The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) Q1 2024 Earnings Call Transcript

The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) Q1 2024 Earnings Call Transcript May 1, 2024

The Chefs’ Warehouse, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $0.07. CHEF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to The Chefs’ Warehouse First Quarter 2024 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. Please proceed.

Alex Aldous : Thank you, operator. Good morning, everyone. With me on today’s call are Chris Pappas, Founder, Chairman and CEO; and Jim Leddy, our CFO. By now, you should have access to our first quarter 2024 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 adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies.

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 and go over our first quarter results in detail. Then we will open the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Chris Pappas: Thank you, Alex, and thank you all for joining our first quarter 2024 earnings call. First quarter 2024 business activity displayed typical seasonal cadence as revenue trends coming out of January increased steadily in February and March. Our business units, international and domestic, delivered strong new customer and placement growth during the first quarter and aggregate price inflation continued to trend in the low-single-digit range. I would like to thank all our Chefs’ Warehouse teams for sales and operations to all the supporting functions for delivering a great start to 2024. As we head into the second quarter and the rest of the year, I would also like to recognize our customer and supplier partners for their support and confidence in our people, diversity and quality of products, and our high-touch, flexible distribution platform.

A few highlights from the first quarter include: 8.8% organic growth in net sales; specially — specialty sales were up 7% organically over the prior year, which was driven by unique customer growth of approximately 10.1%; placement growth of 12%; and specialty case growth of 4.6%. Organic pounds in center-of-the-plate were approximately 6.2% higher than the prior year first quarter. Gross profit margins increased approximately 37 basis points. Gross margin in the specialty category was unchanged as compared to the first quarter of 2023, while gross margin in the center-of-the-plate category increased 19 basis points year-over-year. Excluding the impact of Hardie’s, specialty gross profit margins increased approximately 58 basis points versus the prior year quarter.

Jim will provide more detail on gross profit and margins in a few minutes. As we move into the next phase of our growth, focused on harvesting the investments we have made the past few years, our teams are engaged in continual operational improvement processes across our domestic and international markets. These work streams include implementing technology-driven product selection and loading processes in our distribution centers, enhancements to our customer-facing digital platform as well as our continued consolidation of operation and routes in key markets. A few highlights are: during the quarter, we completed the consolidation of our [Foley Fish] seafood facility located in Boston into our new Bedford, Massachusetts operation. This move reduces overhead expenses and facilitates improved cross-sell opportunities with our specialty produce and Allen Brothers distribution platform in New England.

In Northern California, our project to consolidate multiple protein processing and distribution operations into our new Richmond facility continues to progress. We anticipate initiating operations during the second quarter, with the phased-in consolidation during the second half of 2024 and the first quarter of 2025. We expect to see the majority of operational and distribution efficiencies emerge starting in 2025. In Texas, the integration of Hardie’s in our specialty operations continues to move forward. In addition to driving cross-sell opportunities and initiating improvements in operational efficiency, our teams are making progress on capacity optimization in Houston. We expect this will facilitate growth in specialty produce and protein cross-sell to customers in the Greater Houston market as well as reduced internal transfer costs going forward.

These projects, while not all inclusive, are aimed at providing our teams with a continuous and ever-evolving platform for growth and operational efficiency within the unique business model that Chefs’ Warehouse provides to the thousands of artisan suppliers we represent and customers we serve. We are focused on continued organic growth and building on our brand as the premier marketer and distributor of specialty ingredients, produce and value-add proteins in the region we operate. With that, I’ll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?

Jim Leddy: Thank you, Chris, and good morning, everyone. I’ll now provide a comparison of our current quarter operating results versus the prior year quarter, and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended March 29, 2024 increased approximately 21.5% to $874.5 million from $719.6 million in the first quarter of 2023. The growth in net sales was the result of an increase in organic sales of approximately 8.8% as well as the contribution of sales from acquisitions, which added approximately 12.7% to sales growth for the quarter. Net inflation was 2.7% in the first quarter, consisting of 1.2% inflation in our specialty category and inflation of 4.6% in our center-of-the-plate category versus the prior year quarter.

Gross profit increased 23.4% to $209.4 million for the first quarter of 2024 versus $169.7 million for the first quarter of 2023. Gross profit margins increased approximately 37 basis points to 23.9%. And our procurement, sales, pricing, and operations teams delivered strong gross profit dollar growth across categories during the quarter. Selling, general and administrative expenses increased approximately 21.9% to $190.3 million for the first quarter of 2024 from $156.1 million for the first quarter of 2023. The increase was driven — was primarily due to the higher depreciation and amortization driven by acquisitions and facility investments, and costs associated with compensation, including benefits, facility costs, and distribution costs to support sales growth in the current quarter.

Adjusted operating expenses increased 23.6% versus the prior year first quarter. And as a percentage of net sales, adjusted operating expenses were 19.3% for the first quarter of 2024 compared to 19.1% for the first quarter of 2023. Operating income for the first quarter of 2024 was $16 million compared to $11.9 million for the first quarter of 2023. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general and administrative expenses versus the prior year quarter. Income tax expense was $0.8 million for the first quarter of 2024 compared to $0.5 million expense for the first quarter of 2023. Our GAAP net income was $1.9 million or $0.05 per diluted share for the first quarter of 2024, compared to net income of $1.4 million or $0.04 per diluted share for the first quarter of 2023.

On a non-GAAP basis, we had adjusted EBITDA of $40.2 million for the first quarter of 2024 compared to $32.8 million for the prior year first quarter. Adjusted net income was $5.9 million or $0.15 per diluted share for the first quarter of 2024, compared to $4.6 million or $0.12 per diluted share for the prior year first quarter. Turning to the balance sheet and an update on our liquidity. At the end of the first quarter, we had total liquidity of $204 million, comprised of $42 million in cash and $162 million of availability under our ABL facility. During the first quarter, we executed the following transactions as part of our progress towards achieving our year-end 2025 capital allocation goals of 2.5 to 3x net debt leverage and repurchasing $25 million to $100 million equivalent outstanding shares.

As of March 29, 2024, we repurchased $5 million of our outstanding common shares, resulting in a reduction of approximately 135,000 shares outstanding, and we repaid $6.7 million on the outstanding balance of our term loan. In addition, during the first quarter, we repriced our $270 million term loan maturing in 2029, reducing the coupon from SOFR adjusted for a credit spread plus a fixed spread of 4.75% to SOFR plus a fixed spread of 4%, lowering interest costs by 85 to 90 basis points, depending on the SOFR term selected. As of March 29, 2024, total net debt was approximately $662 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 3.3x as compared to approximately 3.4x as of the fourth quarter of 2023.

Turning to our full year guidance for 2024. Based on the current trends in the business, we are providing our full year financial guidance as follows. We estimate that net sales for the full year of 2024 will be in the range of $3.64 billion to $3.785 billion, gross profit to be between $867 million and $902 million, and adjusted EBITDA to be between $207 million and $219 million. Please note, for the second and third quarters of 2024, we expect both the convertible notes maturing in December of this year and those maturing in 2028 to be dilutive for reporting purposes, and therefore, we expect the fully diluted share count to be approximately 45.9 million shares for those reporting periods. For the fourth quarter and the full year of 2024, we expect the remaining convertible notes maturing in 2028 to be dilutive and therefore, we expect the fully diluted share count to be approximately 45 million shares for the fourth quarter and the full year reporting periods.

Thank you. And at this point, we will open up to questions. Operator?

See also 10 Best Multibagger Stocks to Buy Now and Cathie Wood’s Latest Stock Portfolio: Top 10 Stock Picks.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Alex Slagle with Jeffries.

Alex Slagle: Really strong gross profit. I mean, the best first quarter gross margin, I think, we’ve seen in like 5 years on an apples-to-apples basis and extends on the momentum you reported in the 4Q. So just kind of curious if you could dig into some of the drivers behind that and maybe what’s changed and to the degree some of that’s sustainable as we look ahead.

Jim Leddy: Yes. Thanks for the question, Alex. I’ll start and I’ll let Chris jump in. But, yes, I mean, ever since coming out of the summer 2023, we really focused on gross profit dollar growth and gross profit margin as things normalized coming out of that kind of weird summer. I think the combination of our growth in digital, providing our sales reps with more tools, more data, and still maintaining that strong sales relationship has really helped us improve margins year-over-year and just continue the momentum that we had at the end of last year.

Alex Slagle: Okay. Yes. And even on the OpEx, I mean, I know the expectation was that we’d kind of be working through some ongoing cost headwinds and more so through the first half of the year. And I don’t know, it’s just to the degree this is in line with your expectations with what we reported? Or there’s any other dynamics kind of given what you’ve seen in the first quarter? Because I mean, even with the higher OpEx, I mean, now it’s like the EBITDA margin seems to be highest I’ve seen in — for our first quarter, at least in a really long time.

Jim Leddy: Yes. I mean, to your point, OpEx came in where we expected. It’s a little bit higher year-over-year, but we expected that, and we built that into the guidance. And that’s really mainly driven by all of the facility investments that we made in the last year or 2. The main one impacting the first half of this year is we don’t lap the Florida rent until the summer. We moved in, in the summer of last year. And then some of our other facility investments like expansion in Seattle, expansion in the Philly and Southern New Jersey market, we won’t lap those rent increases until the back half of the year as well. So that’s driving the year-over-year, but operating expenses were right in line with what we expected. And our ops teams did a great job during the first quarter, continuing what they did in the fourth quarter.

Chris Pappas: Yes. I think, Alex, just to add to what Jim said. If you look back the last few years, what I think we keep saying is that we’re investing in facilities, we’re investing in systems, and we’re investing in people. We continue to add more and more people into business development and sales. We think we have a very differentiating approach to the market than a lot of our competition. We only focus on one sector really, and we think we’re the best at it. And there’s always going to be a little up and down in the economy, but our goal is, again, to be the preferred partner to most of the independent restaurants and more of the high end. And I think we get rewarded for it. And we’re all at the mercy of what really happens in the economy.

But I think our customers are a little more insulated. The more higher-end consumer has a little bit more expendable income. And I think our clientele maybe doesn’t have as much sway as what we’re seeing right now and maybe QSR, and where really raising prices $1 or $2 is pushing away traffic. So we don’t have that crystal ball, but we think — we thought that the quarter kind of came in where we had anticipated and obviously, we hope that continues.

Operator: Our next question comes from Mark Carden with UBS.

Mark Carden: So to kind of jump on that last point a little bit. You talked about your customers being a little more insulated economically. Are you guys seeing any changes at all in the competitive backdrop with respect to pricing for distributors? Do you think any segments of your customer set are facing any pressures to lower their menu prices? Or is it just different for your guys overall?

Chris Pappas: Yes. Well, I don’t know if I’ve ever seen restaurants lower prices. So I don’t know if that’s going to happen. Maybe you get a longer happy hour or incentives like Monday, Tuesday, Wednesday. It all depends on which part of the country you’re talking about. I think the coasts are a little different than the middle of the country. I mean, I think we were all concerned with the massive inflation we’ve seen in the last 4 or 5 years, what that would do for traffic. But again, most of our independents are really good restaurateurs and they’ll find that space where they can offer value and offer value for their customer trade that is more affected by price, speaking to a lot of our customers going into the call. I think it’s all the expectation as well.

The last year or 2 coming out of COVID, I think there was a lot of celebratory spending. There was customers who maybe in the past weren’t regular customers that were going out and spending more money in some of the more higher-end restaurants, especially I think you’ve heard chatter about steakhouses. And it’s just amazing how many more steakhouses there are today than — as customers of ours than we had 4 or 5 years ago. And we think that — we kind of expected that to kind of tone down a little bit. I think they were blessed with a tremendous amount of growth. And I think we’re going back to a more normal pace like we saw in 2018 and ’19, where maybe some of these clients were doing 300 turns a night, and they went to 500 turns over the last year or 2.

And of course, nobody likes to see the turns go backwards, but I think it’s more normal pace. So we would be happy with this pace for the next 20 years. Honestly, I don’t know if it’s ever going to go back to what we saw coming out of COVID. Obviously, what we saw during COVID, we never want to see again, that was horrible when all our customers closed. So I think we’re getting back to a more normal pace, and there’ll be winners and losers. We’ve seen a tremendous amount of new openings, which we kind of expected that were delayed with COVID. And with that, you’re going to kind of see an evening out. I think clients — customers have more choices in many neighborhoods and in many cities. And maybe there — I think a lot of our customers are seeing that where there is more competition for them where maybe there wasn’t 4 or 5 years ago.