Chefs' Warehouse Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Ship's Warehouse 4th Quarter of 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO and Jim Luddy, our CFO. By now, you should have access to our Q4 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section.

Speaker 1

Throughout this conference call, we will be presenting non GAAP financial measures, including among others historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non GAAP financial measures used by other companies. Quantitative reconciliations of our non GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward looking statements, including statements regarding our estimated financial performance. Such forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on.

Speaker 1

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10 ks and quarterly reports on Form 10 Q, which are available on the SEC website. Today, we are going to provide a business update and go over our Q4 results in detail. Then we will open up the call for questions.

Speaker 1

With that, I will turn the call over to Chris Pappell. Chris?

Speaker 2

Thank you, Alex, And thank you all for joining our Q4 2023 earnings call. Business activity coming out of September strengthens into Q4 as seasonal customer demand and volume trends progressed through November December to close out 2023. Price inflation continued to moderate and our Chefs' Warehouse teams across our North American and international markets delivered strong organic growth and margin improvement. As we move into 2024, I would like to thank all of our CW teammates For the dedication and passion they have for our mission to discover and deliver the finest specialty foods, fresh produce and center of the plate protein and inspire the culinary creativity and feed the success of our customer and supplier partners as we strive for excellence and impeccable service. As a reminder, we are comparing the Q4 of 2023, a 13 week fiscal quarter to the Q4 of 2022, a 14 week fiscal quarter and as such we will present certain results both as reported and on a pro rata 13 week comparison.

Speaker 2

A few highlights from the Q4 on a pro rata basis includes 11.3 percent organic growth in net sales, Specialty sales were up 11.2% organically over the prior year, which was driven by unique customer growth of approximately 12.4%, placement growth of 6.5% and specialty case growth of 11.3%. Organic pounds in the center of the plate were approximately 8.4 higher than the prior year Q4. Gross profit margins increased approximately 38 basis points. Gross margin in specialty category decreased 76 basis points as compared to the Q4 of 2022, while gross margin in the center of the plate category increased 71 basis points year over year. Specialty gross profit margins were lower primarily due to the addition of Hardee's.

Speaker 2

Excluding Hardee's, Specialty gross profit margins increased approximately 35 basis points versus the prior year quarter. Jim will provide more details on gross profit and margins in a few moments. During the Q4, we completed multiple steps as part of our ongoing focus on harvesting our investments in warehouse and distribution capacity and recent acquisitions. These projects involve both consolidation of distribution center, routes and operations in certain markets as well as further integration of acquired sales teams, distribution and cross selling with our existing specialty and protein businesses in key markets across our network. A few highlights are, in Florida, we completed the consolidation of 3 into our new distribution center located in Opelika.

Speaker 2

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

Speaker 2

Our expansion in Dubai continues to progress and we anticipate commencing operations out of the additional capacity and the second half of this year. Our consolidation of protein processing in Northern California is on track to begin a phased in move starting in the Q2 of 2024 and progressing through the end of the year. For 2024 and beyond, we expect to leverage our expanding infrastructure, further integrate recent acquisitions while strengthening the balance sheet, focusing on free cash flow generation and delivering our 2 year capital allocation plan. As we enter this next phase of our growth, we expect Chefs' Warehouse to remain rooted in our DNA as the leading specialty food marketer and distributor to the upscale casual and higher end dining establishments in the markets we serve. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity.

Speaker 2

Jim?

Speaker 3

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended December 29, 2023 increased approximately 29.3 percent to $950,500,000 from $734,800,000 in the Q4 of 2022, which represents a prorated 13 week net sales for the Q4 of 2022. Net sales on a reported basis, 13 weeks compared to 14 weeks increased 20.1%. The pro rata growth in net sales was a result of an increase in organic sales 11.3% as well as the contribution of sales from acquisitions which added approximately 18% to sales growth for the quarter.

Speaker 3

Net inflation was 1.8% in the 4th quarter consisting of 0.6% inflation in our specialty category and inflation of 3.4% in our center of the plate category versus the prior year quarter. Gross profit increased 31.4 percent to $228,600,000 for the Q4 of 2023 versus a prorated is a prorated $173,900,000 for the Q4 of 2022. On a reported basis comparing 13 weeks to 14 weeks, Gross profit increased 22%. Gross profit margins increased approximately 38 basis points to 24.1%. As mentioned on our Q3 call, gross profit dollar growth and margin trends improved significantly coming out of the softer summer months.

Speaker 3

These trends continued as the quarter progressed into the holiday season and our teams across our regions including sales, operations, procurement And all the supporting functions delivered a strong margin performance while providing the premium quality product and service our customers have come to expect from the Chefs' Warehouse. Selling, general and administrative expenses increased approximately 23.8% $190,000,000 for the Q4 of 2023 from $153,400,000 for the Q4 of 2022. The increase was primarily due to higher costs associated with compensation, including benefits, facility costs and distribution costs to sales growth in the current quarter. On a prorated basis, adjusting operating expenses increased 33% versus the prior year Q4 and as a percentage of net sales, adjusted operating expenses were 17.8% for the Q4 of 2023 compared to 17.3% for the Q4 of 2022. Operating income for the Q4 of 2023 was $38,200,000 compared to $29,800,000 for the Q4 of 2022.

Speaker 3

The increase in operating income was driven primarily by higher gross profit and lower other operating expenses, partially offset by higher selling, general and administrative expenses versus the prior year quarter. Income tax expense was $10,100,000 for the Q4 of 2023 compared to $4,300,000 expense for the Q4 of 2022. Our GAAP net income was $16,000,000 or 0 point 38 dollars per diluted share Q4 of 2023 compared to net income of $1,200,000 or $0.03 per diluted share for the Q4 of 2022. On a non GAAP basis, We had adjusted EBITDA of $59,000,000 for the Q4 of 2023 compared to $50,100,000 for the prior year Q4. Adjusted net income was $20,200,000 or $0.47 per diluted share for the Q4 of 2023 compared to $18,200,000 or $0.46 per diluted share for the prior year Q4.

Speaker 3

Turning to the balance sheet and an update on our liquidity. At the end of the Q4, we had total liquidity of $221,900,000 comprised of $49,900,000 in cash $172,000,000 of availability under our ABL facility. Total net debt was approximately $662,500,000 inclusive of all cash and cash equivalents and net debt to adjusted EBITDA was approximately 3.4 times as compared to approximately 3.6 times as of the end of the Q3 of 2023. Turning to our full year guidance for 2024. Based on the current trends in the business, we are providing our full year financial guidance as follows.

Speaker 3

We estimate that net sales for the full year of 2024 will be in the range of $3,625,000,000 to 3,775,000,000 gross profit to be between $865,000,000 $900,000,000 and adjusted EBITDA to be between $205,000,000 $218,000,000 Our full year estimated diluted share count is approximately 44,900,000 shares. For reporting purposes, we currently expect our senior unsecured convertible notes maturing in 2028 to be dilutive for the full year and accordingly those shares that could be issued upon conversion of the notes are included in our fully diluted share count. Thank you. And at this point, we will open it up to questions. Operator?

Operator

Thank you. Before we start the Q and A, we just want to remind everyone that a reconciliation of the non GAAP financial measures To the most directly comparable GAAP financial measures can be found in the Investor Relations section of the company's website and in today's press release. Fagel of Jefferies. Please go ahead.

Speaker 4

All right. Thank you. Thanks for the question. I wanted to ask about the outlook for 2024 and maybe I guess first if you could provide some expectations on the magnitude of impact related to acquisitions that are rolling over into 2024 and get a sense for the cadence what that looks like, assuming no other transactions?

Speaker 3

Hey, Alex. Good morning. Thanks for the question. Yes, in terms of the acquisition wrap impact, Yes, we had sized that previously right around 2.5% to 3%.

Speaker 4

Okay, Great. And I mean, I guess And

Speaker 3

then in terms of the outlook for 2024, was that the first part of your question?

Speaker 4

Yes.

Speaker 3

Well, we started off with January. It's a pretty good month. Obviously, there was some weather impact that we saw in some of our markets, but we actually January is relative, so it's always the worst month In the industry, really for our company, the entire industry. But actually, Our teams executed very well during the month, and we had a pretty good January. And it feels like the usual build Coming out of January into February is taking place.

Speaker 3

So right now, we're sticking with our guidance and go from there. Okay.

Speaker 4

And the expectation for the elevated operating expenses And continuing through the first half, as we think about the typical 1st quarter, 2nd quarter cadence of EBITDA, I mean, the Q1 is usually only 14%, 15% of your annual EBITDA. Is that are we kind of getting back to that sort of normal Seasonal cadence or the OpEx expenses, should we expect that to be more elevated?

Speaker 3

Yes, we wrapped the increased rent from Florida and kind of midway through the year, and then we'll wrap the impact of the additional New Jersey rent kind of in the Q3. So there are some elevated expenses continuing in the first half of Geared, but the percentages in terms of EBITDA are returning to more normal than they have the past 3

Speaker 5

or 4 years for sure.

Speaker 4

Great. Thanks for that. I'll pass it along.

Speaker 3

Thank you.

Operator

Our next question comes from Todd Brooks of Benchmark Company. Please go ahead.

Speaker 5

Hey, thanks for the questions and congrats on the Q4 results.

Speaker 6

Thanks, Todd.

Speaker 1

Couple of

Speaker 5

quick questions for you. 1, I know as part of the new 2 year capital allocation plan, you guys did put a share repurchase in place, and did some work with your lending partners to be able to execute against that. Just not much evidence of it in what the full quarter share count was, but were you active on the plan at all in the 4th

Speaker 3

No. We actually put it into place well through The Q4, about almost halfway through and, no, we hadn't executed any of it, as of the end of the 4th quarter.

Speaker 5

Okay. But I think and your full year guidance what you pointed to for fully diluted the $44,900,000 Does that imply some repurchase anticipated over the course of 2024?

Speaker 3

No. What it really implies is that we expect to cash settle the 2024 converts to $39,000,000 that mature at the end of 2024. And so we don't expect them to be fully dilutive for the entire year. So the previous estimate was $45,700,000 so you just Pretty much take out that those 900,000 shares associated with the 2024 converts and that gets you to the 44.9. Great.

Speaker 5

Thanks, Jim. And then another one, Chris. I'd love to hear I'm just looking at the unique customer growth and it seems to be accelerating nicely on a year over year basis Over the past several quarters, what are the drivers there? And what's the tail to the ability for Chefs' to go out add new customers to the fold as you look into 2024? Thanks.

Speaker 6

Yes. Great question, Todd. Again, we continue to hire and train new sales people to the team. And that's been our engine driver for almost 40 years now. So as much as we are using digital to grow awareness and take more and more of our orders, the actual orders are coming in from customers, which is freeing up the sales team to go out and continue to open more customers.

Speaker 6

And it really is the It's such an important part of our growth because natural attrition for various reasons as sticky as our customer base is, I mean, we've had customers now for over 30 years, you got to have new customers constantly coming in. It's just the nature of who we sell. We sell to independent restaurants and As they mature, their leases sometimes mature out and many other reasons why there's turnover. But let's face it, customers love new restaurants and restaurant tours like to open new restaurants and we feel that that's where we're winning. Most of the customers that are opening In the territories that we sell, I think Chefs is the dominant partner and I think that's what's driving that number.

Speaker 5

Great. Thanks guys.

Operator

Our next question comes from Mark Carden of UBS. Please go ahead.

Speaker 7

Great. Good morning. Thanks so much for taking the questions. So to start, it sounds like sales got stronger sequentially as the quarter progressed, reflecting some seasonality. Just to clarify, did you guys also see the rate of growth pick up in each month when you adjust out the extra week?

Speaker 7

And then any specific callouts with respect to demand And the amount of trade down you're seeing, is it more or less than you guys might have expected? Thanks so much.

Speaker 3

Thanks, Mark. No, the cadence in the quarter, I think, as you pointed out, was pretty typical of a normal season prior to The many years that COVID volatility impacted seasonality, we talked about on our Q3 call, we saw strength in Demand in margin in September coming out of the weaker summer months. I think October November were kind of very typical October November from a seasonal perspective. And then December was I think the 1st December, the 3 weeks between Thanksgiving and Christmas, that you really saw the corporate parties come back, the level of events come back to pre COVID levels. I think in 2022, you saw a little bit of that, but it wasn't completely back.

Speaker 3

And so I think those were 3 very strong weeks And that I think that really helped the quarter get back to what we would call a normal 4th quarter.

Speaker 1

Got it. That's helpful. And then

Speaker 7

you guys mentioned that inflation moderated in 4Q. Do you think it's bottomed out at this point? And just how do you see it shaping up in 2024 at this point?

Speaker 3

I would say we don't really predict inflation, but what we expect right now and what we see is In aggregate, I mean, we have 70,000 products going through our distribution centers. Some are inflationary, some are deflationary. But in aggregate, What we've seen so far in the beginning of the year is kind of a continuation of what we saw in the Q4, which was moderate kind of lowtomidsingledigit type of sequential and year over year inflation with a little bit of A mix on certain products. Right now, you have things that are cocoa based like chocolate, you have olive oil affected by droughts. You have a couple of dairy products that are inflationary.

Speaker 3

But overall, You're kind of seeing moderate inflation so far this year and we kind of expect that to continue.

Speaker 7

Great. Thanks so much. Good luck, guys.

Speaker 3

Thank you.

Operator

Our next question comes from

Speaker 8

Good morning, guys. Good morning. Good morning. I wanted to talk about some of the acquisitions. Obviously, several have been flowing in for the last couple of quarters.

Speaker 8

But maybe can you just talk a little bit more in detail about how they're performing? It Seems like there might be some top line upside coming in from 1 or more, but correct me if I'm wrong and maybe just help us understand How you're finding those acquisitions getting integrated to the broader Chefs' Warehouse network?

Speaker 6

Sure. I think things are going very well, Kelly. I think the team has their arms around the acquisitions from the past 2 years. And you could see from our growth, we call it hybrid growth. I call it right now, as Companies become comfortable as part of the Chef's Warehouse family of companies.

Speaker 6

We start to We sought to share best practices in many of the acquisitions. We've already put them on our computer systems, So they could start to see other warehouses and what products are available and the sales team starts to meld together. And I think that's really what's been the driving force behind our continued growth for the past many years. So we're not anywhere near the finish line of where our expectations are, but Every day we get better. And I think that shows in the numbers.

Speaker 6

We continue to cross sell each other's customers. And that's really the focus, right? We built these new warehouses and continue to build The warehouses and markets that we have 3, 4 independent businesses. We're here in Florida today, and this is one of our newest facilities where we're able to sell proteins and dairy and some produce and all our specialty and dry goods and combine them on the same trucks. And we'll continue to get the synergies, and that's what's going to drive the bottom line over the next many years.

Speaker 8

Thank you. Just wanted to follow-up with a couple more questions. You mentioned the sales force and growth there. It seems As though some of the big broadliners are maybe also increasing sales force headcount more than in recent years. And I guess the question is, are you seeing that same dynamic across many of the private and specialty competitors that you compete more directly with on a day to day basis?

Speaker 8

And maybe just remind us of the size of your sales force and the growth in headcount This year and in coming years that you expect?

Speaker 6

Yes. From The Street perspective, I think we always see some new people. What we hear from all our leaders is, Again, everything is so expensive today. So when you hire people, the benefits are really expensive if you put them on the road. Car expenses are very expensive.

Speaker 6

So I think our view is continue to use technology to free our team up. And I think that it's going more and more into What I call a team sell, I think I've been saying this for the past 5, 7 years that my vision is there's over 1,000 people in the sales with all our companies. So, it's quite a big people in sales, but it's really leveraging them and having them do more calls on new customers, more calls to their existing customers, introducing new products, As we continue to integrate in all the regions that we have Chef Warehouse protein businesses now with our other businesses and now produce. So it's really doing more with less. I think that's the key.

Speaker 6

And I think every company is facing that and is trying to do the same thing, whether you're one of the giant $70,000,000,000 public companies or you're a small independent in the marketplace, you're going to have to get leverage because everything is more expensive. Everything's inflated especially the last 5 years. So it's so important to get more efficient and larger drops to get the leverage on your overhead.

Speaker 8

Thank you. And just maybe last one, doesn't sound like there's any issues here, but maybe just talk about your ability and cost in getting some of the products that you import over from Europe in today's market conditions? And just remind us What percent of your products are coming from there?

Speaker 3

So there I mean, there hasn't been Really impact from what's happening in the Red Sea to our U. S. Or North American businesses. So Logistics prices have obviously come way down since the crazy COVID prices and kind of settled in a range that are a little bit higher than before, but not insane. So we haven't really had Much difficulty coming from Europe.

Speaker 3

We don't really disclose the percentage that comes from Europe. We have had a little bit of some bumps with our Chefs Middle East business with some of the product that comes via the Red Sea, But they've done a great job of mitigating that, and it seems that the price impacts are being felt really by the entire market there and being passed on. And customers and restaurants are adapting their menus and adjusting just like They would during any kind of supply chain disruption, but it hasn't been material to date and the team over there is doing a great job of managing substitutions and working with customers, etcetera. So I would just say overall, the logistics environment hasn't really had a lot of volatility over the last 6 months or a year that we experienced over the first 2 or 3 years post COVID. Yes.

Speaker 3

Kelly, just

Speaker 6

to add a little bit a little more insight to that. Again, I think ever since COVID, everybody or our partners in from over 2,000 suppliers in 40 countries, kind of have adapted. Everybody keeps more inventory now The world is in a pretty volatile state, right, with 2 wars going on and we got climate change impacts. So, I think everyone's gotten kind of ahead of it, right? So, in the U.

Speaker 6

S, like Jim said, I think everybody always anticipates some sort of disruption. So we're kind of way ahead of it. Our inventory is fine. The team is all over it. And as Jim said, in Dubai, which is our major warehouse, they had a great December.

Speaker 6

Business was strong, and I think any pressure came because it was so strong, the demand was there. And it's an incredible team there that is very seasoned and they're accustomed to dealing with something going with the logistical challenges and they try to get ahead of it way before something happens. So I think we're good.

Speaker 8

Thank you very much.

Speaker 3

Thank you, Kelly.

Operator

Our next question comes from Andrew Wolf of C. L. King. Please go ahead.

Speaker 9

Hi, good morning. Wanted to ask about the guidance in terms of the margins, EBITDA margin. So at the midpoint of sales and EBITDA, It's about expands about 10 basis points in 2024 from 23. And gross margin at the midpoint is more than that closer to 20%. So from Alex's question, it appears you guys are Looking at the first half being sort of heavy on OpEx and then starting to improve.

Speaker 9

So I just wanted to get the sense kind of if you could sort of Dive a little more into the cadence of margins, sort of as they flow for the year, both how you see particularly the OpEx We're the business is deleveraging. And I know you're not said well, actually at ICR, you did talk about longer term guidance. Just how you do see the OpEx leverage really being reestablished? Is it going to sort of be Like is it going to get greater and greater once you start to establish it? Is that how you view it and getting margins up to that 6% to 7% long term goal.

Speaker 3

Yes. Thanks, Andy. Yes, just in terms of the guidance and the cadence through the year, It's a range. I mean, if you look at our EBITDA guidance, it's $205,000,000 to 218,000,000 I think the midpoint adjusted EBITDA margin percentage is conservative. I think there's a chance that That could be improved.

Speaker 3

We do still have some of the near term cost headwinds related to the all the growth investments. We talked about that At ICR and in our Q3 call, so that's mainly in the first half of the year. In the back half of the year, we'll We expect to get start to get a little more leverage and then it's really about 25% and 26%. And I would just go back to Chris' comments. We expect to drive organic volume through this Incredible amount of capacity that we've invested in and added in key growth markets over the next couple of years.

Speaker 3

It'll begin in 'twenty four, but we still have, as I mentioned, some of the we haven't wrapped some of the larger rent investments and some of the other growth related costs, but those will dissipate a lot of the transition costs that we've experienced related to The significant amount of M and A we've done over the last 2 years that will start to decline. And so it's going to be gradual. Combine that with improving adjusted EBITDA margins at key investments like Hardee's in Texas, which is A key strategic decision to enhance and accelerate our platform for growth in Texas, which is a huge growth market. And they're diluting us initially. So I think we're a little bit above 5.6% For the full year of 2023, if you excluded the dilutive the initial dilutive impact of adding Hardee's, we'd be very close to what we delivered in 2022, we'd be around 5.9 percent.

Speaker 3

In 2022, we delivered 6%. So it's really just about Driving the organic volume through these significant capacity investments and then improving the adjusted EBITDA margins over time as we integrate this kind of 15% of our revenue base that comes at a lower EBITDA margin percentage.

Speaker 9

Thanks, Jim. And just speaking of Hardee's, and I know Yes, the other acquisitions that were similar, smaller I think, but similar where you're able to margin them up, I think 300 basis points in the 2 Boston acquisition.

Operator

Could you just give us

Speaker 9

a sense of that? Is it more rightsizing the business or is it more the cross sell and Which I guess it is more the latter, but what percent of the customers are you kind of is the right goal either based on experience or How you're modeling it that you want to cross sell to and what kind of penetration and how does just give us a sense of what needs to happen for that acquisition to really move the right way?

Speaker 6

Yes. Thanks, Andy. Every market is unique, right? So, obviously, New York is our first business and Our biggest market and our business our biggest business out of 1 OpCo, right? San Francisco is quite big when you look at all the businesses that we own.

Speaker 6

So each we go through a very, very thoughtful process before we make an acquisition. And as you know, you've been following us for a long time to get our to get the footprint, We've had to it's much more effective unless you're annexing the market next to you, which is typical in the distribution business, right? If you're a typical distributor, which we're not, we always say we're a marketing company that also distributes And that's our strength, right? With over a 1,000 of our own vehicles in the streets every day, We control most of our own destiny, bringing these wonderful products to market. So in the case of Texas, Since we're talking about it, the thought process of we know Texas is going to be a big market.

Speaker 6

Obviously, a lot of people have moved Texas and continue to move to Texas for various reasons in the past 5, 6 years. More of our customers are opening to Texas. They want us to serve them there. And now we have an Allen Brothers cut shop facility, which is doing phenomenal. We have a chef's warehouse, which we put together with some small acquisitions just to get enough business to get the warehouse moving.

Speaker 6

We bought some non core businesses, but That's when we realized what an opportunity it was because there really was nobody in Texas to buy Who was Leica, and that's always the great thing is there's nobody like Shep really that puts the amount of 2,000 Artists and vendors from around the world together in one building and has the logistical expertise and the ability to train a sales force, which does take time. So really when we looked at Hardee's, They were not in Chefs' Warehouse. Their margins weren't their bottom line wasn't anywhere near Chefs' Warehouse. But over the next 5, 10 years, We continue to it was a great company. We're changing the way they go to market.

Speaker 6

We're selling more and more independent restaurants. We're starting to add Chefs' Warehouse products to their trucks. And that's really the March. And then you've watched This year, for many years right now, and as we grow, as we did in New England, New England was Similar, we bought Sid Wehner, a great company, great people and we kind of shrunk their business And we're growing them more as a Chef's Warehouse with more of our products on their trucks. And they're starting to look more and more like a chef's warehouse, right?

Speaker 6

They're marching towards the EBITDA margins that we expect in our businesses. And I think that's what you're going to start to see in Texas and in most markets where we've made these investments. So it's pretty exciting times. I always look at it as We own a bunch of stadiums and the stadiums are doing great and you have to add more seats to do more business. And as You're adding and building those seats, it costs money, it's a drag on your overall percentage when you look at your capital.

Speaker 6

But As the stadium seats start to open and you start to fill them, you start to get a great return on your investment. And I think that's the way we look at it.

Operator

Our next question comes from Peter Saleh of BTIG. Please go ahead.

Speaker 10

Yes. Good morning and thanks for taking the question and congrats on a strong quarter. I did want to ask about I think in the past we were talking about how some of the less mature markets like Texas and or Florida, Your customer buys less of their needs from Chef versus some of the more mature markets like New York City. Are you starting to see some evidence now that given the investments you guys have made and some of the organic growth that you're seeing Some of these customers are starting to pick up their purchases from you in terms of their needs. Is that percentage of their needs kind of ticking up?

Speaker 10

Are you seeing any evidence of that?

Speaker 6

Yes. Thanks for the question, Peter. Yes, absolutely. I couldn't be more optimistic than I am right now that things are going as planned. Everything takes a little time, right?

Speaker 6

You got to get your systems in, the warehouse set up. And we're still in the 1st inning, But Florida is growing at a very rapid pace and every day We're selling more and more items to the customers that we had as we start to fill up the warehouse. So Florida is going to be top 4 markets over the next 5 years and so is Texas. Texas It's taking a little longer because we didn't have the facilities. So we're operating as out of multiple facilities right now.

Speaker 6

As we're starting to figure it out, you got Austin, you got San Antonio, you got Dallas, you got Houston. It's a very large place. It's a country in itself. But every day, the team is making headway as Salespeople start to get comfortable with the thousands of items. Even though we hire a lot of chefs who understand food, It's really understanding how to go to market, sell against your competition.

Speaker 6

But the reason we've made these investments is we're so encouraged to see the reception we get when we start to enter a market And you're hitting on 2 probably of big long term growth markets, Texas and Florida and absolutely We're starting to sell more items to these customers.

Speaker 10

Great. And then just, Jim, are there any calendar shifts or anything that we should be aware of in the Q1 that might be beneficial or detrimental to the business? And then Just on the inflation, I think you guys said kind of maybe a low to mid single digit expectation for this year. Is there any Sort of change in the cadence first half versus second half, I know you guys don't like to really forecast out the inflation. I'm just trying to understand if there's anything that we should be thinking about Higher or lower in the first half on inflation?

Speaker 3

Thanks, Pete. In terms of the Q1, there There are no significant calendar shifts that really come to mind right now, so nothing to really call out there. In terms of inflation, once again, we build it into the range of our guidance. The range of our guidance incorporates Potential variability on volume due to macro demand, which we don't control and due to price, which We don't control as well, but we adapt to as we move through the year, whether it's trying to hold price in a deflationary environment or managing the customer and the price in an inflationary environment. So I think it's just incorporated into that range of the guidance and we adapt and manage as we move along.

Speaker 10

Great. Thank you very much.

Speaker 3

Thank you.

Operator

Our next question comes from Ben Klieve of Lake Street Capital Markets. Please go ahead.

Speaker 11

Congratulations on wrapping up a really good 2023. Just one question for me. Throughout call, I appreciate your comments about kind of focusing on integration of your legacy investments and acquisitions and throughout 2024. And my question to you, Jim, is In this context where you're really focusing on what you have already done and integrating these investments, What remains compelling to you in a potential acquisition that you could potentially still make in 2024? Are there kind of high level characteristics of an acquisition you could look to make in 2024 or is your foot really kind of off the gas here for the balance of this year?

Speaker 6

Yes. Thanks for the question. Again, Sheps is being the little guy of the all the public that we're measured against. We had to acquire to get the footprint. And now the focus has shifted on we've created by the end of the year, we'll probably have 60% more capacity.

Speaker 6

So Yes, the focus is on hypercharging organic growth. And of course, we're always opportunistic. We've always been opportunistic. We're not looking to do anything major in our new territory and we've already stated what our CapEx forecast is going to be. So we're focused on creating more cash, pay down some debt and Maybe buy back shares, but there's a great fold in, which could speed up some of the I mean, we don't want to fill up all our that's what we build it.

Speaker 6

We want to grow into it. But some of these little tuck in acquisitions could be extremely profitable and help us on our march to our EBITDA goals. So, we're always looking. People are always calling, but the real focus right now is to drive the organic growth because we have we finally have good capacity in a lot of our New major markets like we've said, Florida and Los Angeles, our new processing facility is opening in San Francisco, Hopefully, in this quarter and we're going to consolidate a whole bunch of businesses into one state of the art facility. So got a lot of exciting things happening in the next year and 2.

Speaker 11

Very good. All right. Thanks, Chris. I appreciate that comment. Plenty more to talk about, but that's a good place to leave it.

Speaker 11

Thanks for taking my questions. I'll get back in line here.

Speaker 3

Thanks, Ben.

Operator

We have reached the end of our question and answer session. We would like to take a further question from Ben Kees.

Speaker 6

Yes. Well, thank you for everybody for joining our call. I couldn't be prouder of the Thanks from this team and look forward to everyone joining our next call. So thank you very much. Have a great day.

Operator

Thank you very much, sir.

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Earnings Conference Call
Chefs' Warehouse Q4 2023
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