The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) Q4 2023 Earnings Call Transcript

The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) Q4 2023 Earnings Call Transcript February 14, 2024

The Chefs’ Warehouse, Inc. beats earnings expectations. Reported EPS is $0.47, expectations were $0.43. 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: Greeting, and welcome to The Chefs’ Warehouse Fourth Quarter of 2023 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 go ahead, sir.

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 fourth quarter 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we’ll 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 fourth quarter results in detail. 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 all for joining our fourth quarter 2023 earnings call. Business activity coming out of September strengthened into the fourth quarter as seasonal customer demand and volume trends progress through November and December to close out 2023. Price inflation continued to moderate and our Chefs’ Warehouse teams across our North American and international markets delivered strong organic growth and margin improvement. As we move into 2024, I would like to thank all of our CW teammates for the dedication and passion they have for our mission to discover and deliver the finest specialty foods, fresh produce and center-of-the-plate protein that inspire the culinary creativity and feed the success of our customer and supplier partners, as we strive for excellence and impeccable service.

As a reminder, we are comparing the fourth quarter of 2023, a 13 week fiscal quarter for the fourth quarter of 2022, a 14 week fiscal quarter and as such we will present certain results both as reported and on a prorated 13 week comparison. A few highlights from the fourth quarter on a prorated basis include 11.3% organic growth in net sales, specialty sales were up 11.2% organically over the prior year, which was driven by unique customer growth of approximately 12.4%, placement growth of 6.5% and specialty case growth of 11.3%. Organic pounds in the center-of-the-plate were approximately 8.4% higher than the prior year fourth quarter. Gross profit margins increased approximately 38 basis points. Gross margin in specialty category decreased 76 basis points, as compared to the fourth quarter of 2022, while gross margin in the center-of-the-plate category increased 71 basis points year-over-year.

Specialty gross profit margins were lower primarily due to the addition of Hardie’s. Excluding Hardie’s, specialty gross profit margin increased approximately 35 basis points versus the prior year quarter. Jim will provide more details on gross profit and margins in a few moments. During the Q4, we completed multiple steps as part of our ongoing focus on harvesting our investments in warehouse and distribution capacity in recent acquisitions. These projects involve both consolidation of distribution center, routes and operations in certain markets as well as further integration of acquired sales teams distribution and cross selling with our existing specialty and protein businesses in key markets across our network. A few highlights are; in Florida, we completed the consolidation of three facilities into our new distribution center located in Opa-Locka.

We now have meat and sea food processing specialty and produce distribution operating under one roof with significant room to grow over the years to come. We initiated operations in our new distribution center located in Southern New Jersey serving the Philadelphia and Pennsylvania market. This facility provides expanded capacity in a region as well as creates additional room for growth in the New York Metro and Mid Atlantic markets. In Dallas and Austin, Texas, we have begun the process of cross selling our specialty and Allen Brothers protein distribution with Hardie’s is facilitated by a combined sales force and route consolidation in the initial stages. We have reduced facility related costs in Houston and are working on future distribution plans in the state’s largest market.

Our expansion in Dubai continues to progress and we anticipate commencing operations out of the additional capacity in the second half of this year. Our consolidation of protein processing in Northern California is on-track to begin a phased-in move starting in the second quarter of 2024 and progressing through the end of the year. For 2024 and beyond, we expect to leverage our expanding infrastructure, further integrate recent acquisitions, while strengthening the balance sheet, focusing on free cash flow generation and delivering our two year capital allocation plan. As we enter this next phase of our growth, we expect Chefs’ Warehouse to remain rooted in our DNA as the leading specialty food marketer and distributor to the upscale casual and higher-end dining establishments in the markets we serve.

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 December 29, 2023, increased approximately 29.3% to $950.5 million from $734.8 million in the fourth quarter of 2022, which represents a prorated 13 week net sales for the fourth quarter of 2022. Net sales on a reported basis, 13 weeks compared to 14 weeks, increased 20.1%. The prorated growth in net sales was a result of an increase in organic sales of 11.3% as well as the contribution of sales from acquisitions, which added approximately 18% to the sales growth for the quarter.

Net inflation was 1.8% in the fourth quarter, consisting of 0.6% inflation in our specialty category and inflation of 3.4% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 31.4% to $228.6 million for the fourth quarter of 2023 versus a prorated $173.9 million for the fourth quarter of 2022. On a reported basis, comparing 13 weeks to 14 weeks, gross profit increased 22%. Gross profit margins increased approximately 38 basis points to 24.1%. As mentioned on our third quarter call, gross profit dollar growth and margin trends improved significantly coming out of the softer summer months. These trends continued as the quarter progressed into the holiday season and our teams across our regions including sales, operations, procurement and all the supporting functions delivered a strong margin performance, while providing the premium quality product and service our customers have come to expect from The Chefs’ Warehouse.

Selling, general and administrative expenses increased approximately 23.8% to $190 million for the fourth quarter of 2023 from $153.4 million for the fourth quarter of 2022. The increase was primarily due to higher costs associated with compensation, including benefits, facility costs and distribution costs to support sales growth in the current quarter. On a prorated basis, adjusted operating expenses increased 33% versus the prior year fourth quarter and as a percentage of net sales, adjusted operating expenses were 17.8% for the fourth quarter of 2023 compared to 17.3% for the fourth quarter of 2022. Operating income for the fourth quarter of 2023 was $38.2 million compared to $29.8 million for the fourth quarter of 2022. The increase in operating income was driven primarily by higher gross profit and lower other operating expenses, partially offset by higher selling, general and administrative expenses versus the prior year quarter.

Income tax expense was $10.1 million for the fourth quarter of 2023, compared to $4.3 million expense for the fourth quarter of 2022. Our GAAP net income was $16 million or $0.38 per diluted share for the fourth quarter of 2023, compared to net income of $1.2 million or $0.03 per diluted share for the fourth quarter of 2022. On a non-GAAP basis, we had adjusted EBITDA of $59 million for the fourth quarter of 2023 compared to $50.1 million for the prior year fourth quarter. Adjusted net income was $20.2 million or $0.47 per diluted share for the fourth quarter of 2023, compared to $18.2 million or $0.46 per diluted share for the prior year fourth quarter. Turning to the balance sheet and an update on our liquidity. At the end of the fourth quarter, we had total liquidity of $221.9 million comprised of $49.9 million in cash and $172 million of availability under our ABL facility.

Total net debt was approximately $662.5 million, inclusive of all cash and cash equivalents. And net debt-to-adjusted EBITDA was approximately 3.4x as compared to approximately 3.6x as of the end of third 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 a range of $3.625 billion to $3.775 billion. Gross profit to be between $865 million and $900 million and adjusted EBITDA to be between be between $205 million and $218 million. Our full year estimated diluted share count is approximately 44.9 million shares. For reporting purposes, we currently expect our senior unsecured convertible notes maturing in 2028 to be dilutive for the full year and accordingly, those shares that could be issued upon conversion of the notes are included in our fully diluted share count.

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

See also 14 Best US Stocks For Foreign Investors and 15 Highest Quality Fish Oil Supplements for 2024.

Q&A Session

Operator: Thank you. Before we start the Q&A, we just want to remind everyone that a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the Investor Relations section of the company’s website and in today’s press release. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Alex Slagle of Jefferies

Alex Slagle: I wanted to ask about the outlook for ’24 and maybe I guess first, if you can provide some expectations on the magnitude of impact related to acquisitions that are rolling over into ’24, and get any sense for the cadence, what that looks like, assuming no other transactions?

Jim Leddy : Yes, in terms of the acquisition wrap impact. We had sized that previously right around 2.5% to 3%. And then in terms of the outlook for 2024, was that the first part of your question?

Alex Slagle: Yes.

Jim Leddy: We started off with January. It’s a pretty good month. Obviously, there was some weather impact that we saw in some of our markets, but actually January is relative, it’s always the worst month in the industry, really for our company and the entire industry. But actually our teams executed very well during the month and we had a pretty good January and it feels like the usual build coming out of January into February is taking place. So right now, we’re sticking with our guidance and go from there.

Alex Slagle: The expectation for the elevated operating expenses continuing through the first half, as we think about the typical first quarter, second quarter cadence of EBITDA. I mean, the first quarter is usually only 14%, 15% of your annual EBITDA. Are we kind of getting back to that normal seasonal cadence or the OpEx expenses? Should we expect that to be more elevated?

Jim Leddy: Yes. We wrapped the increased rent from Florida and kind of midway through the year and then we’ll wrap the impact of the additional New Jersey rent in the third quarter. There are some elevated expenses continuing in the first half of year. But the percentages in terms of EBITDA returning to more normal than they have the past three or four years for sure.

Operator: Our next question comes from Todd Brooks of Benchmark Company.

Todd Brooks: Thanks for the questions and congrats on the Q4 results. Couple of quick questions for you. One, I know as part of the new two year capital allocation plan, you guys did put a share repurchase in place and did some work with your lending partners to be able to execute against that. Just not much evidence of it in what the full quarter share count was, but were you active on the plan at all in the fourth quarter?

Jim Leddy: No. We actually put it into place well through the fourth quarter, about almost halfway through and we hadn’t executed any of it as of the end of fourth quarter.

Todd Brooks: Okay. But I think in your full year guidance, what you pointed to for fully diluted 44.9 million does that imply some repurchase anticipated over the course of ’24?

Jim Leddy: No. What it really implies is that we expect to cash settle the ’24 converts to $39 million that mature at the end of 2024, and so we don’t expect them to be fully dilutive for the entire year. The previous estimate, as you know, 45.7 million. You just pretty much take out those 900,000 shares associated with the 2024 converts and that gets you to the 44.9 million.

Todd Brooks: Another one, Chris. I’d love to hear, I’m just looking at the unique customer growth and it seems to be accelerating nicely on a year-over-year basis over the past several quarters, what are the drivers there? And what’s the tail to the ability for Chefs’ to go out and add new customers to the fold as you look into ’24?

Chris Pappas: Yes. Great question, Todd. Again, we continue to hire and train new salespeople to the team and that’s been our engine driver for almost 40 years now. As much as we are using digital to grow awareness and take more and more of our orders, the actual orders that are coming in from customers, which is freeing up the sales team to go out and continue to open more customers. It really is — it’s such an important part of our growth because natural attrition for various reasons as sticky as our customer base is, I mean, we’ve had customers now for over 30 years. You got to have new customers constantly coming in. It’s just the nature of who we sell? We sell to independent restaurants and as they mature, their leases sometimes mature out and many other reasons why there’s turnover but let’s face it.

Customers love new restaurants and restaurant tours like to open new restaurants. We feel that’s where we’re winning. Most of the customers that are opening in the territories that we sell, I think Chefs’ is the dominant partner and I think that’s what’s driving that number.

Operator: Our next question comes from Mark Cullen of UBS.

Mark Cullen: It sounds like sales got stronger sequentially as the quarter progressed, reflecting some seasonality. Just to clarify, did you guys also see the rate of growth pick up in each month when you adjust that extra week? And then any specific callouts with respect to demand and the amount of trade down you’re seen. Is it more or less than you guys might have expected? Thanks so much.

Chris Pappas: Thanks, Mark. No, the cadence in the quarter, I think, as you pointed out was pretty typical of a normal season prior to the many years that COVID volatility impacted seasonality. We talked about on our Q3 call. We saw strength in demand and margin in September coming out of the weaker summer months. I think October and November were kind of very typical October and November from a seasonal perspective. And then December was, I think the 1 December, the 3 weeks between Thanksgiving and Christmas, that you really saw the corporate parties come back, the level of events come back to pre-COVID levels. I think in ’22, you saw a little bit of that but it wasn’t completely back, and so I think those were three very strong weeks, and that I think that really helped the quarter get back to what we would call a normal fourth quarter.