement I just discussed. As a percentage of net sales, the G&A cost decreased 17 basis points to 5.4% of net sales. However, excluding the impact of the settlement, G&A costs increased approximately 54 basis points to 6.1% of net sales. Operating income for the third quarter of 2014 was $9.0 million compared to $9.4 million for the third quarter of the prior year. Income tax was flat year over year at $2.9 million and our effective tax rate was approximately 41.0% for the quarter. Net income was $4.2 million or $0.17 per diluted share for the third quarter of 2014, compared to $4.2 million or $0.20 per diluted share for the third quarter of 2013, reflecting our common stock offering which we completed in late September 2013. On a non-GAAP basis, adjusted EBITDA was $10.6 million for the third quarter of 2014 as compared to $12.0 million for the third quarter of 2013. Modified pro forma net income was $3.7 million and modified pro forma EPS was $0.15 for the third quarter of 2014, compared to modified pro forma net income of $4.4 million or $0.21 modified pro forma EPS for the third quarter of the prior year. The decrease in modified pro forma EPS versus the prior year was due in part to the increase in the number of outstanding shares as a result of the Company’s stock offering completed in September 2013. Please refer to our press release for the quantitative reconciliations of these non-GAAP measures to their most comparable GAAP measures. In regard to our outlook for the remainder of 2014, we are adjusting our expectations to incorporate our year-to-date results as well as the trends we are seeing in the business. Given the approximately $2 million negative impact that Allen Brothers had on current results, and the likely impact they will have on the balance of the year, we estimate that revenue will be in the range of $825 million to $835 million. Adjusted EBITDA will be between $43.7 million and $46.3 million. And net income will be between $14.3 million and $15.5 million. Income per diluted share will be between $0.57 and $0.62, and modified pro forma EPS to be between $0.60 and $0.65. This guidance is based on an effective tax rate of approximately 41% for 2014 and an estimated diluted share count of 25 million shares. With that, operator we’ll turn it over for questions.

[Operator:]

(Operator instruction). Our first question comes from Mark Wiltamuth from Jefferies. Please state the question.

[Unidentified Analyst:]

Good afternoon. This is actually Chris on for Mark. John, if I could just get your take on inflation in general, hopefully maybe a little bit of commentary in terms of how far along do you expect the protein inflation to really persist going into 2015? And then maybe just any added color to which you could provide as to why dairy has become more of a prevalent issue versus the beef protein which you’ve called out history.

[John Austin:]

Yeah, maybe what I’ll do is I’ll comment on the general environment, what we are seeing across all of our largest product categories and I might turn it over to Chris on the beef and dairy issues. But we saw a sequential uptick in inflation. We were at 5.6%. Our top 10 categories, I think only one or two of them were deflationary, but what we were seeing is some really significant inflation in a lot of our key categories. For instance we had almost 30% in dairy with 29.7%, 29.8%. Meat and seafood were 9%, 15%. So, pretty meaningful amount of inflation and the uptick there. It’s really difficult to that pass that along quick enough. I think Chris will say and I’ll turn it over to him, the dairy –he’s been in the dairy businesses for a long, long time and I’m not sure we’ve ever seen that kind of inflation.

[Christopher Pappas:]

When butter shoots up from a dollar something to over $3 a pound, it’s market changing. So actually that has started to come down drastically. So we are starting to get relief in some of the dairy markets. As far as beef -- pork already has started to come down, which is a great sign and there’s some relief. I don’t think anybody expects really the beef market to come down anytime soon, but what we could do is we could file a little better in dip markets. And the customers are starting to get used to it. We inherited -- we bought Allen Brothers last Christmas and a lot of the prices are up to 25% increases. So it was drastic, drastic headwinds with that inflationary environment. And as the market settles, my experience in the business for 30 years is that as people get used to it, they raise their prices and they start to live with it. And what we’re hearing from our customers is hopefully as it comes down, they will be able to make some of their money back and we’ll capture a lot of our margin back. Maybe towards the end of 2015 going into 2016, but right now a lot of the experts are calling it 2016.

[Unidentified Analyst:]

And in 2016 you’re talking about the beef? The herd, they are normalizing and things like that as well?

[Christopher Pappas:]

Normalizing the herd, right.

[Unidentified Analyst:]

Right. So as I kind of assume or look towards 2015 from a gross margin standpoint, obviously you’ll lap Allen Brothers this coming December, but you’ll still be receiving some inflationary pressures. Is there anything which you guys can mention in terms of how you view your gross margin progression for next year at all at this point?

[John Austin:]

I think it's a little early for us to comment on 2015. We still believe in a long term guidance or goal of mid to high single digit top line. And I think you’ve started to talk about growing into our infrastructure. We expect to return to that 7%, 7% plus EBITDA kind of target. That’s [happily] still intact and where we expect to get to. Exactly when that happens is we get I think when we get into the $1 billion, $1.2 billion range, we start to approach that, we’ll give you more specific guidance likely in early January.

[Christopher Pappas:]

Just keep in mind, our core business was down about 40 basis points with incredible amounts of inflationary pressure. We‘ve already started seeing the dairy market come back to a level of normalcy. So we are optimist there that as we increase our buying power. Obviously we’ve done one little acquisition. We said that we would like to do a whole bunch and some in the next few months. So we are optimistic about that. As we hit up our cost, buying power continues to increase, normalcy in markets, we can’t be but optimistic about capturing the margin back. And especially as the beef markets normalize, we think we are going to be in a great position to get our EBTHBA margin back to what we are used to.

[Unidentified Analyst:]

Okay, great. And then I guess just my final question is from kind of a customer level if you will, how traffic trends kind of progressed throughout the quarter, maybe how they’re looking quarter-to-date. Did you see any types of regional pockets of strength or weakness? And then I have a quick follow up to that if you will.

[Christopher Pappas:]

I think in our report, organic growth was fantastic, obviously helped a little bit by the excess inflation. But our case growth of 5% very, very healthy, double digit growth overall in a lot of our regions. I think we mentioned we saw the growth continuing into the fourth quarter. I don’t think we’ve seen anything but positive signs in our customers’ business. Something is driving this growth. Obviously we’d like to think a lot of it is that we do have penetration. So our penetration per customer is going in the right way. I think it’s a combination of our customers -- our customers business looks healthy and we are starting to penetrate further selling more products to our existing customers. So all healthy signs, plus we had about -- I think we had 10% increase in our customer base so organically, so extremely healthy numbers.

[Unidentified Analyst:]

Right and you mentioned that’s persistent into Q4?

[Christopher Pappas:]

Correct.

[John Austin:]

Yeah. Case growth in ‘04 started very similarly to how third quarter started. So, pretty good strong numbers.

[Unidentified Analyst:]

Great. And then my last question in regards to the M&A environment if you will. I realize you guys you now have a dedicated team towards integration of some of your more historical acquisitions and you just took on Euro Gourmet. It’s a small tuck-in. You’ve kind of been quiet on that front for the most part over the last year or so in reality. I’m just curious, you did say that you are still looking and that there’s opportunity out there. But has there been any type of dialogue internally about maybe a strategic shift in terms of scaling back acquisitions to focus on the existing operations and kind of riding the ship at Allen Brothers if you will?

[Christopher Pappas:]

Yeah. I think we took the break. We had a tremendous amount of things internally to get straight. We had to digest Allen Brothers. We started building out the new warehouse facility in Chicago. Obviously I’d say a huge market opportunity, so a lot of focus on that. We have our computer systems, our enterprise systems upgrade, so that required a lot of time. And I think the pipeline is extremely frosty. I think that being optimistic you could see a very busy 2015, 2016 for us. Obviously there’s never -- the timing is always on closing. You never know when these deals close. But the pipeline remains very frosty and I think that we’ve digested Allen Brothers. We continue to hire the top talent that we’ve been finding to get our arms around that and get ready to really grow Chicago and take Allen Brothers nationally as a brand. I think we had to take care of our house duties and I think we expect to get a lot of these deals done in the future.

[John Austin:]

While there’s still been a number of things in the pipeline so it’s not like we haven’t been working on them.

[Christopher Pappas:]

Correct.

[Operator:]

Our next question comes from Karen Short with Deutsche Bank. Please state your question.

[Ryan Gilligan:]

Hi, it’s actually Ryan Gilligan on for Karen. One of the large broad line distributors recently mentioned they gained a decent amount of share in the New York market. I guess we are just curious if you noticed this, if you noticed any impact to your business from it. I know you guys don’t have a ton of overlap, but just curious on what your thoughts are there.

[Christopher Pappas:]

No. New York actually, despite the lack of space, we are operating at three warehouses and we anticipate moving into our new space completely in January. Their business continues to grow. It’s extremely healthy. We don’t see any signs of that business, that growth slowing down.

[John Austin:]

And actually we had a sequential uptick from the first and second quarter in that market.

[Christopher Pappas:]

Right. New York is our largest business. We have our most experienced people and we have a lot of confidence that they’ll continue to do a great job.

[Ryan Gilligan:]

That’s really helpful, thanks. Would you say that the competitive environment is relatively unchanged then?

[Christopher Pappas:]

Again, with the sounds of items that we sell, we cross over with many small companies and then obviously in our larger markets where we do sell a much larger portfolio of products in the broad line we compete with some of the larger ones. But competition has not really been something that we focus on as something that curtails our business. It’s really getting our own house in order, getting our systems up and going. We concentrate on a particular segment of the market and we think we dominate that and we are just going to get stronger and stronger in that sector.

[Ryan Gilligan:]

That’s helpful, thanks. And then just last question is I guess a big picture question. Are you guys still thinking about ruling out a cash-and-carry format or you guys have too many things on your plate at the moment?

[Christopher Pappas:]

I think right now there’s lots of things to keep us busy with Chicago, our new facility in San Francisco, moving New York. I think right now we have plenty of business opportunities to grow our business.

[Operator:]

Thank you. Our next question comes from Andrew Wolf with BB&T Capital Markets. Please state your question.

[Andrew Wolf:]

I just want to check because I joined the call a little late. Did you call out a loss at Allen Brothers of $2 million?

[John Austin:]

We did Andy, yeah.

[Andrew Wolf:]

How does that compare to either the year ago or the quarter and is that really about just unprecedented inflation, not being passed through?

[John Austin:]

Obviously we don’t know them a year ago quarter. So it’s not really comparable. We clearly didn’t expect that. We expect them to be about break even this quarter is how far this area of sequential --

[Christopher Pappas:]

A lot of that Andy, topline is healthy. The new product lines are actually performing better than expected. The long term, I’m extremely optimistic. All the things we bought them for entry into Chicago, a great brand, the best brand in high end protein. I think we got a little unlucky with the timing. When you are selling steak to steak houses that go up anywhere from 15% to 25%, there’s a lot of push back and they had a significant, very important large customer as well who -- we had to work with that customer coming. As soon as we acquired them, prices started to go through the roof. We’ve had to take that relationship and nurse it. So I think the headwinds just caught us coming into that acquisition. And we’re very optimistic long-term things will neutralize, get back to normal and we expect great things for them.

[Andrew Wolf:]

Okay and I think last quarter you mentioned you want to bring the systems in there for transparency on pricing and margins by customer and I think management. Could you update us how those two, both the management side, the personnel side and the system side of Allen Brothers..

[Christopher Pappas:]

Implementation is taking place as we speak. So we’re moving closer and closer to having great transparency and we have made a bunch of key hires. I think we’ve hired extremely talented people to run that business on a day to day. And we’re very excited about the people. We’re very excited about getting the IT nailed down and even more excited when we actually move them next year, so we put everything under one roof. We think that solves a lot of the issues of getting the process and getting the efficiencies down to the level that we expect and being able to run a much better business.

[Andrew Wolf:]

Appreciate this disclosure. On the core distribution business, profits were up, but it seems like not -- there wasn’t – margin is still contracted some. And could you just give us a sense of the gross margin and your operating expenses just roughly? I think you said 40 bps or something and how much operating expenses might have been down at the core business or up, excuse me. So and how you see that playing into next year? I know that dairy probably drove the gross margins side, but what are you looking for in the operating expense side?

[John Austin:]

Andy, the 40 basis point was the weighted contribution from our specialty business. Most of that was inflation driven. Virtually half of that was from dairy alone. So that it was really inflation related. On the expense side, I think we’re tracking where we expected to be. Most of the increased cost, particularly this quarter was in the IT area. When you normalize for that $1.5 million settlement that we had with the former owners of Michael’s, we were still up as a percent of sales. But expect that to normalize once we build scale when we get into that $1 billion to $1.2 billion range, I expect total operating expense ratios to be back in line with our historic numbers.

[Christopher Pappas:]

The core business Andy, it seems extremely healthy between the organic growth, customer acquisition. With all our projects going on, everything has to go right for us to exceed expectations. Unfortunately with the headwinds of tremendous inflation we had, exposed some of our growing pains. Overall I’m extremely happy with what I’m seeing from the sales side. Procurement gets better. Operationally we are getting more efficient when you think about the amounts of warehouses we’re running. We haven’t consolidated a lot of them yet. I think this picture starts to change as we consolidate and we get this enterprise system completely upgraded, I think that you’re going to start seeing great things.

[Andrew Wolf:]

Very helpful again. And just a last thing, it’s getting back to the IT spend. Can you give us -- if it was most of the increase in the core operating expense ratio in the core business, is that going to be and how long is it going to stay at that elevated spending rate? When do you think the project starts to come to completion?

[Christopher Pappas:]

Again we move into -- we start to complete the move in New York in January. Chicago we’re expecting to open I think January 1. San Francisco I think is a little later on and then LA is probably a little on than that. You’re going to start to see the consolidation, but the real, I think that the real trophy comes as we start to eat up all our G&A expense. Remember I’ve hired regional vice presidents. I've put in infrastructure to get ready for our expansion. I think the volume -- the efficiencies will get better as we consolidate facilities. You need less -- you need those people, those managers and all the obvious stuff. But really as we have our organic growth is really healthy, plus we do a few tuck-ins and some acquisitions. That’s going to eat up a lot of the G&A. At the unit level, they are actually doing a great job. I think John said that actually operating cost actually started to come down already even without consolidating the facilities.

[John Austin:]

Yeah. Maybe a little granule detail there, Andy. So my commentary around warehouse transportation and selling, I view those, they’re field related experience, not really corporate G&A and they actually went down by basis points. Even though cost dollars are up as we started to leverage and get a little more efficient, you are starting to see a little bit of scale leverage there. G&A when you normalize for $1.5 that million like I was talking about was up, we’ve already actually started to lap a lot of our people investments. We are not fully done there, but the year over year cost was driven a lot by IT. So, maybe a little granular detail on that. We’ve upgraded our system. Actually just a week or so ago at Michael’s we put the new IT system in Allen Brothers about three weeks ago, so upgrading them. We are probably about 40% done on our field ERP implementation with J.D Edwards. So, we’ll finish that in early next year. We probably won’t do much more in the balance of this year. We are making good progress. As it relates to that overall IT spend, I think again that ends up getting leveraged when we build a little bit more scale.

[Operator:]

Our next question comes from John Ivankoe – JPMorgan. Please state your question.

[John Ivankoe:]

Thank you. I'd like to ask a question just for my education so I'll apologies in advance for that. You guys obviously do have some inventory, whether it’s in proteins or if it’s in dairy and in a market like we saw this quarter where costs go straight up, you could imagine a situation where you are buying low and selling higher and you are actually having pretty good gross profit dollar per item in an inflationary environment. Could you – again I'm sorry for the basic question, explain why that might not be the case for a business like yours?

[Christopher Pappas:]

Yes, sure. Dairy I think if you look at it, it will look you in the face, it becomes obvious that milk and cream there is no inventory. It comes in every day. You really -- there is no real advantage, especially when it’s so unexpected. In the case of dairy and butter just went through the roof. Really it wasn’t like you could buy 30, 40 loads and then sit on it which would have been a wonderful thing. In the meat business, a lot of the middle cuts, you do age them a few weeks. A lot of the product though comes in and goes out, your ground hamburger. So you might catch a few pennies on the way up. If the market wasn’t sky high, I think you’d absolutely be right. There would have been a few weeks where you would be able to capture it because you had the inventory. But the scrutiny right now because they are all suffering from food cost, I think if you hear the steak house people report, they’ll say sales are great, traffic is up, margins are tough because it's very hard. We are starting to see steak prices, prime steaks in the 50’s, 60’s. I've even seen them on menus in the 70s. We are entering really new territory. I just think it’s a hypersensitive market that takes away some of the upside that you couldn’t experience in a market that was -- we always said that we like a little volatility and still holds true. The volatility we saw right now we’d not mind not seeing it for another lifetime. Looking forward to get more normalized types of volatility.

[John Ivankoe:]

I understand and thank you for that answer. A prime steakhouse presumably always has to buy prime and so they will be buying it from somebody if not from you. Are you actually seeing if some of your customers are actually downgrading the quality of their meat? Maybe that’s one of the reasons that you are having a difficult time passing on some of your prime meat prices as you are basically -- the market is screwed up enough that even if demand is falling, price is still going up because the supply is so short.

[Christopher Pappas:]

I think what we’ve experienced is that when you look at our other divisions, everybody sells prime meat and our margin is holding up maybe a little bit. We had to give up. But I think that the perfect storm came as we bought this very high profile company that everybody expects the product to be perfect with .And a lot of customers asked us to work with them. I think we were in a position where could we have raised the prices and said this is the market? Perhaps, but I think the timing in our outlook was that we want to build relationship with these customers. So our topline is good. We are opening new accounts. And we feel that maybe taking it on the chin a little bit now and building the relationships for a very long term relationship was probably good business. And just about every expert says this market can’t continue forever. We think we are already seeing it. We hear from the retail markets, which drives the market, there’s getting to be more push back. People are starting to switch to pork. Chicken sales can’t be better. At a certain point the market is going to start to give us back our margin.

[John Ivankoe:]

Okay. And one final question for me. Obviously you can get sales from existing accounts. You can get sales from accounts that had previously been opened that you just simply haven’t been serving. But the question that I’m asking is about new restaurants that are being opened. What are your sales associates telling you if they are about what the addressable market of restaurants is changing year over year?

[Christopher Pappas:]

It’s been a very healthy market for openings. Our new customer base and a lot of customers come from openings, so when we are starting to see 10% additional new business coming in, it shows a pretty good sign that restaurants are opening, our type of customer restaurants are opening. And as I go around the country and visit our units I see and talk to a lot on sales people. It’s just nothing but positive signs.

[Operator:]

(Operator instructions) Our next question comes from Scott Van Winkle with Canaccord Genuity. Please state your question.

[Scott Van Winkle:]

Thanks. Most of my questions have been asked already, but to stick on high beef prices, what about the consumer side? We are going into the consumer quarter of Allen Brothers, aren’t we? Is sensitivity going to be an impediment? Price sensitivity going to be a big impediment to consumer side this quarter?

[Christopher Pappas:]

I don’t expect much. I think that with the consumer side it’s so much is the fourth quarter. It allowed us to get into a position to try to hold on to margin. That product is cut and it’s frozen. It gives you a completely, completely different strategy to look forward to that fourth quarter and hold on to your profitability.

[John Austin:]

It will and I guess Scott maybe the one thing I’ll add to that just from an expectation management perspective, I think we will still see some margin compression if you will on that consumer business, not nearly like the wholesale business.

[Christopher Pappas:]

And we did -- not to go too deeply granular into it, but we did take a price increase.

[Scott Van Winkle:]

And John what kind of tailwind is fuel going forward here with what we’ve seen with prices?

[John Austin:]

Fuel is a relatively small percentage of our overall cost structure. As we are talking I’m going to find my report and tell you. But it’s down in the 25 basis point range. It’s not a big number on our P&L.

[Christopher Pappas:]

Yeah. We don’t travel very long distances for typical deliveries.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I’ll turn the conference back over to Mr. Pappas for closing remarks. Thank you.

[Christopher Pappas:]

Thank you ladies and gentlemen for joining us this evening and hope you have a wonderful night. We look forward to talking to you again shortly. Be well.

[Operator:]

Thank you. All parties may disconnect. Have a great day. Thanks.