Good morning. Hello, Jim, and welcome everybody to the Best Ideas Conference 2024, 22nd Annual CL King Best Ideas Conference. Today we have Jim Leddy, the Chief Financial Officer of The Chefs' Warehouse, with us for a little over half an hour for a fireside chat. And, with no further ado, good morning, Jim, and good morning those of you participating. Let's get going. So, Jim, I was thinking, you know, a year ago, I asked the folks like yourself and from the companies and the industries, you know, it seemed like the consumer was changing in a way that was a little more cautious. So I started with an update on the state of the market for your company versus, you know, The Chefs' Warehouse, but it was a generic question I threw out at everyone.
And I'm doing that again, and I just want to get your sense of it. I think a year ago the sense in the market was things were probably getting a little worse, you know, with the consumer. My kind of nascent theory here is that things kind of bottomed out maybe in the middle of the summer, and there's a sense that if not that the consumer's at least more stable the last couple of months, perhaps even improving. Admittedly, that's a little more of a mass market view and a middle-of-the-market view than where Chefs' Warehouse plays at the high end. But you know, it's sort of. With that kind of an intro and that kind of a thought process from myself, I'd love you to layer on what you guys are seeing in your markets.
Oh, yeah. Thanks for the question, Andy, and good morning. You know, I'll just pretty much reiterate what we talked about and what we communicated on our latest earnings call, you know, which is a little over a month ago, and that was really that, you know, our customers, you know, which are what we call upscale casual to the higher end, you know, really are just continuing to adapt to whatever is the new normal. You know, I think, like the other distributors, we've seen some slowdown in demand in certain sectors, certain markets. You know, we talked about the higher end steakhouses, you know, how there's, you know, they're down a little bit versus last year.
But we continue to see really strong, unique customer growth, both, you know, adding new openings and adding customers that were not our customer before, but were existing establishments, not necessarily a new opening. We still continue to see that, and especially in, you know, some of our higher growth markets, where we've, you know, invested in both salespeople growth, as well as infrastructure and capacity investments. You know, places like Florida and Texas and California and some smaller markets like Seattle and Nashville. So they continue to be, you know, growing nicely.
We continue to see, you know, unique item penetration growth, year over year and sequentially as we add categories and continue to drive the cross-sell, with some of the, you know, companies that we've acquired over the last few years. But I think, you know, when we talk to our customers, they're still adapting to the demographic changes that have happened. A lot of our customers in more mature markets are opening locations in our growth markets, where people have moved, higher income people have moved and are growing. Places like Dallas and places in Florida and places like Nashville that I mentioned.
And I think we just continue to see them being more creative with their menus, with their seating arrangements, with their labor models, adjusting to, you know, the fluidity around working from home and working and going back to the office. So I think they're just adjusting to the new normal.
So a lot of the distributors. That was a really terrific answer, to be honest. But I will just follow up with a direct question. You know, a lot of the other distributors who are more, you know, broadline , middle market-focused, let's say, for the bigger market, have said cases have been down at the same restaurants. You know, which is not surprising. I mean, if the chain's traffic you know, your average chain has been having down traffic the last year, as you just described, independents are generally much more adroit. That's their advantage, one of their advantages. So their cases are less down because, you know, they can change their menu on a dime, and so on. But what is how is the typical restaurant you deliver to, how is their cases?
Is it flattish, or is it down a little, or up? You know, kind of on the same product. Let's say it's a fancy case of tomato, you know, a canned tomatoes or something-
Yeah, I mean [crosstalk]
Or whatever it might be.
Yeah, like I just mentioned, I think it's different regionally, different by market. In certain markets, we are definitely seeing some softness in demand. We're making up for it a bit by growing, continuing to grow categories and item penetration and continuing to, you know, a good, healthy clip of opening new customers. So, you know, basically taking market share, but no, as I mentioned, we're definitely seeing, in certain regions and certain markets, you know, a little bit of softness in volume.
In other markets, I think you mentioned Dallas, Florida, you might see same, you know, same store cases are up because of just population increase, I think, you know, just-
Yeah, I mean, yeah, those markets continue to, you know, do well. Some of our our international markets seem to be not really feeling, you know, that demand pressure that you might be seeing a little bit in certain markets in the U.S. So it's a mixed bag. We have. You know, we have a, you know, we're in, you know, 50, we have 54 distribution centers and 32 locations, and I think we're in 20 + markets. So, it's a little bit of a mixed bag. You see pockets of strength and some pockets of a little bit of softness. But, you know, once again, I think we feel like it's customers adapting to the new normal.
Thank you. The next question is also sort of macro before I get more to, you know, company strategy and the execution. Well, I guess it sounds like your trends have been pretty more steady than maybe what we're seeing in the mass market. I mean, I guess, back to my theory, have you seen any signs of recent improvement, or is it just sort of steady as she goes for you, you know, Chefs' Warehouse?
I mean, we haven't really addressed anything since we reported. But, once again, I just reiterate, we haven't seen anything that is materially different than when we, you know, when we last reported.
Okay. And then, you know, you do a lot of business in catering, country clubs, and just outside of restaurants, which, you know, has been in a recovery mode that sort of lagged the restaurants. Is that still the case, or is that also back to a new normal, you know? Or do you expect, like, a better holiday season than last year, just based on kind of the recovery and that kind of activity?
You know, we have so many different customer types. We sell restaurants and hotels and country clubs, cafes, and even specialty retail. We have, you know. There are many different types of customers. What I would say is that in aggregate or in general, you know, we feel like we're back to a more normal seasonality coming out of the last few years, which was, you know, obviously very up and down. And if you, you know, if you look at our guidance this year, you know, the percentages of, you know, we're. You know, we don't guide by quarter, but consensus has us modeled by quarter. You know, the percentages of our EBITDA by season, by first quarter, second quarter, third quarter, and fourth quarter, have migrated back towards kind of typical seasonality.
You know, the industry has a very weak first quarter. Second quarter and third quarter are somewhat similar. Second quarter generally a little stronger, really because of May and June. And then, you know, you go into the fourth quarter, into the holiday season, and you get the power of the top line driven by the holiday season. And I don't think we see anything different seasonality-wise. It feels like we're moving into a more normal seasonality.
Yeah. So let's talk about the supply side and competition. Sysco has decided, after years of not really doing much in the sales, that they want to grow their sales force. And, you know, PFG... I mean, I know that you guys are in a specialty area, you're not directly competing with them every day. But, they've also, Sysco and US Foods in particular, have kind of staked out more of an urban strategy that could overlap more with what Chef's Warehouse does, and daily delivery and, you know, just, something that on its face sounds a little closer to where you guys are at. Obviously, they cannot match your product assortment, so they're, you know, it's probably limited by that.
You know, are things percolating up from the sales force or, you know, your, the people you talk to, either directly or, you know, people who run your sales divisions, that they're hearing anything about, from those two in particular, US Foods and Sysco, that their new initiatives are being noticed by your customers?
No, I would say that, competition, it's always been an extremely competitive industry. And we've competed against, you know, the three big public broadliners for their portions of their business that are in the restaurant space. And there's big parts of their business, obviously, that we don't compete against, that we don't go after big chains, et cetera. But we compete against so many different types of companies in basically all of our markets, whether they're, you know, 20 million-200 million type of revenue, independents that are, you know, typically, focused on one or two categories. You know, it might be a meat company, a fish company, a produce company, or a specialty company, and those are kind of the companies that we would typically acquire, you know, when we're in acquisition mode.
But we also compete against the big private regionals that are in our markets, and then the big public broadliners. So I would just say that we haven't noticed a significant change in the competitive dynamic. I think you know, they, they grow their salespeople as they're investing in certain markets the way that we do. I mean, we, we talked about it on our latest call, that you know, we've been. We're a growth company, so we, we add salespeople just as part of our DNA. But you know, we've been, obviously, in the markets that we've been investing in, we've been beating up the sales force to get ready for the future growth. And you know, when you add salespeople, they're really not adding value for maybe a year or two.
And so you're, you know, it's an investment that you make, and then you start to get paid back when, you know, as the market matures, and they grow relevance with their customers, and they're building their book. And so I'm sure it's the same with the big broadliners. They're making the investment now, and we are as well, because, you know, you need to grow. And so, you know, what we tell our salespeople is, or we get this question from investors: "What's more important? Is it acquiring new customers, or is it penetrating existing customers?" The answer is both. In order to grow in this industry, you have to do both.
And so I just think it's the normal cycle of the business, and we haven't seen a significant change in the competitive dynamic.
Okay, thank you. Could you talk a little about, you know... On your last call, you know, Chris Pappas, the CEO of the company, talked about, I think, your average sales growth. Sorry, salesperson growth is about 10% a year, but some markets are up to 20% just 'cause that's where the opportunity is. Is the company at a steady state with adding sales? Is that 10% roughly, you know, a good- you know, we're forecasting out, you know, just on a, you know, a normal year, is that sort of the normal add rate for salespeople, or is that a gross number, and then you have some attrition, or how should we think about that?
The 10% that we talked about was we were just kind of highlighting since 2021, our average annual growth rate in salespeople was about 10%. I mean, we grew a lot faster than that because of acquisitions. And we also had higher organic growth, coming out of COVID, right? I mean, I think last-
Yeah
The back half of last year, organic growth was close to 10%, if you average Q3 and Q4, so we're not gonna grow 10% organically, you know, going forward. We, we've already articulated that, you know, our four- to five-year plan to 2028 is, you know, kind of mid-single-digit organic growth, and then, you know, M&A is opportunistic on top of that, if there is any, so no, our sales on average, you know, our salesperson growth will be aligned with our forecasted organic growth.
We just wanted to highlight that, you know, not only were we growing our sales force, you know, organically, a nice clip aligned with our growth, but in our investment markets, you know, we were building our sales force to drive that future growth into those investments that we've made, that we expect to drive, you know, the EBITDA improvement and EBITDA margin improvement over the next, you know, three to four to five years. So that's really what Chris was talking about. And we don't really forecast or guide our sales force growth. It'll be aligned with, you know, our guidance and our four to five-year plan.
Fair enough. And the other thing Chris brought up, which was pretty fascinating, was the 60% increase in just organic square footage or capacity. I think that was since 2019. But that's ex acquisition. So, you know, there's two ways to look at it. You're a growth company that's a little over 10% a year, compounded maybe 11 or 12. But it sounds like in your guidance, and, you know, that's not gonna be the case, it's gonna be lower. And I mean, I think the message is you were in a big investment mode, CapEx wise, and capacity, and now you're in the mode of, you know, harvesting . You know, I'm sure you're not gonna stop expanding, but could you give us a sense of where the capacity is at with overall capacity utilization? Are all your markets have excess capacity?
Sort of what's the steady state? We now know your steady state sales. What's your steady state, you know, addition to organic, you know, square footage? You know, certain markets, I'm sure, are getting close to capacity. And I know it's lumpy, but if you were to smooth that out, how could we model that out?
Yeah, I mean, the way that we've talked about it is, you know, the last couple of years, we had a higher level of CapEx, you know, call it 2% of revenue, kind of average. And we're gonna bring that down. We're gonna migrate gradually down towards, you know, kind of 1% going forward, as we kind of go into, you know, harvesting mode, the capacity that we've added in key markets, key growth markets, as well as, you know, some of the acquisitions that we've added that we need to integrate and improve over time, in terms of their EBITDA margin performance.
So, you know, from a capacity perspective, we've added, you know, significant capacity in high growth markets like Florida and California, Dubai, you know, a growth market like Seattle. We got a new facility in Nashville, which is a, you know, a growing market. We added a facility in the Philadelphia, kind of southern New Jersey market, that is more of a distribution optimization investment, where it's gonna take pressure off of New York to create more capacity in New York without us going out and building a new building in New York, which would be extremely expensive and in the current market. And then also helping us to. We folded in our Philadelphia business and take a little bit of pressure off the Mid-Atlantic as well.
So every market is a little different, but yeah, we did add about 50% or 60% of capacity versus our 2019 baseline, because you know, we were building a lot of that as we were coming out of COVID. And then obviously, we did the acquisition. So, you know, going forward, we still have markets where we need to have a facility solution, but it's just gonna be on a more measured pace and fit within that kind of 1% CapEx. So maybe instead of doing, you know, two or three big buildings a year, we're gonna do one a year or two smaller ones. And so we'll need a building solution eventually in New England, in Houston, so we can bring Hardie's and CW and our Allen Brothers into the same footprint, you know, down the road.
We'll need something in the Mid-Atlantic eventually, but, you know, we've doubled our capacity in Dubai. That's coming online later this year, so we're gonna continue to invest in capacity, just at a much more measured pace.
So, last thing on just capacity and the growth of capacity. I think you said you're in 20 markets, and the IPO was, you know, sort of put out there, every NFL market, maybe except Green Bay. But no offense to the Packer fans, but does that mean there's, you know, let's say round numbers, another 10 markets or so you wanna be in? Or are you kind of, you know, are there maybe five? I mean, has that been refined? I mean, there must be. I haven't gone through your map lately and said, "Oh, that's an obvious market," but how many markets are there that you'd like to get into, whether it be organ-, you know, just however it would be, organically or by somebody?
Yeah, you know, we talked about it. I think, you know, we're not in, kind of, the Atlanta market or the Carolinas in a big way. We ship into some customers there, but we don't have a physical presence. I think, you know, a lot of people have moved there. It, you know, it's a good higher income demographic. There are a number of cities that we'd like to be in. Colorado is one where we're currently very small. We have some, you know, fairly, really good customers that have opened there, and we're shipping from Arizona. So there's a couple of markets that we'd still eventually like to be in, but they're not a real priority at the moment.
Our priority is really to drive, you know, the growth through the investments that we've made and improve. You know, especially in Texas, we bought a very big produce company that we need to, you know, gradually turn more towards a true Chefs' Warehouse, where we're selling more expensive products on their trucks and integrating with our businesses there. And we've already started. We're in the early innings there, similar to what we've done in New England. So that's really, that's really our focus right now.
Yeah.
But there are some markets down the road that you know, we'd like to be in, we think we could do well in.
Yeah. So let's... On the growth algorithm, we know, you know, where you're thinking on sales through '28, and I think the EBITDA works out to what? High single digit or 10% whatever, something, some... You talked about the operating leverage and the EBITDA growth. You're, you know, I mean, you're kind of laying out some of it, but how it kind of- you know, how you expect it between some of the markets where you did acquisitions, like Texas, and, you know, when things turn up, they can really turn up pretty quick, versus a steadier market, such as, let's say, the Mid-Atlantic or, or New York getting more efficient, you know, freeing up capacity, or Philadelphia.
Just sort of how you're looking at the growth algorithm overall, and then how you can think about it between the constituent parts of the business.
Yeah, I mean, we've. You know, we laid out our plan at, you know, kind of a high level. And that's really to just continue in aggregate to grow kind of mid-single digits organically, and really, you know, drive the volume through some of the capacity investments that we've made. And, you know, really, obviously, as we grow, we'll add some variable costs, but a lot of the fixed costs we can leverage. You know, I mean, rent will go up, you know, with inflation, but in markets where we've invested in, we expect to grow, you know, double digits versus, you know, kind of our mature markets, kind of growing, you know, lower to single digits.
And that's just, you know, our portfolio and how our, you know, our growth, how we expect to drive growth through the different levels of maturity that we are in, in different markets. So, I mean, you know, the way we've modeled it is, you know, that mid-single digit organic growth. Incrementally, we can, you know, get to, you know, call it, you know, 20 basis points to 25 basis points of EBITDA margin improvement as we grow organically, that mid-single digits. And that'll, that flow-through should, you know, get us to our 2028 target of, you know, $4.5 billion -$5 billion in revenue and, you know, $300 million, plus in adjusted EBITDA. And, you know, it's never a straight line.
It's always a little bumpy, but that's how we kind of look at it. That's why we made the investments and in the acquisitions to give us the footprint and the categories, and then the capacity in key markets that we see as higher growth that will drive you know a lot of that improvement. As we're continuing to get you know below that, we have a lot of tactical things that we're doing in our operations and our digital growth you know in our systems investments, in integrating our acquisitions, and driving the cross-sell. There's a lot of things below that that are helping you know we expect to get more efficient in our own model as we go forward.
Funny, I was just wanting to get the next question about. You know, it strikes me, I mean, everybody I talk to in any industry, really getting good at digital is really now table stakes. It's no longer, "Hey, you know, here's something, here's a bell and whistle." It's sort of like, you know, and I think it's good for your industry in a lot of ways. But one way, you know, only, only bigger players can really kind of afford to do that. But can you just talk about, you know, how much you're reinvesting in the business? Because you know what another thing I like about this business, it's not really a. Competition is not price-driven as much as it is. I mean, you can't be way out of line, but generally you don't win or lose business on that.
It's more on service and things like that. And obviously, what you can supply, your product assortment. But can you talk about a little more flesh out what you're doing across the company in digital? You know, a lot has been made of, it's part of the sales process, but I assume it's part of the procurement process, part of the you know, just how you, how you can report up to, whether it's operations or up to finance. Just, you know, what AI, how that might be helping you, if it is at this juncture. Just a little fleshed out on digital capabilities, kind of where they, where they're heading, not just where they are.
Sure. So on the customer-facing side, you know, our digital platform, we continue to invest in that, just on a regular basis. Like you said, pretty much everybody has it. It's the way that you communicate now and operate. You know, and so we have, you know, we have our specialty and produce businesses, which are, you know, more heavily online than our, you know, the plants sold directly to customers, and it's a different business, and it's starting to come online, but you know, I think before Covid, you know, we were, you know, our adoption of our customers using our digital platform for ordering and communicating, you know, was somewhere in the 30s in terms of percentage, and now we're over 50% in terms of our specialty business.
And so that continues to develop, and that's just natural given the generational shift in you know, our customers and chefs and as they become, you know, as the younger generations come in. That's just part of it. And we continue to add, you know, a lot of features on, you know. A lot of what we're investing in now is better understanding our customer's behavior through, you know, just taking in the data from their ordering patterns. How price sensitive are they? How much are they shopping us? And then using that and arming our sales managers and our sales teams with more data to better understand our customer.
And so it's not only helping our salespeople have more time, less time taking orders, more time communicating with our customers, but it's, you know, it's giving us some leverage on, you know, customer support as well. But it just continues to evolve. And then in terms of, you know, our distribution centers, we continue to roll out, you know, new process technology. For example, during 2023 and 2024, we've rolled out, you know, a change from our voice pick technology to a wearable technology that is more efficient and allows us to have a reduction in damages and returns and mispicks. And so we still have a number of markets we need to roll out over 2025 and 2026.
We, you know, we schedule them gradually, and we roll that out, so we're starting to see some of the benefits from that, and then in our transportation platform, you know, not only just consolidating our routes through consolidating facilities and integrating businesses, but also we're investing in, you know, route optimization technology. You know, it's, I think most distributors have it. It's really about when you do an acquisition, you gradually get that technology into the... We've done a number over the last, you know, two years, so we're, you know, gradually getting that implemented into various parts of our business that we don't really have it already. Those are just some examples of some of the things we're doing.
Good. So I wanna, go back to the Hardie's and just the Texas, acquisitions in Texas, and, you know, a lot of markets there. I think, you know, that you've talked about three of them: Houston, Dallas, and I think Austin area. Could you just give us an update, you know, how Hardie's is going, you know, the big produce distributor? I think you've analogized it, if you will, to what happened in Boston when you bought a produce distributor. Smaller, but similar situation. You're right sized it, you made it more profitable, you integrated it, you brought in, you know, beef. And just, I mean, is that game plan? Is it the same game plan, or is it a little more produce and specialty focused without custom beef?
But just what the plan is and how it's going according to plan, and you know, is it basically marginally accretive from here? I mean, is it the heavy lifting? It's always work every day, and you're probably thinking, "Well, you know..." I do know how much work it is. I have a sense of that.
Yeah.
But if the work gets done, what we, on the financial outside of the company, can expect?
Yeah, so just to level set, so we got into Texas, you know, right around twenty eighteen or so, we bought a very small distributor, and we started growing our specialty business, mainly selling to hotels, and then gradually growing what we call street business, which are independent restaurants up and down the street. We and we sell to some high-end specialty retail stores there as well that we inherited with the small distributor that we bought, and we continued to grow that. And then we opened up an Allen Brothers processing facility because we have a number of big customers there, and we wanted to integrate that with our specialty business, and we started to do that.
and we sell all of our proteins on our specialty trucks, and now on Hardie's trucks as well. So we're in the early innings, but so that was the landscape, and then we bought Hardie's, and Hardie's is a big produce company, you know, $200+ million in revenue when we bought them. And they didn't make much money because, you know, produce companies are a lot of trucks. They go out twice a day selling a commoditized box, and they tend to have, you know, a mix of customers that we want to sell other products to, you know, what we call street customers, independents.
But they also tend to have what we call kind of big, corporate, chunky business that they need to fill up their trucks and their warehouses and really generate that return on capital that produce companies do. But they tend to be lower EBITDA margin because of their OpEx and, you know, the number of trucks, et cetera. So what we saw them as is, you know, there wasn't another great specialty company to buy in Texas, so we would see them as, you know, already having routes to hundreds of customers or even thousands of customers that we want to sell products to, but they have a customer base that is really not our customer, and so we'll gradually attrit out of that over time, like we did in New England, and grow the street business.
And so what we've already started to do is, you know, we racked their facility in Austin, where they had capacity, with our specialty products. We've already started to sell some of our Allen Brothers protein products on their trucks. We've integrated the sales teams. We've integrated the operations teams and put them under our leadership team that drives our West Coast operations, and so we're gradually integrating with them. We do need a facility solution down the road in Houston, especially. We have a small CW facility there, and then a very big produce facility now. Dallas, we're getting integrated. We have two facilities there.
We did take some extra space in Houston that we're racking to give us a bridge to whenever we do invest in a facility solution down the road. So we've already started to see improvement from that integration on their EBITDA margins. It's gonna be gradual. You know, our goal will be to get their EBITDA margins up, call it 100-150 basis points a year, from a very low base of, you know, kind of 1%-2% to, you know, 6%-7% over time, but it's not gonna happen, you know, overnight.
It's gonna be a gradual process, and you know, that'll be our goal, to just basically integrate the companies, you know, as we grow and replace some of that kind of unprofitable business with more profitable business.
Okay, thank you. And has the business been kind of right-sized, where some of the produce business, you know, the lower-margin businesses that don't make sense for a food service distributor, have they been, you know, let another distributor do that business? Is that process done, or-
Yeah, no-
kind of close to it?
No, it's not completely done. You know, you gotta do it gradually over time, and you know, because you still have to service your customers. You know, we lost a fairly big one right away, right? You know, we took a charge last year for that. And that was fine. We were gonna lose them anyway. But no, you know, it'll happen over time. The same with our Sid Wainer business that we bought in New England. We did it over a couple of years. You know, you don't just fire the customer. You go to them, and you say, "You know, this is what we can service this for, and be profitable for us and give you a really good value." And that kind of happens over time.
You don't, you don't just pull the Band-Aid off, because you know, these are customers they've been serving for many years, and it's just a matter of time as the business develops into more of a true chef's warehouse. That's what happens kind of naturally over time.
Good. We've come to the end of our time. Jim, thank you very much, and with that, I'm gonna end the webcast, and have a good day, everybody. Take care. Thank you.
Hey, thank you. Thanks for having me, Andy.