Q3 2024 The Chefs' Warehouse Inc Earnings Call

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Speaker Change: Greetings, ladies and gentlemen and welcome to the shift we have third quarter to ensure you for earnings conference call. As a reminder, this conference is being recorded.

Speaker Change: Audnano to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please come and hit sir.

Alex Aldous: Thank you, operator, good morning everyone. With me on today's call our Chris Pappas founder, Chairman and CEO and Jim Leddy or CFO. By now you should have access to our third quarter 2024 earnings press release. It can also be found at www.shiftswarehouse.com under the Investor Relations section.

Alex Aldous: Throughout this conference call, we will be presenting non-gap financial measures, including among others, historical and estimated EBITDA and Adjustment EBITDA, as well as both historical and estimated Adjustment and income and Adjustment earnings per share.

Alex Aldous: These measures are not calculated in the accordance with gap and may be calculated differently in similarly titled non-gap financial measures used by other companies. Quantitative reconciliation of our non-gap financial measures to their most directly comparable gap financial measures appear in today's press release.

Alex Aldous: 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.

Alex Aldous: So, to look at the statements are not their entities of future performance, and therefore you should not put into reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Alex Aldous: Some of these risks are mentioned in today's release. Others are discussing our annual report on Form 10K and quarterly reports on Form 10Q, which are available on the SEC website.

Alex Aldous: Today we are going to provide a business update and go over our third quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on the Chefs4 Our website under the Investor Relations section titled third quarter 2020 for earnings presentation.

Alex Aldous: Please note that these slides are disclosed at this time for illustration purposes only. 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 us third quarter 2024, Herning School.

Chris Pappas: Business and demand trends improved sequentially through the third quarter.

Chris Pappas: Continued seasonal increase in international travel among the higher income demographic led to a slightly sore-to-season in July and early August.

Chris Pappas: Customer Activity Accelerators into the later half of the quarter and momentum and demand continued into October. Our operating division across domestic and international markets deliver strong growth and gross profit dollars and margin.

Chris Pappas: As well as continued progress, increasing relevance with our customer base with strong year over year growth and unique item placements.

Chris Pappas: I would like to thank the entire CW team for the dedication and commitment to delivering our diverse and highly high-quality product and service in partnership with our suppliers and customers and the communities we serve.

Chris Pappas: Please refer to slide three of the presentation. If you highlights from the third quarter includes 5.6% organic growth in net sales.

Chris Pappas: Specialty sales were up 7.5% organically over the prior year, which was driven by a unique customer growth of approximately 4.7%.

Chris Pappas: Placement Growth of 10.8% and specialty case growth of 3.1%.

Chris Pappas: Organic pounds, and center of the plate were approximately 1% higher than the prior year third quarter.

Chris Pappas: The year of a year percentage pounds growth was partially impacted by a tradition related to non-core lower margin business in certain markets.

Chris Pappas: Gross profit margins increase approximately 58 basis points.

Chris Pappas: Gross margin in the specialty category increase approximately 50 basis points as compared to the third quarter of 2023. While Gross margin in the center of the play category increase approximately 45 basis points year of year.

Speaker Change: Jim will provide more detail on Gros Prophet, Marginton, and a few moments.

Speaker Change: As we progress in the growth in capital allocation plan announced during the first fourth quarter of 2023.

Speaker Change: We wanted to take this opportunity to provide more detail on certain commercial and operational metrics that we expect to contribute to achieving our targeted exchange of financial goals by year

Speaker Change: In addition, we have engaged the global consulting firm to assist our teams in driving both top-line and bottom-line improvements as we target annual incremental margin gains.

Speaker Change: Please refer to Slide 4.

Speaker Change: Chart won this place trailing 12-month gross profit dollars per route as a third quarter 2024 as compared to full year 2019.

Speaker Change: Chart to display suggested operating expense as a percentage of gross profit dollars as well as the progression of adjusted EBITAR per employee for full year 2023 and estimated 2024.

Speaker Change: Based on the midpoint of our current full-year guidance as compared to 2019.

Speaker Change: Cross-Rollocations are teams continue, work to improve distribution, cost, be a multiple initiatives, which include route consolidation and internal transfer reductions in certain key markets.

Speaker Change: During 2024, we've eliminated routes and transfers in the southwest as we opened our Arizona facility. In Northern California, as we integrated recent acquisitions with our specialty operations and in the northwest with our Seattle facility coming online.

Speaker Change: The solidation of foreprotein processing and distribution operations in Northern California continues to progress and we expect completion by the first quarter of 2025.

Speaker Change: And now please refer to slide 5. The charge here display the progression of customer orders coming via our digital platforms, which include orders coming via mobile and website.

Speaker Change: Investments in our digital platform continue to contribute to margin enhancement as our team drives both online order adoption growth and enhancements to customer-facing functionality and improve real-time data and analytics supporting our sales teams.

Speaker Change: As of the third quarter of 2024 approximately 54% of customers ordering through our domestic specialty locations, Iran line versus 48% 2023 and 20% at the end of 2019.

Speaker Change: Now you can please refer to slide 6. This slide provides the 5 primary areas or teams of focus on in order to deliver our 2021 financial targets.

Speaker Change: While we will not go into detail of every initiative on this school, we do expect to provide more color during future presentations.

Speaker Change: In addition to the metrics just discussed, we have highlighted here a number growth and efficiency related areas of focus.

Speaker Change: One key focus to highlight is the ongoing integration of our specialty, produce and protein businesses and taxes.

Speaker Change: We are taking steps to improve operational efficiency, merge our sales teams and incrementally grow the cross-sell of our diverse and high quality specialty.

Speaker Change: Sproaders and protein products across our platform. The year today, 2024, even a margin for a combined Texas operations has proved approximately 110 basis points versus the same period in 2023.

Speaker Change: 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.

Jim Leddy: Please refer to Slide 7.

Jim Leddy: Our net sales for the quarter ended September 27, 2024, increased approximately 5.6% and 931.5 million.

Jim Leddy: from 881.8 million in the third quarter of 2023. We estimate that softer demand during July, including the impact of Hurricane Barrel, impacted third quarter revenue growth by approximately 1%.

Jim Leddy: Net inflation was 3.2% the third quarter, consisting of 4.3% inflation in our specialty category, and inflation of 1.4% in our center of the play category versus the prior year quarter.

Jim Leddy: Adrigate specialty inflation was primarily driven by significant year-of-year pricing creases in chocolate and certain dairy products. Excluding these products, remaining Adrigate specialty product inflation was in the 2% to 3% range.

Jim Leddy: grows profit increased 8.2% to 224.7 million for the third quarter of 2024 versus 27.7 million for the third quarter of 2023.

Jim Leddy: Gross Prophet margins increased approximately 58 basis points to 24.1%. And our procurement sales pricing and operations teams delivered strong gross profit dollar growth across categories during the quarter.

Jim Leddy: Selling General and Administrative Expenses Increased Approximately 7.4% to 192.9 million for the 3rd quarter of 2024 from 179.6 million for the 3rd quarter of 2023.

Jim Leddy: The increase of...

Jim Leddy: primarily due to higher depreciation and amortization driven by facility investments and costs associated with compensation, facilities and distribution to support sales growth in the current quarter.

Jim Leddy: Adjusted Operating Experiences increased 8.2% versus the prior year third quarter, and as a percentage of net sales, adjusted operating expenses were 18.3% for the third quarter of 2024.

Jim Leddy: Operating income for the third quarter of 2024 was 31.9 million compared to 25.5 million for the third quarter of 2023. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling general and in administration expenses.

Jim Leddy: versus the prior year quarter.

Jim Leddy: Our Gopnetting Cumb was 14.1 million, or 34 cents per diluted share for the third quarter of 2024, compared to netting Cumb of 7.3 million, or 19 cents per diluted share for the third quarter of 2023.

Jim Leddy: On a non-gap basis, we had adjusted the EBITDA of 54.5 million for the third quarter of 2024, compared to 50.3 million for the prior year third quarter.

Jim Leddy: A just-ed net income was 15.4 million or 36 cents per diluted share. For the third quarter of 2024, compared to 13.7 million or 33 cents per diluted share for the prior year third quarter.

Jim Leddy: Turning to the balance sheet and an update on our liquidity, please refer to slide 8. At the end of the third quarter, we had total liquidity of 221.3 million, comprised of 50.7 million in cash, and 170.6 million of availability under our ABL facility.

Jim Leddy: During the third quarter we continue to make progress toward achieving our year-end 2020-25 capital allocation goals of 2.5 to 3 times net debt leverage and repurchasing 25 to $100 million of equivalent outstanding shares.

Jim Leddy: Timing of Repurchases will continue to be dependent on share price, market conditions, and free cash flow generation.

Jim Leddy: As of September 27, 2024

Jim Leddy: Year to date.

Jim Leddy: We have repurchased 10 million shares of our outstanding common shares resulting in a production of approximately 264,000 shares outstanding. And repaid 18.5 million about standing dead.

Jim Leddy: As of September 27, 2024, total net debt was approximately 651 million, inclusive of all cash and cash equivalents.

Jim Leddy: and NetDead to Adjusted EBITDA was approximately 3.1 times as compared to approximately 3.4 times as of year in 2023.

Jim Leddy: Post-3rd Quarter End on October 22, 2024, we repriced our 262 million term loan maturing in 2021.

Jim Leddy: We're producing the coupon from SOFER plus a thick spread of 4% to SOFER plus a thick spread of 3.5%.

Jim Leddy: Turning to our full year guidance for 2024, based on the current trends in the business we are updating our full year financial guidance as follows.

Jim Leddy: We asked to make that net sales for the 4 year of 2024 will be in the range of 3.71 billion to 3.775 billion.

Jim Leddy: Gross Prophet to be between 890 million and 96 million. And the Justice Debatata to be between 210 million and 219 million.

Jim Leddy: Please note for the fourth quarter and full year of 2024. We expect the convertible notes, maturing in 2028 to be diluted and therefore we expect the fully diluted share count to be approximately 45 million shares for the fourth quarter and full year reporting periods.

Speaker Change: Thank you, and at this point we will open it up to questions. Operator.

Speaker Change: Thank you sir. Ladies and gentlemen, we will not be conducting the Christian and all of the session. If you'd like for a question, please restarve in one. On each elephant keypad. A confirmation turn will indicate that the line is in the question queue.

Speaker Change: He may press star and then two to leave the question cue

Speaker Change: for participants making use of speaker equipment, it may be necessary to be kept at the handset before pressing the star keys.

Speaker Change: Offer the question, come from Mark Kardon of UBS. Please go ahead.

Mark Kardon: Good morning and thanks so much for taking the question. So to start, it sounds like Trenton proved as a quarter-progressed, in fact by some of the summer travel at the beginning of the period.

Mark Kardon: More broadly speaking though, it sounds like traffic challenges were a bit more intense for the industry as a whole. I just want to see if any additional pockets of softness emerge for chef and three-key, or if it was pretty steady, so what you guys have been saying in recent quarters. Thank you.

Speaker Change: Thanks Mark. Yeah, I think you kind of summarized it. We had a little bit of a blip in July. I think last year, I think the industry thought that July was a bit of an anomaly early August with the level of international travel.

Speaker Change: That repeated again this year that may be the new normal where you have a softer July than pre-COVID periods.

Speaker Change: and then you have a good strength going into the back half of the quarter and that's kind of how it would play it out.

Speaker Change: So I would say, you know, I think we mentioned in our prepared remarks that we think it costs us about 1% on top line in the quarter.

Speaker Change: But our teams did a really good job of driving really strong, gross, profit-dollar growth.

Speaker Change: Continue to take markets here with unique item penetration to offset some of the softness in July. And as we mentioned, the trends which were building into September, you know, kind of continued in October.

Speaker Change: Okay, great. And then just, if you guys see many ships in the salesperson hiring environment, and by this just so you see any competition for top talent picking up at all, or just any impact of applications just given some industry-wide declining traffic that we're seeing even if your customers are holding them with it better.

Speaker Change: We continue to hire, we're always looking to bring in the bench as we say it. You have to have that bench to grow.

Speaker Change: I think that sometimes it's underestimated how long it takes to train.

Speaker Change: Call it by people. I always use the example of, you know, would you go see a doctor who just did one year medical school?

Speaker Change: I wouldn't seem to like them to be graduated and do their residency. Same with sales team. It takes years to build really high qualified, I call them relationship managers at this point to understand, especially us.

Speaker Change: and the more complicated.

Speaker Change: Product Line. So, our people are good performers, it's a job almost for life.

Speaker Change: It takes years to build those relationships and the portfolio products that customers are relying on. So we don't have a lot of jump in Iran and we continue to hire.

Speaker Change: Great, thanks so much for your luck guys.

Speaker Change: Thank you.

Speaker Change: An excretion comes from Alex's slugal obj effort. Please go ahead.

Speaker Change: Thanks for the morning, you can grab.

Alex Aldous: I'm going to ask on Hardy that you gave some color on your Texas business, the margin ramp there.

Alex Aldous: If you could update us on how much hearty is the looting you'll grow all of that margin.

Alex Aldous: and this point. And then the progress you talked about, the progress integrating across selling maybe could provide some examples of improvements you've seen in certain parts of the business that the early work there has been paying off.

Speaker Change: Well, yeah, sure I'll start Alexandros. Yeah, you know, I think we mentioned on one of the slides that we posted that, and most of that is hardies, but we expect...

Speaker Change: 20 to 30 basis points of improvement and our overall EBITDA margins as we further integrate. Some of the acquisitions and hardies is a big part of that because it's a big revenue company. It's given us a big footprint.

Speaker Change: in Texas that we were looking for. And the team is making progress. I mean, we've...

Speaker Change: We've got our operations team in there to help them get more efficient operationally. We've taken out some costs initially.

Speaker Change: and then building that business and integrating it with our CW Specialty business and our Allen Brothers Protein Business in Texas.

Speaker Change: is underway. It's going to take a couple of years to really ramp it up, but that's pretty normal when you're creating a true chef's warehouse in a market where you're small and you're going to grow fast.

Speaker Change: So what's the margin? Yeah, it hasn't really changed. It dilutes us by about 20 to 25 basis points overall. And we look to get that back as we integrate the business over the next couple of years.

Speaker Change: Alex, what you're seeing from our performance is all the investments we've made over the many many years. We're just taking a market share. It's all the cross-selling that's working.

Speaker Change: and a market, we kind of built our system for environments like today where you do have traffic slow down in a restaurant. So I think all your reports and all your data that's coming out is that it's a little soft compared to last year.

Speaker Change: And the only way really to grow in the reason you see our numbers performing so well is we're just taking market share from all our investments in people and systems.

Speaker Change: and our warehouse is a grind and you gotta be able to win the grind right now and thank God we're winning.

Speaker Change: Yeah, that's helpful. Hey, I guess I follow up just

Speaker Change: and wondering about churn levels and where they're tracking. I know it's still tough out there, like you've been saying, and the higher price levels, and more food service operators are shopping around, looking for better prices.

Speaker Change: You think maybe this turn level would pick up, still impressive, next customer growth, mid-Single Digits, but curious what you're seeing there.

Speaker Change: Yeah, I mean, again, it's always been a comparative industry, but you see that our actually our margin is up so...

Speaker Change: I keep going back to people that are following and have invested in us. We've been investing. We've been constantly investing into the systems and into the model.

Speaker Change: You know, kind of built for this environment where things are not, you know, optimal, you don't have a giant tailwind and, you know, big customer, grow actually, you know, we're, we're winning with our customers. New customer acquisition is helping us, you know, with the headwind right now of a little softness.

Speaker Change: at the customer level, but business is pretty good. People still think that you're going to have COVID rush.

Speaker Change: and that we saw and I think it's just more normalizing, you know, are really good core customers are performing really well, a little softness, maybe at the super high end still in the steak houses.

Speaker Change: But you know we think that business has been coming back and it'll get better and fortunately customers are going to get used to it.

Speaker Change: Higher Price, Susan.

Speaker Change: You know, the more cost to go out, the more consumers are going to want that great experience.

Speaker Change: You better have great service and great food.

Speaker Change: You know, when the customers are going to spend, you know, $100, $100 ahead. So I think that's where Chef Warehouse, you know, the reliability.

Speaker Change: of what we sell and what we're able to deliver them. And I think that's driving our cross selling.

Speaker Change: Thank you.

Speaker Change: Thanks, Alex.

Speaker Change: Good next question comes from Andrew Wolf of C.O. King. Please go ahead.

Speaker Change: I'm Grace, thank you for your good morning. I'm not a minister, but could you kind of give us a sense of the cadence? I know.

Andrew Wolf: You know, you gave it qualitatively, but how much better you know has September and October been versus you know the 3.3% or so Case growth you have special to case growth for the quarter.

Speaker Change: Yeah, I mean, I would say that, you know, the best way to frame it is really, we think July and early August costs about 1% on top line and that was...

Speaker Change: you know primarily Demandridden.

Speaker Change: and then it just progressed nicely through the quarter. We don't have a breakout month by month. And then as I mentioned, Transcontinued in October coming out of September.

Speaker Change: Okay, and just, you know, Cisco yesterday said late October was better because beginning about to overwis.

Speaker Change: You know, impacted by hurricanes, kind of suggested that late October's even was better, maybe perhaps in September. Did you also see a similar kind of cadence?

Speaker Change: We don't operate a huge amount of business in a good portion where the hurricane hit in Florida. It did impact us a little bit in early October, but nothing usually material. So don't have any commentary in October other than the trends we're good coming out of September into October.

Speaker Change: and thank you for the charts.

Speaker Change: Look at the information on the bridge to the long-term guidance. I just did some simple math.

Speaker Change: With how hard he is, you know, it's about 25 basis points of EBITDA margin expansion a year and between now and 2008 without it it's like 20 so you can tackle this either way but

Speaker Change: You know, it's kind of two questions. If we were building on a model to O8

Speaker Change: In this way, would we look for margins to increase linearly like 20-betts a year or 25, including Hardy's getting better? Or is it something where the out-years is more improvement?

Speaker Change: You're adding digital, you're doing Rob Expansion.

Speaker Change: and the facilities of getting increasingly productive. How do you suggest the margin build is going to play out?

Speaker Change: Yeah, I mean, you know, you can never predict exactly how it's going to play out. Nothing goes in the straight line, but you know, I'll go back to you know, the three or four years before COVID hit.

Speaker Change: We were coming up a big investment period and we were able to deliver kind of 20 to 25 basis points of the E-Bid margin improvement, adjusted E-Bid margin improvement.

Speaker Change: You know uh

Speaker Change: for a couple of years there, then we got hit by the nuclear bomb. And I think we're coming up with a similar type of investment period, and we talked about this before.

Speaker Change: and the goal will be to kind of get that 25 basis points a year. Whether it happens in a straight line will, a lot of that will depend on the macro economic environment, obviously. So you can model it either way, I think, but that's our target.

Speaker Change: Okay, so that's fair. So there's nothing in these plans that are like dependent on, you know, a lot of

Speaker Change: Digital or internal when in college consolidation like Rapids.

Speaker Change: All the stuff is in this.

Speaker Change: Meet and potato can be executed on a day-to-day basis.

Speaker Change: Don't Big Investments or Trainings that After.

Speaker Change: Happens. James.

Speaker Change: I think that's already baked in, Andy. We've made major, major investments in all departments. We're not 100% there yet, but we've had a lot of capacity. There are some markets that do need a more modernized consolidated.

Speaker Change: Set up, you know, we have multiple warehouses in multiple markets that one day probably will be consolidated and you get a lot more efficiency capital going through right now in San Francisco with protein.

Speaker Change: We built it, now we're consolidating it and you should get the rewards over the next many years of the efficiencies of scale.

Speaker Change: and I think that besides some of the new markets that still need a little more consolidating as we...

Speaker Change: You've been doing this for a long time, you know, the business that

Speaker Change: As we drive more volume into the capacity that we build, it should eat up more and more of the overhead, you know, a lot of the overhead is fixed.

Speaker Change: and you get more of that drops to the bottom line and that's kind of the phase, you know, we think that we're going through right now and we're going to start to, you know, to get the rewards of those investments.

Speaker Change: at the volume, as we drive those volumes, like Jim said.

Speaker Change: We are at the mercy of the economic environment, good environment. Volume continues to tick up faster. We start to get more leverage faster. You know, a little slow down, you get a little bit less.

Speaker Change: Gladdy, I think the team is done an unbelievable job. If you really look at the numbers and you say you mentioned...

Speaker Change: some of the reports coming out from other companies. The environment is...

Speaker Change: Environment is more challenging and to put up the kind of numbers we're putting up. It's the grind and taking markets here and all the investments and people to sell more products to the same customers. And that's what's driving the bottom line.

Speaker Change: Great, thank you, I'll get back into you.

Speaker Change: Thanks, Andy.

Speaker Change: An Exquisition, comes from Killie Bernier of BMO Capital Markets. Please go ahead.

Speaker Change: Good morning. Thanks for taking our questions. I wanted to just talk about some of the initiatives you outlined here as you target these in 2008 financial goals.

Speaker Change: Can you give us just any more color on the biggest contributors to the margin expansion? I guess I see the route consolidation initiative that I was hoping we could build down on a little bit more within that because...

Speaker Change: It may be it's always been going on behind the scenes, but maybe you can just talk about framing up the opportunity there as well as some of the other big factors that contribute to that

Speaker Change: When you see margin go, you're talking about gross margin or just bottom line margin kill you.

Speaker Change: Yeah, we adjusted EBITDA, Margin Gould of six and a half to seven by 2028.

Speaker Change: Yeah, I think it's Goldilocks, I think it's a little bit everywhere, you know, our digital teams and our pricing teams just, you know, continue to get better.

Speaker Change: So, you know, we're able to manage pricing, you know, in an environment where you do have more volatility or, you know, shortages and, you know, what climate change has been doing to a lot of our products, you know, when you look at...

Speaker Change: and what's happening in the chocolate market where it has this massive inflation in it. It's challenging, so I think it's part of the pricing teams.

Speaker Change: Category Management Teams and it's the operation team like you say you know there's always you know we're always trying to get a Pissiont season routing but

Speaker Change: Now that we built out some of these larger warehouses, you know, as the volume starts to increase, you're going to get more.

Speaker Change: To the bottom line, as long as you're, you know, your core business is strong and you're good customers.

Speaker Change: You're not adding.

Speaker Change: of the business just to fill up the warehouse at Low Margin. I mean, part of our top line.

Speaker Change: of Soapiness, of Well, Soapiness to I guess expectation is that, you know, we continue to shed business that we think is, you know, long term is not core chef warehouse business.

Speaker Change: Sometimes we'll take on some of that business, especially where we have the space.

Speaker Change: as we start to grow into our space.

Speaker Change: We start to show that business that we don't find very profitable.

Speaker Change: and I think we're very disciplined. We've been doing that for years and we continue to give up that business and that's why sometimes you see our top line a little softer than we anticipate because we're just finding a time and place that we're willing to...

Speaker Change: Race prices on their business and it goes away to somebody that...

Speaker Change: You know, maybe you can try to figure out how to make profit on that business. So, you know, you've been following us for many years, you know, where a margin of profit company, it's built to not sell everybody and we've got to be willing to let go of some of that business.

Speaker Change: I think that's what you start in the sea. And you know, as the economy starts to hopefully pick up, you know, with a little bit more tailwind, you know, more and more of that more and more of that GP drops to the bottom line, because we'll start to get the leverage on the overhead.

Speaker Change: i

Speaker Change: and that's helpful. And then Chris, you've talked in the past couple quarters maybe just about new restaurants openings. What are you hearing from your kind of core customer base?

Speaker Change: and particularly how, if at all, you know, a lower rate environment may impact their pace of openings or their plans for new openings.

Chris Pappas: Well, again, our core business are the independence. We have great customers, we have 20, 30, 50 restaurants, and we have a few that have a lot more.

Chris Pappas: And, you know, they're opportunistic and I think that coming out of COVID I said, you know, there's going to be a lot of, you know, restaurants that are closed but...

Chris Pappas: as Lisa's come up, landlords need to put, you know, restaurants that could draw traffic into their buildings, especially, but they've been facing getting people.

Chris Pappas: Back to the office. A lot of new developments in the suburbs and you know how COVID has changed.

Chris Pappas: The workplace where people are working more remotely and going out in the neighborhoods that they live or have a local office.

Chris Pappas: We saw strong growth in opening, and I think you're going to continue to see that.

Chris Pappas: Obviously interest rates can help but restaurant tours build restaurants. That's what they do. So they find a great location or a landlord that enticing them to come in and the economics makes sense. They're going to open.

Chris Pappas: Restaurant, and I think that's what we've been seeing and I really don't see an end inside.

Speaker Change: Thank you.

Speaker Change: Thanks for coming.

Speaker Change: The next question comes from a Todd Brooks of Pagewalk Company. Please go ahead.

Todd Brooks: Hey, thanks for coming to your booth.

Todd Brooks: You could talk about the presentation that Chef has engaged a global consulting firm. I'm just wondering what...

Todd Brooks: What are you hoping that outside talent can unlock either from an efficiency standpoint or is it a revenue driving standpoint? Just what are you hoping that the outside viewpoints might bring to shelf?

Speaker Change: Sure. So, you know, we've always ran the business almost kind of what the...

Speaker Change: Like a startup mentality like, you know, we develop great tools and great systems and obviously you can't replace the people, you know, we are in the people business so we make sure that we're getting the best talent and keeping them.

Speaker Change: But, you know, technology has changed so much, you know, AI, obviously, you know, everybody's talking about AI, we're using AI and obviously we, we see the future of more.

Speaker Change: AI, you know, to help our people, you know. So I think it's just a fresh pair of eyes, Todd, to, you know, help go through, you know, some of the projects and things that we're looking at to give us an outside perspective of

Speaker Change: We can always do better.

Speaker Change: Great, thanks. Secondly, I know we get to the end of October and amusually.

Speaker Change: asking you this question, Chris, on this conference call, but early reads, what are you hearing from customers about there?

Speaker Change: They're used on the holiday, I know the bookings tend to happen a little bit later than it did historically around that kind of peak holiday demand, but in the early re-tour, feedback that you're hearing from your customers on holiday.

Speaker Change: We have AMN

Chris Pappas: I think the overall tone is pretty positive. The one thing that has changed is that you just hit on is that synth co-vid.

Speaker Change: People don't like they tend not to look far ahead. Yes, sure, conference isn't stuff where you have to look.

Speaker Change: So much is, you know, I wouldn't say last minute, I got the rizbelaut last minute, but you know, they get a few weeks.

Speaker Change: of customers, I was actually talking to one of our longtime customers the other day. You know, he goes, I'm going to send you something Chris. These are the parties that booked.

Speaker Change: in the last few days.

Speaker Change: For next week, normally they would book a month or two, three, four months ahead.

Speaker Change: and this is the new environment that we have to be ready for. You look at it and say, okay, this is the kind of staff we'll probably need. This is what it looks like in all of a sudden, you get 30-40% uptick.

Speaker Change: and you're booking. So of course we're very excited about that but you know, pretty little bit more challenging and environment but they're adapting. They're getting used to that and I think that's the business that you know was missing, you know, obviously during COVID the most.

Speaker Change: and I think that's the strongest part that we see coming back small parties.

Speaker Change: of Booking for everything for meetings, for celebrations, for planning, for just client dinners, lunches, and I think that's, you know, we've been very pleased with what we're here.

Speaker Change: Okay, great. One final one, I'll jump back into GM. You talked about...

Speaker Change: The inflation in the quarter, and I think a little north of 3%. The highlight of a couple of categories that saw outside the inflation and the rest of them, kind of specialty basket being in that 2% to 3% range.

Speaker Change: If that kind of looked forward, thinking for the fourth quarter and any early reads on how you're thinking about inflation and any sources of really easing and pricing as we go into 25. Thank you.

Speaker Change: Thanks to that. No, I think you know, volume and price, you know, you can never predict exactly the mix, because product mix impacts that and then we highlighted the chocolate and dairy products.

Speaker Change: because it really had a product mix impact on volume and price. They're higher dollar boxes, so when you grow them a quarter over a quarter, you have a little bit lower volume but you get really good gross profit dollar growth which.

Speaker Change: You know, we definitely generated this past quarter, but I think, you know, we guided to our Gynic Reben, you wrote of 6 to 7% this year, you know, more heavily waited to the first half of the year.

Speaker Change: and that's been kind of playing out. So as we go into the fourth quarter, I don't think we see anything on the horizon. That's going to be materially different from getting to that 6 to 7% on a full year basis. And so I think it'll be similar the way it plays out, at least right now.

Speaker Change: Ok, thank you.

Speaker Change: Sure.

Speaker Change: An Exclestion comes on Peter Seller of BTIG. Please come ahead.

Peter Seller: Great thanks for taking my question.

Peter Seller: I was hoping you could talk a little bit more about how your customers are.

Peter Seller: Using you in mature markets like New York and the Northeast versus some more of the new markets, areas of Texas and Florida and California. Are you just seeing, um, the customers use you differently in those markets, um, based on maturity, and then I have a follow up. Thanks.

Peter Seller: Yeah.

Speaker Change: I mean...

Speaker Change: Our more mature markets, Peter, obviously, we have protein divisions, we have produce divisions, besides our specialty and broad lines. So, we're kind of a one-stop shop in many ways, and more of the mature markets, and really that's our goal to be able to have that presence.

Speaker Change: and all markets. So, the young growing markets, people usually...

Speaker Change: Focus more on buying specialty premise.

Speaker Change: and then there's certain markets that really, you know, we entered as a protein company.

Speaker Change: and you know, we're selling protein and then some more specialty.

Speaker Change: and as those warehouses start to go up, we have a small, you know.

Speaker Change: Small facility now in Nashville and that business continues to grow from specialty and protein to more time like, oh we say kind of like looking like New York which is our benchmark our most mature market our biggest business.

Speaker Change: So we're really happy, you know, in all markets they're all growing, you know, as fast as they can. As we say, you've got to have that staff that's trained, you've got to build that relationship team, that, you know, becomes experts and protein and produce and specialty.

Speaker Change: and so that takes time.

Speaker Change: I think we're in a really good place with all our markets and they're growing as fast as they can with the ability of what their warehouse allows them to and their inventory allows them to grow.

Speaker Change: Great, and then just my last question, on the bridge to 2020 and the, called 2030 basis points of EBITDA margin expansion.

Speaker Change: are acquisitions contemplated at all in these credentials, or is this just strictly based on organic rules for the next call three years.

Speaker Change: It's based on organic. Obviously, acquisitions are opportunistic, so we don't model them in.

Speaker Change: Okay, thank you very much.

Speaker Change: Thanks Peter.

Speaker Change: An excretion comes from Ben Pave of Blake Street Capital Markets.

Ben Pave: Alright, thanks for taking my questions and congratulations on another nice quarter here. I've got a couple around the dynamic we both refer to around kind of rationalization of lower margin business. I'm wondering, first of all, Jim, if you're able to help quantify that, you know, the impact of this either from a perspective of...

Ben Pave: had one to revenue growth and the degree to which Gross Martin's been expanded because of that initiative.

Jim Leddy: Thanks Ben, we don't break it out exactly, but I mean the way you think about it is some of our...

Jim Leddy: I think top line across the industry has been a little bit weaker this year because demand has been a little bit weaker.

Jim Leddy: and then for us, you know, a part of that is...

Jim Leddy: I think we called it out, especially we were able to center the plate, a tristion of some non-core business, and so you see it in.

Jim Leddy: Gross Prophet Margin expansion. There's a number of things that go into that. Part of it is a Trishon of Lower Margin business. A good portion of it is all of the work that are pricing and sales teams and operations teams have done around.

Jim Leddy: Reducing damages and returns and waste and better inventory management.

Jim Leddy: as well as some of the...

Jim Leddy: the pricing models that we've started to integrate and work with our sales teams on.

Speaker Change: is a lot of different components and, you know, as Chris mentioned, it's kind of a thing that naturally happens. As we do some of the acquisitions that we've done, you do inherit some non-core business.

Speaker Change: and you will a trade out of that over time.

Speaker Change: Nothing to really call out specifically in the quarter, but it's obviously a contributor to some of the dynamics we have seen so far this year Yeah, and I think I could give you a little bit more color, you know, looking at it and I...

Speaker Change: It's coming, you know, so the margin improvement is coming from, I think, a little bit of...

Speaker Change: from everywhere. So some of the business that a naturally goes away like Jim said does help the overall margin go up because they really low margin.

Speaker Change: Part of the margin expansion is coming from just salespeople maturing and learning how to sell more of the book.

Speaker Change: and the more products you can sell, usually the margin.

Speaker Change: Tens to go up because you have more opportunities. So you're not just selling two-three items that you're kind of locked in. You get to sell a lot of the, I call them, a long-tailed items that tend to have a higher margin. So it's a little bit from that natural attrition of...

Speaker Change: But especially the companies that we bought the last few years, you know, the best example is I would say New England, we bought a great business that had too much

Speaker Change: Little margin business and we kind of let go of maybe half of it.

Speaker Change: and Azdi.

Speaker Change: Continue to grow as a chef warehouse.

Speaker Change: They're margin profile starts to look more like a chef warehouse.

Speaker Change: and obviously our goal and we're really, you know, so please.

Speaker Change: and how they continue to grow and kind of we're running the same.

Speaker Change: You know, same playbook and Texas and other markets where, you know, we had to enter a market and we had to enter maybe at a little lower margin than with our model, you know, tends to give us. And as those markets start to mature, they start to look more and more like a chef warehouse.

Speaker Change: Great, that's very helpful for both of you.

Speaker Change: You know, as a follow-up, I'm curious about kind of how...

Speaker Change: This thought process has evolved. Are you sharpening your pencils more on these kind of lower margin products or customers?

Speaker Change: Today, then maybe, you know, then you did maybe pre-pandemic or, or has your philosophy on this really been unchanged and what you're calling it, I'll more today.

Speaker Change: I mean, I don't think the philosophy hasn't changed, but I think the reality stresses more that you can't, you can't lie to yourself, labor costs you more, building facilities cost you a lot more.

Speaker Change: Everything cool, you call it plumber, it costs you a lot more. Okay, so the reality is that it just costs you more, okay, to do the same job as it did pre-COVID.

Speaker Change: and you just have to get paid for it.

Speaker Change: I suffered from that 20 years ago again, you know, I've been doing this long enough that

Speaker Change: We're really good psychologically saying, you know, we're going to figure it out. We'll do the volume and eventually we'll make some money. And it just doesn't work that way. You get tied into...

Speaker Change: selling at a very low margin with high-class, you know, we're a high-touch company, we get tremendous service. It's just not our model, you know, so it's kind of like...

Speaker Change: I'm going to a four season hotel and you've got great linens and you've got great service and you can't do it at the price of a motel six.

Speaker Change: So that's why our model is not to sell everybody. You know, we know who we are and...

Speaker Change: We want to stand our mat.

Speaker Change: and continue to grow because we think our clientele continues to grow. People love.

Speaker Change: Great dining, good food and we just don't need to try to be everything to everybody.

Speaker Change: Very good. Appreciate that color. Congratulations again on this course. Keep up the good work and I'll get back to you.

Speaker Change: Thanks for watching.

Speaker Change: yeah

Speaker Change: Thank you. It appears that we've reached the end of our question in our session. I will now hand over to the CEO of Christopher Pappas, Bookhouse Grimox.

Chris Pappas: Sure, well we thank everybody for joining our coal today with so proud of our team, you know

Christopher Pappas: that they put up another great quarter and we're moving all our initiatives forward and continue to continue to strive to become a better better, the leading specialty food supplier for, you know, best chefs in the world.

Christopher Pappas: and we thank everybody and we look forward to our next call. Thank you.

Speaker Change: Thank you sir. Ladies and gentlemen, this concludes today's event. Thank you for joining us. Anymana, disconnect your lines.

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Speaker Change: Greetings, ladies and gentlemen and welcome to the shift we have third quarter to ensure you for earnings conference call. As a reminder, this conference is being recorded.

Speaker Change: Adnan, I've 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 our Chris Pappas founder, Chairman and CEO and Jim Leddy or CFO. By now you should have access to our third quarter 2024 earnings press release. It can also be found at www.shiftswarehouse.com under the Investor Relations section.

Alex Aldous: throughout this conference call, we will be presenting non-gap financial measures, including among others historical and estimated you betigned a just that you betowed, as well as both historical and estimated adjusted net income and adjusted earnings per share.

Alex Aldous: These measures are not calculated in accordance with gap and may be calculated differently in similarly titled non-gap financial measures used by other companies.

Alex Aldous: Quantitative Reconciliation of our non-gap financial measures to their most directly comparable gap financial measures appear in today's press release.

Alex Aldous: 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.

Alex Aldous: So, for looking statements are not guarantees of future performance, and therefore you should not put into your alliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Alex Aldous: Some of these risks are mentioned in today's release. Others are discussing our annual report on Form 10K and quarterly reports on Form 10Q which are available in the SEC website.

Alex Aldous: Today we are going to provide a business update and go over our third quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on the Shephsware House website under the Investor Relations section titled 3rd quarter 2024 earnings presentation.

Alex Aldous: Please note that these slides are disclosed that this time for illustration purposes only. 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 third quarter 2024 earnings call.

Christopher Pappas: Business and demand trends improved sequentially through the third quarter.

Christopher Pappas: Continued seasonal increase in international travel among the higher income demographic led to a slightly softer season in July and early August.

Christopher Pappas: Customer activity accelerated into the later half of the quarter, and momentum and demand continued into October.

Christopher Pappas: Our operating divisions across domestic and international markets delivered strong growth in gross profit dollars and margin.

Christopher Pappas: as well as continued progress, increasing relevance with our customer base with strong year-over-year growth and unique item placements.

Christopher Pappas: I would like to thank the entire CW team for their dedication and commitment to delivering our diverse and highly high quality product and service in partnership with our suppliers and customers and the communities we serve.

Christopher Pappas: Thank you.

Speaker Change: Please refer to slide 3 of the presentation. A few highlights from the third quarter include 5.6% organic growth and net sales.

Speaker Change: Placement growth of 10.8% and specialty case growth of 3.1%.

Speaker Change: Organic pounds in the center of the plate were approximately 1% higher than the prior year third quarter.

Speaker Change: The year-over-year percentage pounds growth was partially impacted by attrition related to non-core lower margin business in certain markets.

Speaker Change: Gross profit margins increased approximately 58 basis points.

Speaker Change: Gross margin in the specialty category increased approximately 50 basis points as compared to the third quarter of 2023, while gross margin in the center of the plate category increased approximately 45 basis points year-over-year.

Speaker Change: Jim will provide more detail on gross profit margins in a few moments.

Speaker Change: by year-end 2028.

Speaker Change: In addition, we have engaged a global consulting firm to assist our teams in driving both top-line and bottom-line improvements as we target annual incremental margin gains.

Speaker Change: Please refer to slide 4.

Speaker Change: Chart 1 displays trailing 12-month gross profit dollars per route as of third quarter 2024 as compared to full year 2019.

Speaker Change: Chart 2 displays adjusted operating expense as a percentage of gross profit dollars, as well as the progression of adjusted EBITDA per employee for full year 2023 and estimated 2024.

Speaker Change: During 2024, we've eliminated routes and transfers in the Southwest as we opened our Arizona facility. In Northern California, as we integrated recent acquisitions with our specialty operations, and in the Northwest with our Seattle facility coming online.

Speaker Change: The consolidation of four protein processing and distribution operations in Northern California continues to progress and we expect completion by the first quarter of 2025.

Speaker Change: Now please refer to slide 5. The charts here display the progression of customer orders coming via our digital platforms.

Speaker Change: which include orders coming via mobile and website.

Speaker Change: Investments in our digital platform continue to contribute to margin enhancement as our team drives both online order adoption growth, enhancements to customer-facing functionality, and improved real-time data analytics supporting our sales teams.

Speaker Change: As of the third quarter of 2024, approximately 54% of customers ordering through our domestic specialty locations are online versus 48% in 2023 and 20% at the end of 2019.

Speaker Change: Now you can please refer to slide 6. This slide provides the five primary areas our teams are focused on in order to deliver our 2028 financial targets.

Speaker Change: While we will not go into detail of every initiative on this call, we do expect to provide more color during future presentations.

Speaker Change: In addition to the metrics just discussed, we have highlighted here a number of growth and efficiency-related areas of focus.

Speaker Change: One key focus to highlight is the ongoing integration of our specialty, produce, and protein businesses in Texas.

Speaker Change: We are taking steps to improve operational efficiency, merge our sales teams, and incrementally grow the cross-sell of our diverse and high-quality specialty.

Speaker Change: produce and protein products across our platform. The year-to-date 2024 EBITDA margin for our combined Texas operations has improved approximately 110 basis points versus the same period in 2023.

Speaker Change: 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.

Jim Leddy: Please refer to slide 7.

Jim Leddy: Our net sales for the quarter ended September 27th, 2024, increased approximately 5.6% to $931.5 million.

Jim Leddy: from $881.8 million in the third quarter of 2023. We estimate that softer demand during July, including the impact of Hurricane Beryl, impacted third-quarter revenue growth by approximately 1%.

Jim Leddy: Net inflation was 3.2% in the third quarter, consisting of 4.3% inflation in our specialty category and inflation of 1.4% in our center-of-the-plate category versus the prior year quarter.

Jim Leddy: Aggregate specialty inflation was primarily driven by significant year-over-year price increases in chocolate and certain dairy products. Excluding these products, remaining aggregate specialty product inflation was in the 2% to 3% range.

Jim Leddy: Gross profit increased 8.2% to $224.7 million for the third quarter of 2024 versus $207.7 million for the third quarter of 2023.

Jim Leddy: Gross profit margins increased approximately 58 basis points to 24.1%, and our procurement, sales, pricing, and operations teams delivered strong gross profit dollar growth across categories during the quarter.

Jim Leddy: Selling general and administrative expenses increased approximately 7.4% to $192.9 million for the third quarter of 2024, from $179.6 million for the third quarter of 2023.

Jim Leddy: The increase...

Jim Leddy: primarily due to higher depreciation and amortization driven by facility investments and costs associated with compensation, facilities, and distribution to support sales growth in the current quarter.

Jim Leddy: Adjusted operating expenses increased 8.2% versus the prior year third quarter and as a percentage of net sales, adjusted operating expenses were 18.3% for the third quarter of 2024.

Jim Leddy: Operating income for the third quarter of 2024 was $31.9 million, compared to $25.5 million for the third quarter of 2023. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling general and administration expenses.

Jim Leddy: versus the prior year quarter.

Jim Leddy: Our GAAP net income was $14.1 million, or $0.34 per diluted share for the third quarter of 2024, compared to net income of $7.3 million, or $0.19 per diluted share for the third quarter of 2023.

Jim Leddy: On a non-gap basis, we had adjusted EBITDA of $54.5 million for the third quarter of 2024 compared to $50.3 million for the prior year third quarter.

Jim Leddy: Adjusted net income was $15.4 million, or $0.36 per diluted share, for the third quarter of 2024, compared to $13.7 million, or $0.33 per diluted share, for the prior year third quarter.

Jim Leddy: Turning to the balance sheet and an update on our liquidity, please refer to slide 8.

Jim Leddy: At the end of the third quarter, we had total liquidity of $221.3 million, comprised of $50.7 million in cash and $170.6 million of availability under our ABL facility.

Jim Leddy: During the third quarter we continue to make progress toward achieving our year-end 2025 capital allocation goals of two and a half to three times net debt leverage and repurchasing 25 to 100 million dollars of equivalent outstanding shares.

Jim Leddy: Timing of your purchases will continue to be dependent on share price, market conditions, and free cash flow generation.

Jim Leddy: Year to date

Jim Leddy: We have repurchased...

Jim Leddy: $10 million of our outstanding common shares, resulting in a reduction of approximately 264,000 shares outstanding, and repaid $18.5 million of outstanding debt.

Jim Leddy: As of September 27, 2024, total net debt was approximately $651 million, inclusive of all cash and cash equivalents.

Jim Leddy: as compared to approximately 3.4 times as of year-end 2023.

Jim Leddy: Post third quarter end on October 22nd 2024, we repriced our 262 million term loan maturing in 2029, reducing the coupon from SOFR plus a fixed spread of 4% to SOFR plus a fixed spread of 3.5%.

Jim Leddy: Turning to our full year guidance for 2024. Based on the current trends in the business, we are updating our full year financial guidance as follows.

Jim Leddy: We estimate that net sales for the full year of 2024 will be in the range of $3.71 billion to $3.775 billion.

Jim Leddy: Gross profit to be between $890 million and $906 million And adjusted EBITDA to be between $210 million and $219 million

Jim Leddy: Please note for the fourth quarter and full year of 2024, we expect the convertible notes maturing in 2028

Jim Leddy: to be diluted, and therefore we expect the fully diluted share count

Jim Leddy: to be approximately 45 million shares for the fourth quarter and full year reporting periods.

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

Speaker Change: Thank you sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Speaker Change: You may press star and then 2 to leave the question queue.

Speaker Change: For participants making use of speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

Speaker Change: Our first question comes from Mark Carden of UBS. Please go ahead.

Mark Carden: Good morning and thanks so much for taking the question. So to start, it sounds like trends improved as the quarter progressed, impacted by some of the summer travel at the beginning of the period.

Mark Carden: More broadly speaking though, it sounds like traffic challenges were a bit more intense for the industry as a whole. I just wanted to see if any additional pockets of softness emerged for SHEP in 3Q or if it was pretty steady for what you guys have been seeing in recent quarters. Thank you.

Speaker Change #101: Thanks, Mark. I think you kind of summarized it. We had a little bit of a blip in July. I think, you know, last year, I think the industry thought that July was a bit of an anomaly, early August with the level of international travel.

Speaker Change #101: That repeated again this year, that may be the new normal, where you have a softer July than, you know, kind of pre-COVID periods.

Speaker Change #101: and then you have a good strength going into the back half of the quarter and that's kind of how it played out.

Speaker Change #101: So, I would say, you know, I think we mentioned in our prepared remarks that we think it costs us about 1% on top line in the quarter.

Speaker Change #101: But our teams did a really good job of driving, you know, really strong gross profit dollar growth, continue to take market share with unique item penetration to offset, you know, some of the softness in July. And as we mentioned, the trends which were building into September, you know, kind of continued into October.

Speaker Change #102: Okay, great. And then just, have you guys seen any shifts in the salesperson hiring environment? And by this, just are you seeing any competition for top talent picking up at all, or just any impact of applications, just given some of the industry-wide declining traffic that we're seeing, even if your customers are holding up a bit better?

Speaker Change #103: Yeah, I mean we continue to hire we're always looking you know to bring in the bench as we say it You know you have to have that bench to grow

Speaker Change #103: I think that sometimes it's underestimated how long it takes to train.

Speaker Change #103: I always use the example of, you know, would you go see a doctor who just did one year medical school?

Speaker Change #103: more complicated

Speaker Change #103: So our people, you know, are good performers. It's a job almost for life. It takes years to build those relationships and the portfolio products that customers are relying on. So we don't have a lot of jumping around and we continue to hire.

Speaker Change #104: Great. Thanks so much. Good luck, guys.

Speaker Change #105: Thank you.

Speaker Change #106: Our next question comes from Alex Slagle of Jefferies. Please go ahead.

Alex Slagle: Thanks, good morning, and congrats.

Alex Slagle: Just wondering if you could update us on how much Hardee's is diluting the overall EBITDA margin at this point and then just the progress. You talked about the progress integrating cross-sellings. Maybe you could provide some examples of improvements you've seen in certain parts of the business that the early work there has been paying off.

Speaker Change #108: Yeah, sure, I'll start. Alex, thanks. I think we mentioned on one of the slides that we posted that, and most of that is Hardee's, but we expect

Speaker Change #108: You know, kind of 20 to 30 basis points of improvement and our overall EBITDA margins as we further integrate, you know, some of the acquisitions. And Hardee's is a big part of that because it's a big revenue company, you know, it's given us a big footprint.

Speaker Change #108: in Texas that we were looking for.

Speaker Change #108: And the team is making progress. I mean, we've gotten our operations team in there to help them get more efficient operationally. We've taken out some costs initially. And then, you know, building that business and integrating it with our CW specialty business and our Allen Brothers Protein business in Texas.

Speaker Change #108: is underway. It's going to take a couple of years to really ramp it up, but that's pretty normal when you're creating a true chef's warehouse in a market where you're small and you're going to grow fast.

Speaker Change #109: So what's the margin compression? Yeah, it hasn't really changed. It dilutes us by about 20 to 25 basis points overall, and we look to get that back as we integrate the business over the next couple of years.

Speaker Change #110: Yeah, Alex, you know, what you're seeing, you know, from our performance is all the investments we've made over the many, many years.

Speaker Change #110: We're just taking market share.

Speaker Change #110: It's all the cross-selling that's working.

Speaker Change #110: And in a market, I mean, we kind of built our system for environments like today where you do have traffic slowdown in restaurants.

Speaker Change #110: So, I think, you know, all your reports and all your data that's coming out is that it's a little soft compared to last year.

Speaker Change #110: and the only way really to grow and the reason you know you see our numbers you know performing so well is we're just taking market share from all the all our investments in people and systems.

Speaker Change #110: in our warehouses and it's a grind and you've got to be able to win the grind right now and thank God we're winning.

Speaker Change #111: Yeah, that's helpful. And I guess that follow-up, just...

Speaker Change #112: You know, you'd think maybe this churn level would pick up. Still impressive net customer growth mid-single digits, but kind of curious what you're seeing there.

Speaker Change #113: Yeah, I mean, again, it's always been a very competitive industry, but you see that actually our margin is up, so...

Speaker Change #114: We're kind of built for this environment, where things are not optimal, you don't have a giant tailwind, and big customers grow. Actually, we're winning with our customers.

Speaker Change #114: New customer acquisition is helping us with the headwind right now of a little softness.

Speaker Change #114: at the customer level, but you know, business is pretty good. I mean, you know, people still think that you're going to have COVID, you know, that COVID rush.

Speaker Change #114: that we saw, and I think it's just more normalizing.

Speaker Change #114: You know, our really good core customers are performing really well, a little softness maybe at the super high end, still in the steakhouses.

Speaker Change #114: But, you know, we think that business has been coming back.

Speaker Change #114: higher prices and

Speaker Change #114: The more it costs to go out, the more consumers are going to want that great experience.

Speaker Change #114: You better have, you know, great service and great food, you know, when customers are going to spend, you know, $100, $150 a head. So I think that's where Chef Warehouse, you know, the reliability of what we sell and what we're able to deliver them, and I think that's driving, you know, that's driving our cross-selling.

Speaker Change #115: Thank you.

Alex Slagle: Thanks, Alex.

Speaker Change #116: Our next question comes from Andrew Wolfe of Seahawking. Please go ahead.

Andrew Wolf: Thank you. Good morning. I might have missed this, but could you kind of give us a sense of the cadence? I know

Andrew Wolf: You know, you gave it qualitatively, but how much better, you know, has September and October been versus, you know, the three point three percent or so case growth you had specialty case growth for the quarter.

Speaker Change #117: Yeah, I mean, I would say that, you know, the best way to frame it is really we think July and early August cost us about 1% on top line and that was, you know, primarily demand driven. And then it just progressed nicely through the quarter. We don't have a breakout month by month. And then as I mentioned, trends continued into October coming out of September.

Speaker Change #118: Okay, Cisco yesterday said late October was better because beginning of October was.

Speaker Change #119: you know, impacted by hurricanes, kind of suggested that late October even was better, maybe perhaps in September. Did you all see a similar kind of cadence?

Speaker Change #120: You know, we don't operate a huge amount of business in a good portion of where the hurricane hit in Florida. It did impact us a little bit in early October, but nothing huge in the materials. So, I don't have any commentary in October other than, you know, the trends were good coming out of September into October.

Speaker Change #121: Thank you for the charts.

Speaker Change #122: look at, you know, and the information on the bridge to the long-term guidance, you know, I just did some simple math and

Speaker Change #122: With Hardee's, you know, it's about 25 basis points of EBITDA margin expansion a year, and between now and 2008. Without it, it's like 20, so you can tackle this either way, but.

Speaker Change #123: It's kind of two questions. If we were building on a model to 08.

Speaker Change #123: In this way, would we look for margins to increase linearly, like 20 bits a year, or 25, including Hardy's getting better? Or is it something where the out-years, there's more improvement, because...

Speaker Change #123: You know, you're adding digital, you're doing route expansion, facilities are getting increasingly productive. How do you suggest the margin build is going to play out?

Speaker Change #124: Yeah, I mean, you know, you can never predict exactly how it's going to play out. Nothing goes in a straight line. But, you know, I'll go back to, you know, the three or four years before COVID hit. You know, we were coming off a big investment period, and we were able to deliver, you know, kind of 20 to 25 basis points of EBITDA margin improvement, adjusted EBITDA margin improvement.

Speaker Change #124: You know, uh...

Speaker Change #124: for a couple of years there, then we got hit by the nuclear bomb. And I think we're coming off of a similar type of investment period, and we've talked about this before.

Speaker Change #124: And the goal will be to, you know, kind of get that 20, 25 basis points a year, whether it happens extreme, you know, in a straight line, a lot of that will depend on the macro economic environment, obviously. So, you know, you can model it, you know, either way, I think. But that's our target. Yeah. Okay. So that's fair. So there's nothing in these.

Speaker Change #125: Thank you.

Speaker Change #125: All of this stuff is just...

Speaker Change #125: meat and potato can be executed on a day-to-day basis.

Speaker Change #125: there's no big investments or trainings that have to.

Speaker Change #125: Happened

Speaker Change #125: Yeah.

Speaker Change #126: I think that's already baked in Andy, you know, we've made major major investments, you know, in in all departments, you know, we're not 100% there yet, but we've added a lot of capacity. There's some markets that do need a more modern, you know, modernized, consolidated.

Speaker Change #126: set up, you know, we have multiple warehouses and

Speaker Change #126: in multiple markets that one day probably will be consolidated and you'll get a lot more efficiency, kind of what we're going through right now in San Francisco with protein.

Speaker Change #126: where, you know, we built it, now we're consolidating it, and, you know, we should get the rewards over the next many years of the efficiencies of scale.

Speaker Change #127: Okay, and I think that...

Speaker Change #127: you know, besides some of the new markets that still need, you know, a little more consolidating,

Speaker Change #128: I mean, you've been doing this a long time, you know the business that...

Speaker Change #128: As we drive more volume into the capacity that we build, it should eat up more and more of the overhead, you know, a lot of the overhead is fixed.

Speaker Change #128: and you get more that drops to the bottom line and that's kind of the phase you know we think that we're going through right now and we're going to start to you know to get the rewards of those investments.

Speaker Change #129: as we drive those volumes. And like Jim said,

Speaker Change #129: You know, we are at the mercy of the economic environment, you know, good environment.

Speaker Change #129: you know, volume continues to tick up faster.

Speaker Change #129: We start to get more leverage faster, you know, a little slow down, you get a little bit less.

Speaker Change #129: But I think the team has done an unbelievable job.

Speaker Change #130: If you really look at the numbers and you say you mentioned...

Speaker Change #131: Some of the reports coming out from other companies, the environment is...

Speaker Change #131: The environment is more challenging, and to put up the kind of numbers we're putting up, it's the grind and taking market share and all the investments in people to sell more products to the same customers, and that's what's driving the bottom line.

Speaker Change #131: Thank you.

Speaker Change #132: Great, thank you. I'll get back in queue.

Speaker Change #133: Thanks, Andy.

Speaker Change #134: Our next questions come from Kelly Bernier of BMO Capital Markets. Please go ahead.

Kelly Bernier: Thank you.

Kelly Bernier: Can you give us just any more color on, you know, the biggest contributors to the margin expansion? I guess I see here the route consolidation initiative that I was hoping we could drill down on a little bit more within that because

Kelly Bernier: It might, maybe it's always been going on behind the scenes, but maybe you can just talk about framing up the opportunity there as well as some of the other big factors that contribute to that margin goal.

Speaker Change #136: When you say margin, Bill, are you talking about gross margin or just bottom line margin, Kelly?

Kelly Bernier: Yeah, the adjusted EBITDA margin goal of 6.5 to 7 by 2028.

Speaker Change #137: Yeah, I think it's Goldilocks. I think it's a little bit everywhere, you know, our digital teams and our pricing teams just, you know, continue to get better.

Speaker Change #137: So, you know, we're able to manage pricing, you know, in an environment where you do have more volatility or, you know, shortages and, you know, what climate change has been doing to a lot of our products. You know, when you look at...

Speaker Change #137: You know, what's happening in the chocolate market, you know, where you have this massive now inflation in it, you know, it's...

Speaker Change #137: It's challenging, so I think it's part of the pricing teams.

Speaker Change #137: category management teams, and it's the operation team. Like you say, we're always trying to get efficiencies in routing, but...

Speaker Change #137: As now that we've built out so many of these larger warehouses, you know, as the volume starts to increase, you're going to get more.

Speaker Change #137: to the bottom line, as long as your core business is strong and you have good customers, you're not adding a ton of business just to fill up the warehouse at low margin. I mean, part of our top line...

Speaker Change #137: A softness to, I guess, expectation is, you know, we continue to shed business that we think is, you know, long-term is not core Chef Warehouse business.

Speaker Change #137: You know, sometimes we'll take on some of that business, you know, especially when we have the space.

Speaker Change #137: as we start to grow into our space.

Speaker Change #137: We start to shed that business that we don't find very profitable.

Speaker Change #137: and I think we're very disciplined. You know, we've been doing that for years and we continue, you know, to give up that business and that's why sometimes you see our top line.

Speaker Change #137: a little softer than sometimes we anticipate because we're just finding a time and place that we're willing to...

Speaker Change #137: you know, maybe can try to figure out how to make profit on that business. So, you know, I mean, you've been following us for many years. You know, we're a margin profit company. It's built to not sell everybody. And you've got to be willing to let go of some of that business.

Speaker Change #137: I think that's what you're starting to see and, you know, as the economy starts to hopefully pick up, you know, with a little bit more tailwind, you know, more and more of that, more and more of that GP drops to the bottom line because we're starting to get the leverage on the overhead.

Speaker Change #138: That's helpful and then Chris, you've talked in the past couple quarters maybe just about new restaurant openings. What are you hearing from your kind of core customer base?

Speaker Change #138: and particularly how, if at all, a lower rate environment may impact their pace of openings or their plans for new openings.

Speaker Change #139: Yeah, well again, you know, our core business are the independents, right? I mean, we have great, great customers who have 20, 30, 50 restaurants and, you know, we have a few that have a lot more.

Speaker Change #139: You know, they're opportunistic, and I think that, you know, coming out of COVID, I said, you know, there's going to be a lot of, you know, restaurants that close, but

Speaker Change #139: As leases come up, landlords need to put, you know, restaurants that could draw traffic into their buildings, you know, especially with what they've been facing, getting people

Speaker Change #139: back to the office. A lot of new developments in the suburbs and you know how COVID has changed the

Speaker Change #139: The workplace where people are working more remotely and going out in the neighborhoods that they live or have a local office.

Speaker Change #139: We saw strong growth in openings, and I think you're going to continue to see that, you know.

Speaker Change #139: Obviously, interest rates can help, but...

Speaker Change #139: Restauranteurs build restaurants, that's what they do. So if they find a great location and or a landlord that enticing them to come in and the economics makes sense, they're going to open restaurants. And I think that's what we've been seeing and I really don't see an end in sight.

Speaker Change #140: Thank you.

Speaker Change #141: Thanks, Kelly.

Speaker Change #142: The next question comes from Todd Brooks of Benchmark Company. Please go ahead.

Todd Brooks: Thanks and good morning to you both.

Todd Brooks: A few quick questions if I may. Hey Chris, you talked about in the presentation that Chef has engaged a global consulting firm. I'm just wondering what...

Todd Brooks: Chefs' Warehouse

Speaker Change #143: Sure, so you know we've always ran the business almost kind of with the like a startup mentality like you know you know we develop great great tools and great systems and obviously you can't replace you know the people you know I mean we are in the people business so we make sure that we're getting the best talent and keeping them.

Speaker Change #143: But, you know, technology has changed so much, you know, AI, obviously, you know, everybody's talking about AI, we're using AI, and obviously we see the future of more.

Speaker Change #143: I think it's just a fresh pair of eyes, Todd, to help go through some of the projects and things that we're looking at to give us an outside perspective of we can always do better.

Speaker Change #144: Okay, great. Thanks. Secondly, I know we get to the end of October and I'm usually

Speaker Change #145: asking this question Chris on this conference call, but early reads, what are you hearing from customers about their their views on the holiday? I know the bookings tend to happen a little bit later than they did historically around that kind of peak holiday demand, but any early reads or feedback that you're hearing from your customers on holiday?

Speaker Change #145: Yeah

Speaker Change #145: Thank you.

Speaker Change #146: I think the overall tone is pretty positive. The one thing that has changed that you just hit on is...

Speaker Change #146: that since COVID...

Speaker Change #146: So much is, you know, I wouldn't say last minute, although there is a lot of last minute, but, you know, they get a few weeks.

Speaker Change #146: I was actually talking to one of our long-time customers the other day and he goes, I'm going to send you something, Chris. These are the parties that booked. I'm going to send you something, Chris.

Speaker Change #146: in the last few days.

Speaker Change #146: for next week. Normally, they would book a month, two, three, four months ahead. And this is the new environment that we have to be ready for. You know, you look at it and say, okay, we're, you know, this is the kind of staff we'll probably need. This is what it looks like. And all of a sudden, you get 30, 40 percent uptick.

Speaker Change #146: in your booking. So, of course, we're very excited about that. But, you know, it creates a little bit more challenging environment, but they're adapting. They're getting used to that. And I think that's the business that, you know, was missing, you know, obviously during COVID the most.

Speaker Change #146: And I think that's the strongest part that we see coming back, small parties.

Speaker Change #146: booking for everything, for meetings, for celebrations, for planning, for just client dinners, lunches, and I think that we've been very pleased with what we're hearing.

Speaker Change #147: Okay, great. One final one and I'll jump back in queue. Jim, you talked about

Speaker Change #148: Is that kind of the forward thinking for the fourth quarter and any early reads on on how you're thinking about inflation and any sources of Really easing and pricing as we go into into 25. Thank you

Jim Leddy: because it really had a product mix impact on volume and price. You know, they're higher dollar boxes, so when you grow them a quarter over a quarter, you have a little bit lower volume, but you get really good gross profit dollar growth, which...

Jim Leddy: You know, we definitely generated this past quarter, but I think...

Jim Leddy: You know, we guided to organic revenue growth of 6-7% this year, more heavily weighted to the first half of the year.

Jim Leddy: And that's been kind of playing out. So, as we go into the fourth quarter, I don't think we see anything on the horizon that's going to be materially different from, you know, getting to that 6 to 7 percent on a full year basis. And so, I think it'll be similar the way it plays out at least right now.

Speaker Change #149: Okay, thank you.

Speaker Change #149: Sure.

Speaker Change #150: Our next question comes from Peter Seller of BTIG. Please come ahead.

Peter Seller: Great. Thanks for taking my question. I was hoping you could talk a little bit more about how your customers are...

Peter Seller: using you in mature markets like New York and the Northeast versus some more the new markets, areas of Texas and Florida and California. Are you just seeing, do customers use you differently in those markets based on maturity? And then I have a follow-up. Thanks.

Peter Seller: Yeah.

Speaker Change #151: Yeah, I mean...

Speaker Change #151: focus more on buying specialty from us.

Speaker Change #151: And then there's certain markets that really, you know, we entered as a protein company.

Speaker Change #151: and you know we're selling protein and then some more specialty.

Speaker Change #151: And as those warehouses start to go up, like, you know, we have a small, you know.

Speaker Change #151: Small facility now in Nashville, and that business continues to grow, you know, from specialty and protein to more kind of like, I always say, kind of like looking like New York, which is, you know, our benchmark, our most mature market, our biggest business.

Speaker Change #151: And so that takes time, so I think we're in a really good place with all our markets and they're growing, you know, as fast as they can with the ability of what their warehouse allows them to and their inventory allows them to grow.

Speaker Change #152: My last question, on the bridge to 2028 and the 2030 basis points of EBITDA margin expansion,

Speaker Change #153: Are acquisitions contemplated at all in these financials, or is this just strictly based on organic growth for the next three years?

Speaker Change #154: It's based on organic. Obviously acquisitions are opportunistic so we don't model them in.

Speaker Change #155: Okay, thank you very much.

Speaker Change #156: Thanks, Peter.

Speaker Change #157: Thanks for watching!

Speaker Change #158: All right, thanks for taking my questions and congratulations on another nice quarter here. I've got a couple around the dynamic we both have referred to around kind of rationalization of lower margin business. I'm wondering, first of all, Jen, if you're able to help quantify that, you know, the impact of this either from from the perspective of

Speaker Change #158: Headline to Revenue Growth and or the degree to which gross margins have been expanded because of that initiative.

Speaker Change #159: Yeah, thanks Ben. We don't, you know, break it out exactly, but I mean the way you think about it is, you know, some of our...

Speaker Change #159: The Gross Profit Margin Expansion, there's a number of things that go into that. Part of it is attrition of lower margin business. A good portion of it is all of the work that our pricing and sales teams and operations teams have done around

Speaker Change #159: Reducing damages and returns and waste and better inventory management.

Speaker Change #159: as well as some of the

Speaker Change #159: The pricing models that we've started to integrate and work with our sales teams on.

Speaker Change #159: And you will treat out of that over time. So, nothing to really call out specifically in the quarter, but it's obviously a contributor to some of the dynamics we have seen so far this year. Yeah. And I think I could give you a little bit more color, you know, looking at it. And I'm not sure if I'm going to be able to answer your question. I'm not sure if I'm going to be able to answer your question. I'm not sure if I'm going to be able to answer your question.

Speaker Change #159: It's coming, so the margin improvement is coming from I think a little bit of

Speaker Change #159: from everywhere. So some of the business that naturally goes away, like Jim said, does help the overall margin go up because, you know, they're really low margin.

Speaker Change #159: Part of the margin expansion is coming from just salespeople maturing and learning how to sell more of the book.

Speaker Change #159: and the more products you can sell, usually the margin...

Speaker Change #159: especially of the companies that we've bought the last few years. You know, the best example is, I would say, New England. We bought a great business that had too much...

Speaker Change #159: Low margin business and we kind of let go of maybe half of it

Speaker Change #159: and as they...

Speaker Change #159: continue to grow as a Chef Warehouse.

Speaker Change #159: their margin profile starts to look more like a chef's warehouse. And that's obviously our goal. We're really so pleased with that business and how they continue to grow. And we're running the same.

Speaker Change #159: You know, same playbook in Texas and other markets where, you know, we had to enter a market and we had to enter maybe at a little lower margin than what our model, you know, tends to give us. And as those markets start to mature, they start to look more and more like a chef warehouse.

Speaker Change #160: Great, that's very helpful from both of you.

Speaker Change #161: You know, as a follow-up, I'm curious about kind of how...

Speaker Change #161: This, you know, thought process has evolved, you know, are you are you sharpening your pencils more on these? You know kind of lower margin products or you know customers today then then maybe You know Then you did maybe pre pandemic or or has your philosophy on that's really been unchanged and we're just calling it out more today

Speaker Change #162: Yeah, I mean, I don't think the philosophy hasn't changed, but I think the reality stresses more that you can't, you know, you can't lie to yourself. Labor costs you more. Building facilities cost you a lot more.

Speaker Change #162: Everything called, you know, you call a plumber, it costs you a lot more, okay? So, the reality is that it just costs you more, okay, to do the same job as it did pre-COVID.

Speaker Change #162: I suffered from that 20 years ago again, you know, I've been doing this long enough that.

Speaker Change #162: We're really good psychologically at saying, you know, we're going to figure it out. We'll do the volume and eventually we'll make some money. And it just doesn't work that way. You know, you get tied into...

Speaker Change #162: Selling at a very low margin with high cost, you know, we're a high-touch company. We give tremendous service

Speaker Change #162: It's just not our model, you know, so it's kind of like...

Speaker Change #162: Going to a Four Seasons hotel and, you know, you got great linens and you got great service and you can't do it at the price of a Motel 6.

Speaker Change #162: So, that's why, you know, our model is not to sell everybody, you know, we know who we are and...

Speaker Change #162: We want to stay on our mat.

Speaker Change #162: and continue to grow because we think our clientele continues to grow.

Speaker Change #162: Great, you know, great dining, good food, and we just don't need to, you know, try to be everything to everybody.

Speaker Change #163: Very good. Appreciate that caller. Congratulations again on a nice quarter. Keep up the good work and I'll get back in queue.

Speaker Change #164: Thanks Ben.

Speaker Change #165: Thank you. It appears we have reached the end of our question and answer session. I will now hand over to the CEO, Chris Pappas, for closing remarks.

Chris Pappas: Sure. Well, we thank everybody for joining our call today. We're so proud of our team.

Chris Pappas: They put up another great quarter, and we're moving all our initiatives forward and continue to strive to become a better, better, as the leading specialty food supplier for, you know, the best chefs in the world.

Chris Pappas: and we thank everybody and we look forward to our next call. Thank you.

Speaker Change #166: Thank you sir. Ladies and gentlemen, this concludes today's event. Thank you for joining us and you may now disconnect your lines.