The Chefs' Warehouse, Inc. (CHEF) Earnings Call Transcript
May 20, 2021
Earnings Call Speaker Segments
All right. Good morning, everybody. I'm Kelly Bania, food retail and distribution analyst here at BMO Capital. Thrilled to host our next presenter, Chefs' Warehouse. Thanks for joining us from Ridgefield, Connecticut. I'm happy to introduce Chris Pappas, Founder, President and CEO and Chairman of Chefs' Warehouse, as well as Jim Leddy, Chief Financial Officer of Chefs' Warehouse. Thanks for joining us. I will remind the audience that there -- you can submit questions to me. Otherwise, I'm prepared for an interesting fireside chat here. And I think it's safe to say that everybody involved in the food supply chain over this past year has been incredibly busy. So I appreciate you taking the time to join us.
So just to start it off. So we just had earnings a couple of weeks ago. You raised your goal for your exit rate of this year to 85% to 90% of pro forma sales. So I guess the question is as we look around, what if demand is greater than that? Are you going to be able to respond to that in terms of what you can provide your customers given kind of the constraints in the supply chain?
Yes, yes. Well, great question, Kelly. 6 months ago, if you would have told me that we'd be scrambling to meet demand, it would be hard to have imagined coming from the depths of all the shutdowns and what our industry has gone through. So it's a good problem to have right now with raging demand and everything seems to be opening and people are outside, events are starting. But, yes, it is a scramble. We're all scrambling for labor. I think, being who we are, the last mile for over 35 years, we're used to scrambling. So our team is working 24/7 to put more trucks on the road and be able to pick more boxes and pieces and meet the surging demand. So as challenging as it is, it's a really good problem to have. And we're creative. We're doing everything we can to go out there and recruit people that fit the mold of being part of Chefs' Warehouse, our frontline workers. It is a tough job. So it was always a tough job even before the pandemic, people that work at night and work in cold environments. And we have processing centers. And we have pick the orders all night long. It's a just-in-time model, try to get there in time slots. So we're kind of used to the pressure of trying to perform. And this is just one more chapter in our evolving history. We purchased a company 2 weeks ago, so we keep adding to our puzzle. I think there's tremendous opportunity where the industry was already consolidating. I think it's going to accelerate. At this point, I think there was a big lag during COVID. Obviously, a lot of deals were put on hold. But our industry was consolidating. It needs to be -- you have to find more efficiencies in scale with all the headwinds we had even before with health care and labor demands that were tough, pre-pandemic. So kind of fits into our strategy for the next 5 years. Someone asked me this morning, what's your 10-year strategy? I said it's -- it changes a little bit, but it's still the best to be the best just-in-time company, meeting our over 40,000 customers and growing demands and really good products, where we separate ourselves. We're really more of a food marketing company that distributes than the other way around. So I think our model just continues to get refined and we get better and better executing on our strategy and really selling to more of the independents around the country, and it's so great to see them coming back. And we hope to be able to meet that demand.
So maybe -- can you just help frame for us as you think about warehouse and drivers and supply chain, headcount, what you need to get back maybe by the end of the year to where you'd like to be. And then also maybe on the sales force. Maybe that's less of a constraint there, but just help us frame for that in terms of percentages or what you can share?
Well, we -- at the depths of the pandemic, we shrank the size of the headcount, the size of our overall headcount. And mainly, that was in the operation, obviously. That's the biggest part of our variable cost base. And then we've been gradually building that back as volume has come back. And I think now the last 2 months given the violent ramp that we've seen that's created a challenge for, not just us, but really everybody in the industry, in a lot of industries. So we'll continue to layer in operational hours, windshield time and bring on drivers and warehouse workers and processors in our processing plants. And we've been doing that. We'll continue to do that. But we also used the time during the pandemic to really focus on becoming a more efficient operation, improved picking and packing and loading processes that our head of operations really focused on. And we -- as we talked about in our earnings call, we rolled out a number of different technology improvements to our warehouse system really across our platform, and we completed our ERP rollout. So it's 100% of our legacy businesses are on our ERP, and we get scale and efficiencies, especially as it links to our online platform. So we'll continue to do that. In terms of our sales force, we didn't shrink our sales force to the level that we shrank the rest of the company. And really, that was -- part of that was just kind of keeping the key players, the key people that you want to continue to grow the company with. And we actually added talent. So we -- I think we published in our 10-K, we had just under 500 salespeople across our platform at the end of the year, at the end of 2020. And we've continued to add salespeople as we've gone through the first few months of this year.
So maybe just help us understand, there's so many competitors that you compete with that are small that we don't get to hear from, just how are they dealing with this environment? Is it a wide range? Or is it just harder as a smaller company? Help us understand what you're seeing out there today?
Sure. I think it's a tale of two cities. There's -- if you're small enough and you could depend on a core team, I think you're able to execute and get to the other side. We're seeing many midsized companies just have complete breakdowns in service, cut way back, almost saying, we're just going to survive right now. We want to be profitable, so we're not investing in the future business. We just want to make it through. And I believe many of these companies were blessed with PPP, so I think that's why you haven't seen as many M&A deals in the past year. So as the lights go back on, I think there's that reality check like, wow, this is challenging, yes, business is coming back, but it's demanding. It's hard on small to midsized businesses. The same headwinds that were there before the pandemic are just amplified. And I think that's why I'm really excited. I'm more excited about M&A even though we're very disciplined on who and how we buy companies. We are able to buy our best-in-class company that we were working on the deal before the pandemic. So I think that's what you'll hear. I think the Cassandra crystal ball will say that you'll see many deals that were going to get done before the pandemic getting done first, and then there'll be a backlog. So I think '21 -- I mean, the rest of '21, '22 and going into '23, I think you will see a very active M&A pipeline deals announced for many, many different reasons, labor, health insurance, cost of occupancy, just the things that you need scale to be able to achieve to be successful, but there's still -- at the same time, you'll see many, many small companies continue to thrive because they fill a niche that the bigger players can't. So I really like our position. I think we've always invested ahead of time. We have major facilities going up in 2 of our really booming markets, Southern California and Florida. We've made investments in Texas. We've made investments in Chicago. We've been hiring talent that I don't think we were able to get to before the pandemic. So I think a lot of people had time to think and say, you know what, where do I want to spend the rest of my career. And I'm really proud that they chose Chefs'. So we're really excited about the next 48 months.
So a couple of follow-up questions there. So one, when you look at these M&A opportunities, how do you think about valuing them?
It's hard right now. It's definitely hard. I think a lot of the smaller companies that we look at, they -- they're still kind of living off of their 2019 numbers. And so it's really a matter of being able to forecast. Going forward, I think we're getting more visibility. But the recent ramp in business has been really recent, really literally a couple of months. So it makes it challenging, but I think we still have a pretty deep pipeline. We continue to talk to a lot of the companies we've been talking to before the pandemic. And the PPP money and the dynamics happening during the pandemic have just really kind of pushed forward or delayed certain transactions. We closed one recently, which will be a great transaction for us. It's strategic. It's in New England. We're going to generate a lot of synergies and integration with the other 2 companies that we purchased in 2020 there. So we'll continue to look at deals like that, but it does -- it definitely does make it challenging from a valuation perspective.
Yes. I think, Kelly, you followed us for a very long time. The way we like to structure deals is a certain amount of multiples on EBITDA with an earn-out. So that's kind of our comfort zone. So I think not being able to forecast now completely depending on where these businesses are, I think great companies, great leadership in companies that we were looking at pre-pandemic. I don't think much has changed. I think we're extremely interested in getting those deals done. I think where it gets a little fuzzy is companies that were maybe more leveraged into inner cities. So the obvious, right? Midtown Manhattan, San Francisco, Chicago. I think those numbers get a little fuzzier as we come out and how many people actually go back to 140%. Now in other parts of metropolitan cities, so it's amazing watching the money flow into different pockets and different geographies. But the demand is there. I think everybody got tired of cooking at a certain point. And we're starting to really see that the benefit of off-premise, especially people wanting to get out again and socialize, takeout continues to be a big part of the business. So it's just amazing to watch the money move around.
So it's a good point you bring up. So I'd love to hear a little bit more just about how you think about your exposure to kind of maybe those urban markets that maybe there are some more question marks on the timing or pace of that recovery versus some of the suburban markets. Because I think there's still a lot of people that think, "Oh, Chefs' Warehouse, New York City." And you're in many more places than New York City now.
Right. Well, just the numbers that we're seeing on the top line shows us that we did a really good job the last 10 years diversifying into many geographies. And it's paid huge dividends now as we start to come out. We're in the areas that we're getting the volume, not 100% yet, but way ahead of where I thought we would be in May. I think we're seeing numbers that I thought we wouldn't reach until September, so -- and we're starting to see the inner cities do better than I expected, honestly. I think places like New York, until you have the theaters open and the stadiums back, I don't think you can get to that 100% volume. But we're seeing amazing volumes come back in different parts of the cities where people live, where people are working and trying to meet demand. But now, I would say, the last few weeks, we're actually first -- for the first time starting to see some of the inner cities, the Midtowns of the world, people are coming back. They know they're open. They want to get back. They're starting to do lunch again, which is the first sign of, I call, the office people back to work. So I think you can only be optimistic at this point, but we're really appreciative that we have all that, the sales teams and the routes in all different parts of metropolitan cities. And we're able to get that volume as it starts to come back even when it's not, say, in classic Midtown.
Right, right. And New York just went to 100%, yes? Was it yesterday?
It was yesterday, yes.
Yes, yes.
Can you talk about more specifically what you're seeing?
We are drowning. It was like the switch goes on, and you've got 1 million orders. So it's challenging. It's wonderful to see. I think it's going to be layered. Not everyone is going to go back to the office overnight. So I think it's a layering process. And it's a good problem to have. It's extremely challenging. It's challenging on our work force. They're working extremely hard, and it's tiring. And we're hiring as fast as possible. But in the long run, we'll look back and say it was a good problem. It was another challenge. We've been through 9/11. We've been through financial crashes and all sorts of headwinds, and this is just another challenge, and we'll get through it.
It really started to happen before New York went to 100%. We had a lot of customers who went into hibernation for the winter given the COVID situation, given the weather, given where they were. And really, they're starting to open now in the major cities. And that's where we're -- so we've been seeing it for a couple of months now, really a number of weeks. So it's very nascent. But yes, it started building before New York even went to 100%, that's for sure.
So a couple of questions there. So Chris, I heard you say -- I think you said 40,000 customers. I think it used to be pre-COVID 34,000. I don't know if those are apples-to-apples numbers or if a number -- customers has expanded that much?
So what we've always disclosed, Kelly, is a number -- like -- so we disclosed in our 10-K, we say more than 34,000 customers because we have a lot of customers that are seasonal. There's -- so what we do is we measure our average weekly customers when we report, et cetera. So we're very pleased that even given the higher level of attrition that you saw during the pandemic that we were -- we had a higher level of new customer additions as well. And we reported in our 2019 K more than 34,000 customers. And in our 2020 K, we reported more than 34,000 customers as well. So there are a few acquisitions in there. So it's not completely apples-to-apples, but yes, I'm very pleased with the amount of share we've been able to take during the pandemic.
And I guess to follow up on that, and maybe this is a good problem to have, but -- in some ways, but are you having to choose because of the constraints going after a new customer or fulfilling -- servicing an existing customer as well as you would like in having to do that balancing act?
It is a balancing act. It's challenging us to be extremely creative. And you're absolutely right. We are asking customers to be patient, consolidate where -- we spoil our customers. So having built a company that really serviced customers that had no storage space, we built the model to be able to service customers sometimes multiple times in a day depending on their -- where they are geographically, right, to our warehouses. So we've always built our facilities closer to our major markets to enable us to do that, which cost more money. And today, I think, for the next 6 months, we are asking customers to try to foresee their demand, which is really hard, right, especially with so much outdoor dining. It depends on the weather as well. But we are definitely asking customers to be more patient. They have the same issues. They're having labor problems and consolidate their orders. And it is a partnership, so we're working hand-in-hand, but we definitely have to work with each other to get through this next cycle of trying to get labor back, for sure.
And just going back to the question about customers. So it sounds like roughly similar amount of customers, there's some movements seasonally and with M&A. But do you expect that you will be able to come out of this with more customers or more share of wallet with customers? How should we think about that just from what you're seeing today? I know it's a hard one.
It's definitely squishy. So the -- it's the same way I tell analysts and everybody to look at -- you can't look at margins as much today. You've got to look at GP dollars because of -- I'm sure we'll get to that with inflation. But the numbers are really squishy, like Jim said, because there's a lot of consolidation. So say there was -- say some of the casinos we have, we'd had 6 different addresses and we're billing 6 different customers. So that kind of takes the number up. And during the pandemic because everyone is doing more volume, we were consolidating maybe into 1 drop and 1 bill. So we are looking at customer counts, but -- and the same way we're looking at margins, but we're looking at it differently until what we think there's more normality. So we're really looking at right now is OpEx and GP dollars to run the business. And because things are inflated and because customers are consolidated. So we'll look and say, wow, we have less customers, say, in a geography, but we see the volume. And we're like, wow. How can that be? And a lot of it is because there's some squishiness in the numbers. But we definitely have taken market share. We're seeing so many new applications every day, new customers. Our successful customers have signed new leases. When I hear people are walking away or closing places, I think most of the -- any prime location, if somebody walked away, they're going to walk away anyway. It was a matter of time. The concept wasn't working. They had to redo the concept. But nobody gives away a prime location, unless they really have to. There's something that was underneath it. So I think that you'll start to see a lot of the reopenings. A lot of our customers, like Jim said, especially in the high-rent districts, opening up without less than 75% to 100% capacity didn't make any financial sense. So I think they did go into hibernation. Many were blessed with PPP, which we're very happy for them. And their ability to come back. A lot of clients change concepts and chose to do renovations. So there's many factors. But I think nature finds a way in our industry. Restaurateurs open up restaurants. That's what they do, and that's what they're doing. So I think the only real headwind holding back an explosive recovery right now is labor.
Right. So I do want to get to labor and inflation, but I have one more question before that. Just in terms of just how dynamic the past year was and how many changes that you maybe made with routing and efficiencies, have you -- did you learn anything about those processes that you could maybe change longer term or different customers that maybe need to be serviced more or less frequently or timely that you can change in the way you operate? Or is it pretty much going back to normal?
Yes. I mean, I think that -- never waste a good pandemic, right? But I think our industry is always -- it's constantly evolving and learning more e-commerce or getting customers to order online more. I think we've learned that we got to speak to our customers more, and we've got to be really honest. It does cost -- it costs a lot of money to service people on a more frequent basis. So the days of -- I mean, health care was always a headwind, and it was intensifying. So everybody that works at Chefs' full-time has health insurance programs. Labor is going up. They -- our customers know that. So working where we can, where customers could do a better job forecasting and cutting down our overhead is beneficial for both of us. So obviously, that's been a big learning curve. And we also learned that our most valuable asset really is our people, right? It takes years and years to become very knowledgeable on the amount of products that we sell and the quality. So obviously, we do sell commodities, but we are experts. And we saw that more and more in the pandemic because customers are leaning on us for information, what can they substitute, how can we help them with their menus, especially dealing in a pandemic where they had less labor. So we learned more about each other, and we learned more about our supply chains and how important they are. And really that -- what we built was an incredible array of artisan manufacturers and growers of products which we knew, but we really appreciate it who they were and their ability to supply us during this crazy 14 months. So I think it's made us stronger. And I think the best is yet to come as we start to come out of this with labor and we're able to meet the demand. I think the exposure, I call it like a reset button, everybody had time to really look at what they were doing a lot closer and see the thousands and thousands of products that they have available at their fingertips from somebody like us who does go deep into categories. I think you're going to see really expansion of menus and a lot of new ideas coming into menus coming out of the pandemic.
So wanted to touch on labor again and then maybe just commodity inflation. So in terms of labor, we're hearing about signing bonuses to attract workers back. Just -- are you seeing something similar? Or is there any structural impact to wages that you're needing to pay in order to get workers back? And just thoughts on if there's an expectation that everything will get better on that front in the fall, just where you stand on that?
I think -- we think some of it will be temporary. So the signing bonuses and the incentives, the extreme incentives. I mean, we're doing a little bit of it, but we haven't had to do it on a large scale. We already were above the minimum wage scales in almost all of our markets. So that's going to continue for a few more months. Ours is more focused on retaining really good people. And then with the market, you raise the overall level of wages. And I think that's just going to be part of prices resetting all through the value chain, not just labor, but commodity price inflation. Our customers will be raising prices. So you're going to see some pricing reset, and then it will level off as supply catches up. So we've had some of that, and we've been able to manage through it pretty effectively.
So let's talk about that a little bit more. So inflation, 6% it was last quarter. Could that get higher or worse before it gets better? And I guess, your thoughts on is that sustainable? Is this going to be kind of a longer cycle of inflation? Or is this quite temporary? And what is the definition of temporary?
So I think you got to put it into context of the year-over-year comp. We're comping against April and May and March of last year. Q1 in 2020, we reported 0 inflation. It was flat. And really, that 6% to 7% is an amalgam of many -- like Chris said, we have thousands of different items and SKUs and categories. And we had, obviously, the center-of-the-plate side of the inflation was the most extreme. And we've seen that in the past. It's hurt us for a quarter or two. And then we usually get it back as things normalize. And so there's some of that going on. But I think it's primarily supply chain-driven, it's mainly logistics-driven, that we expect to normalize towards the back half of the year. But once again, I'll go back to -- we believe it's a situation where prices will reset higher and then level off. The year-over-year comps will be challenging because you're going to be comping against 2020 and then comping against 2021 and 2022. So I think you have to take away the year-over-year comp noise. And I think our ability to pass it on, will get better as things start to normalize.
Can you hear me? Just lost a little connection there.
Yes.
Yes.
Sorry about that.
Yes. We can hear you, Kelly.
We can hear you now, Kelly.
Sorry about that. Not sure what happened there. I guess, if you can hear me, Jim, following up on that. Could that end up -- there's a lot of concern about that, but could that end up being a good thing if prices reset higher?
Yes. Well, Again, I think we're in uncharted territory. I mean we've seen crazy inflation in certain parts of our supply chain. Prime beef being one that always comes to mind. A lot of this is logistical at this point. As Europe opens up and a lot of our sources of supply, a lot of it is in freight, just trying to get -- they're lacking labor to get the containers to the port and then get them loaded. There's backups in our ports here to get them unloaded. So I think that's going to work itself out. So I think it's kind of little goldilocks. It's a little bit here, a little bit there. And you start to get back to some normality. But I think we do have a reset at a higher number. So I don't think that labor is going to go backwards, the price of labor. So you got to build that into your model. And we're already seeing many, many customers' menus. Prices are higher. Thank god customers are willing to pay it. So it's $0.50, a $1 here. I think the things that are really -- that giant inflation is, I think a lot of those products, they find their way down to where supply and demand equal each other. I think you'll get a break. So we're all going to get a reprieve from some of those products that have had tremendous inflation. But I do see at this point you're going to have a higher reset button.
Kelly, I'll just go back to something that Chris mentioned earlier. It's something that during the pandemic and recently we've -- one of our strengths is our diversity of product and the amount of expertise within our sales force has allowed us to provide our customers with a lot of alternatives. So you get stake that goes -- a cut stake that increases 50%. We're allowed -- we have the ability to provide them with a lot of high-quality alternatives to put on their menu. And it's turned into an advantage for us in this type of situation. So having that diversity, the ability to process ourselves as well as so many artisanal suppliers from around the world has allowed us to leverage that diversity.
Thank you. Sorry. I had a little connection issue there, but I just dialed back in, but we're out of time now. So...
We've gone to the landline.
Yes, we can see you -- we could see you, we can hear you.
Yes.
Okay. Well, thanks so much for taking the time to participate in Farm To Market.
All right, Kelly. Thank you.
Thank you, Kelly.
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