Q3 2019 Earnings Call
Greetings and welcome to the chefs warehouse third quarter 2019 earnings Conference call. As a reminder, this conference is being recorded.
Now I'd like to turn the conference over to your whole Alex how that's.
General Counsel corporate Secretary and Chief Government Relations Officer. Please go ahead Sir.
Thank you operator, good afternoon, everyone with me on today's call or Chris Pappas, founder, Chairman and CEO and Jim Leddy, Our CFO by now you should have access to our third quarter 2019 earnings press release. It can also be found at www dot chefs warehouse dot com under the Investor Relations section.
Throughout this conference call, we will be presenting non-GAAP financial measures, including among others historical an estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income in adjusted earnings per share.
These measurements are not calculated in accordance with gap and may be calculated differently and similarly, titled non-GAAP financial measures used by other companies.
Wanted to get it reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures up here 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 statement.
Including statements regarding our estimated financial performance.
Such forward looking statements are not guarantees of future performance.
Therefore, you should not put undue reliance on.
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 FCC website.
Today, we are going to provide a business update go over a third quarter results in detail and review our 2019 full year guidance.
We will open up the call for questions with that I will turn the call over to Chris Pappas Chris.
Thank you Alex and thank you walk for joining on third quarter 2019 earnings call.
Our team delivered solid third quarter revenue and gross profit performance well year over year unit volume growth remained below our typical range due to changes in product mix and continued cycling out of lower margin high volume placements organic revenue growth continued to meet expectations and our team delivered a pause.
Gross profit to adjusted operating expense spread in the quarter.
During the quarter, we also continued to invest in growth.
We added seasoned sales in category specialist talent to both our east coast and West Coast region.
We also continue to invest in our brands, our customers and supplier partners via targeted marketing events across our expanding geography.
A few highlights in the third quarter include.
Born epicenter organic growth in itself.
Specialty sales were up 5.8% organically over the prior year was which was driven by unique customer growth of approximately 3.9%.
Placement growth of 3.1%.
And specialty case growth of 3.2%.
Organic pounds growth and center other plate was approximately <unk>, 0.9%.
Sequentially higher than the second quarter of 2019 product mix changes continue to drive specialty case growth trends in the third quarter.
The year over year basis, as compared to the third quarter of 2018. This represents a ship from higher volume dairy category cases to lower volume.
<unk> revenue per case categories.
Such a specialty oils and vinegars as well as pay stream bakery products.
Looking on a two year basis third quarter specialty case growth averaged approximately 4.6% and specialty organic revenue growth averaged 6.8%.
The play pound growth compares to a strong third quarter of 2018 and continues to cycle through attrition of some higher volume lower margin placements.
Gross profit margins increased approximately 25 basis point.
Gross margin in the specialty category increased 24 basis points as compared to the third quarter of 2018, while gross margins and center other Blake category increased 54 basis points year over year.
In addition, gross profit dollars grew approximately 10.9% versus the prior year quarter, Jim will provide more detail on margin in a few moments.
During the quarter, we continue to progress on several growth and integration priorities.
Conversion of our Texas business onto our ERP platform was completed in August and the team commence preparations for integrating southern New Jersey, Philadelphia, which we expect the complete in the first half for 2020.
In addition, our southern California facility expansion continues to move forward, we've substantially completed design phase and expect to commence construction the first quarter of 2020.
In terms of e-commerce , our digital and customer experience team continues to leverage customer feedback and input and creating value add features and processes.
During the third quarter, we implement that improved search functionality with their nom overlap and we expect to introduce enhancements related to product selection and menu design in the coming but.
As of October we estimate online sales represented approximately 14% of organic revenue.
This included website mobile an electronic water applications linked directly to certain customer order systems.
Approximately 20% of all specialty orders were placed on E Commerce platform.
Our up truck scanning implementation continued to progress with our South Florida, our operation, reaching completion in the third quarter.
Portland, Seattle operations will adopt this process in early 2020, followed by our West Coast distribution centers post ERP conversion later in 2020.
I would like to thank our team members customers and supplier partners for producing a successful third quarter.
During the quarter as we do every year in our major markets. We brought hundreds of our shop customers not as a supplier partners together from around the globe.
In New York, San Francisco in Texas. These events showcased innovative new products ingredient cure rate and your relationships and strengthening existing bonds.
Help our customers continue to grow creatively and enhance the calling experience for their customers.
As we get ready for 2020, or 30 50 year building the chefs warehouse. Our team has never been stronger more focused are excited about our future as the leading national marketer and distributor to the chef driven customer base that continues to grow with chefs warehouse and his family of companies as this partner with.
I'll turn it over to Jim to discuss more detailed financial information Jim.
Thank you, Chris and good afternoon, everyone. Our net sales for the quarter ended September 27, 2018 increased approximately 9.8% to 396.9 million from 361.5 million in third quarter of 2018. The increase in net sales was the result of organic growth of approximately.
4.5% as well as the contribution of sales from acquisitions, which added approximately 5.3% to sales growth for the quarter.
Net inflation was 2.1% third quarter, consisting of 2.5% inflation in our specialty category and inflation of 1.5% center of the plate category versus the prior year quarter.
Gross profit increased 10.9% to 102 million for the third quarter of 2019 versus 92 million for the third quarter 2018, gross profit margins increased approximately 25 basis points to 25.7%.
Specialty inflation was driven by above average increases in cheese, and dairy categories with pastry and bakery products, showing a mix of moderate inflation and deflation.
Significant inflation in certain Primal center of the plate meets particularly Prime Tenderloins was partially offset by deflation in lower in middle meet cuts.
Total operating expense increased approximately 11.8% to 91.3 million for the third quarter of 2018 from 81.7 million for the third quarter of 2018.
Including the impact of the earn out adjustment third quarter total operating expenses increased 11.1% versus the prior year quarter.
On an adjusted basis and as a percentage of net sales operating expenses were 20.3% for the third quarter 2019 relatively unchanged as compared to the prior year quarter has increased operating costs related to our investment in Texas and in additional sales and business development talent were materially offset by.
Lower distribution related costs as a percentage of revenue.
Third quarter year over year gross profit growth to adjusted operating expense growth was a positive spread of approximately 80 basis points.
Operating income for the third quarter of 2018 was 10.6 million compared to 10.3 million for the third quarter of 2018.
Increase in operating income was driven primarily by increased gross profit offset in part by higher operating expenses as a percentage of net sales operating income was 2.7% in the third quarter 2019 versus 2.8% in the third quarter of 2018.
Interest expense decreased to 4.5 million for the third quarter of 2019 compared to 4.7 million for the third quarter of 2018, due primarily to lower effective interest rates charged to the company's outstanding debt.
Income before income tax expense was 1.7 million for the third quarter 2019, compared to 1.4 million for the third quarter 2018. The increased an income tax expenses, primarily due to higher pre tax income versus the prior year third quarter.
Our GAAP net income was 4.4 million or 15 cents per diluted share for the third quarter 2019, compared to net income of 4.2 million or 14 cents per diluted share for the third quarter of 2018.
On a non-GAAP basis, adjusted EBITDA was 21.6 million for the third quarter of 2019 compared to 18.9 million for the third quarter of the prior year.
Adjusted net income was 6.8 million or 23 cents per diluted share for the third quarter of 2019 compared to adjusted net income of 5.5 million or 19 cents per diluted share for the prior year third quarter.
We ended the third quarter of 2019 with 21.5 million in cash and at the end of the third quarter net debt to adjusted EBITDA was 3.1 times.
Turning to our guidance for 2018 based on the current trends in the business. We are updating our financial guidance to be as follows.
We estimate net sales for the full year of 29 team will be in the range of 1.58 billion to 1.6 billion.
Gross profit to be between 402 million and 410 million.
Net income to be between 23.5 million and 25.7 million.
GAAP net income per diluted share to be between 79 cents, an 86 cents and adjusted EBITDA to be between 88 million and 91 million and adjusted net income.
Per diluted share to be between 96 cents and one dollar and three cents.
This guidance is based on an effective tax rate of approximately 27.5 per cent for 2019.
Full year estimated diluted share count is approximately 30 million shares.
Thank you and at this point, we will open it up to questions operator.
Certainly sir.
Well now begin to question answer session to join the question can you maybe press Star then one of your telephone keypad, you will hear its own launching a request if you're using a speakerphone. Please pick up your hasn't before passing any key to withdraw your question. Please press Star then too.
Well I'll pause for a moment that's college join the queue.
The first question comes from Andrew Wolf <unk> capital markets. Please go ahead.
Thanks, Good afternoon, so in the quarter, it's one of their gross.
Yes.
Uh huh.
On gross margin and profits because I think you had commented in September that.
Prime beef was or parts of it.
The prime.
Well, it's at record high prices.
Uh huh.
It looks like you manage that okay or did that impact the quarter getting.
Passing that through when and what is what does the outlook I know what the prime market can kinda Barry quarter <unk> pretty quickly.
Yeah, So a prime prime it's been a headwind it's it's finally.
Finally, a more prime so I think the availability of total prime was like a 2% then.
I'm not mistake I think it's now more seven 8%, 9%. So availability is starting to increase until we get through probably mid December you know tend to lines.
Have held pretty high I reckon prices and I don't think I mean, they're going to break it. It's a question of when.
You know, we get back to some normality, but we've been managing through it is definitely <unk> been a headwind and we look forward to.
No more availability and more normality and we have.
You know.
<unk>.
Every time that we see a marker like this Andrew we look at it as an opportunity to rethink it for the following year and come out with new programs and things that we can offer our customers more solutions you know.
Let's take on the menu at more affordable prices. So a we've learned again, we've learned a lot.
And this process and I think it's going to make us better market isn't the future.
Okay, and just sort of a follow up some I remember Allen brothers.
Catalog business like an online business is pretty heavy this quarter that impact quarter, I mean archi raised prices.
To the catalog customers retail customers ahead of Oh, Yeah. It's a balancing act you know we try to get ahead of it because they know that product is frozen.
So we try to get ahead of it when we you know you know as it.
During the year as we see markets that we think a very favorable you know we're able to make buys.
So you know you don't have to wait until the last minute to buy that record prices. So what we do get way ahead of that.
Indeed, the retail is not a huge precise river overall Fred.
Uh huh.
Oh I realize that.
On the operating cost <unk>.
<unk>.
Can you just sort of either if you would quantify the kinda de leveraging your got out of.
Texas and.
Ally.
And you know one and a hot and if you don't want to quantify it maybe at least answer one and how you know that turns into leveraging you know as it.
Obviously, its volume driven but timing and you know what kind of events.
Thank you know how would the normal flow go and I wouldn't know sound like a tuck in acquisition impact.
Yeah sure so from a leverage perspective.
The the L.A. situation is just a duplicate rent until we move ins. So we're adding that back in a from a from an operating leverage perspective, we did generate operating leverage.
<unk> gross profit to adjusted Opex perspective.
In terms of Texas or really the costs. There are building the team are going through the transition over the summer the ERP system.
We've built a sales and business development talent, we've added to the warehouse we've added to the distribution platform. So that's basically just ramping up the business I'm really ahead of the revenue growth, which will come over the next couple of years, we expect a texas to move closer to breakeven next year, obviously you.
It won't be breakeven this year, but we didn't expect that.
And in terms of L.A. or you know, we will definitely have the room for fold in acquisitions, we expect to move.
Into that facility in the third quarter of 2020.
Yeah. Thanks, if I could just ask about guidance just in one part and sales and can play a $20 million spread for the fourth quarter.
Like 5% variability.
You know it seems pretty wide is there.
Hi, Choppiness in the market are there.
You know you're looking that you might have some attrition I'm just trying to understand.
No, it's and seems conservative.
It's consistent with the way we've guided in the past Oh, we've narrowed it from you know roughly.
40, or 50 million spread as we go through the year, we've we tightened did last quarter and it's consistent with the way we've tightened did.
In prior years, Yeah, and always the fourth quarter, Andy It's always strong you know the question is whether.
Oh, well how does Christmas in your ideas for how does that affect people, leaving a you know we had a we had real surprises this year with a the way the fourth of July week went and some of the Jewish holidays, and Labor day or you know it just seemed the way the holidays.
Fell this year, they really affected our business you know we did much less business than a normal league. So you know when we look at our past quarters. We had you know our trends were strong you know on on where our forecast were and the the holiday weeks, what the holiday weeks really a where where this.
Pointing it seems almost the economies to good and people just take the whole week off so Oh, you know looking at the fourth quarter. Yeah. I think we're optimistic a with customers look strong spending is spending seems to be well, but they just don't know about the whether and how the holidays affect that.
Okay, great. Thank you.
Sure. Thanks, Andy.
Our next question comes from Christopher Mandeville <unk> of Jefferies. Please go ahead.
Hi, just like on for Chris just on the guidance again, no you tighten the EBITDA little bit.
Was that just because.
Yes, we're entering the fourth quarter or was there anything to read into versus your expectations.
Hello.
We raised the midpoint of our gross profit dollar.
The guidance just to reflect the the improvement in gross profit margin then in gross profit dollar growth that we've seen throughout the year.
And no we look for that too to continue and then we we raised the adjusted Opex to reflect the.
The opex pressures that I went through earlier, so that's really that's really the oh.
The guidance changes.
Got it.
Can you talk about your exposure to European imports and any impact you expect from tariffs.
Yeah, we we haven't seen really any impact to date.
If you look at a list of items there very specific is very.
Specific to certain locations in very a unique specifications.
And you know given that we have over 50000 SK use we benefit from that diversified portfolio. A product. We also have a significant private label portfolio that gives us a lot of flexibility on the supply chain. So we're working with our customers and supplier partners work.
And with all the stakeholders involved to to make sure that we can provide customers with the right value in pricing.
And so right now we don't estimate anything major major.
In 2019, that's good to hear Alas, one or have you seen any impact from the fires in California business.
Yeah, well obviously.
It's a it's devastating to watch we experience I think that's it was last year in the year before.
It seems to be the new norm. Unfortunately, yeah, we paper everybody's safety and to get through this but you know there's an impact.
At this point you know, it's a it's hundreds and hundreds of thousands dollars I would say of probably lost sales. So you know I think we always you know kind of put in a you know a piece of our are our forecast knowing that there's going to be some five.
Yes, So oh, you know, where we're praying that this thing gets a put down to bad pretty soon.
And you know everyone safe we've got some normality, it's very recent a in the quarter I think we'll know more if this thing extends but generally a kits.
It gets come down.
Fairly quickly.
Thanks, a lot.
Once again, if you have a question. Please press Star then one now.
The next question comes from Kelly Dania of BMO capital markets. Please go ahead.
Hello, This is Steve on for Kelly.
Just looking at your organic growth trends, if you could highlight anything that was outside of your expectations for the corner and that would be helpful.
Within the ranges that we expected a the July 4th.
A shift was a very we are very weak for us that a lot of people left for the for the entire weak and then the hurricane in Florida.
We think those two combined.
Cost us a a couple of sense in terms of a topline other than that the cadence of the quarter was was generally as expected inorganic growth is you know right around mid single digits.
Kind of in the ranges that we expected.
Thank you.
This concludes the question answer session I would now like to turn the conference back over to Mr., Chris Pappas for any closing remarks.
Yeah, we thank everybody for joining us on our earnings call.
Our team did a great job it was a oh it was a good quarter sales where sales were strong profitability was strong and so we look forward to a strong fourth quarter and everybody joining us once again, thank you very much and.
Thank you for joining thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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