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Chefs' Warehouse(NASDAQ:CHEF)

Q2 2014 Earnings Conference Call

July 31, 2014 05:00 PM ET

Executives

Alex Aldous - General Counsel and Corporate Secretary

Christopher Pappas - Founder, Chairman and CEO

John Austin - CFO

Analysts

Mark Wiltamuth - Jefferies

Andrew Wolf - BB&T Capital Markets

Karen Short - Deutsche Bank Securities

Kelly Bania - BMO Capital

Scott Van Winkle - Canaccord Genuity

Karen Short - Deutsche Bank Securities

Kelly Bania - BMO Capital

Scott Van Winkle - Canaccord Genuity

Operator

Greetings, and welcome to the Chefs’ Warehouse Second Quarter 2014 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Aldous, General Counsel and Corporate Secretary for the Chefs’ Warehouse. Thank you. Mr. Aldous, you may begin.

Alex Aldous

Thank you, operator, good afternoon everyone. With me on today’s call are Chris Pappas, Founder, Chairman and CEO; and John Austin, CFO. By now you should have access to our second quarter 2014 earnings press release? It can also be found at www.chefswarehouse.com under the Investor Relations section.

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 modified proforma net income and modified proforma earnings per share. These measures are not calculated in accordance with GAAP and may be calculated differently than other companies’ similarly titled non-GAAP financial measures. 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 them.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today’s release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available at www.sec.com.

Today, we’re going to provide a business update, go over our second quarter results in detail and review our updated 2014 guidance. Then we will open the call for questions.

With that, I would like to turn the call over to Chris Pappas. Chris?

Christopher Pappas

Thanks Alex. And welcome to all who are listening today. The second quarter was mostly in line with our expectations as we continue to see sequential improvement in customer and case growth during the quarter for four special distribution business. A few highlights including following. An increase in net sales of approximately 25% over the second quarter in 2013, a gross profit dollar increase of approximately 19% over the second quarter of 2013 and adjusted EBITDA decrease of approximately 10% over the second quarter of 2013 reflecting inflationary pressures, investments in infrastructure as well as the cadence of earnings from our recently acquired businesses.

During the second quarter the number of cases grew in excess of 3%, over the second quarter of 2013 adjusted for acquisitions. In addition our number of unique customers and placements also grew approximately 9% and 5% respectively versus the prior year quarter after adjusting for the estimated impact of acquisitions.

We continue to see positive trends across the country in our special distribution business. Our overall growth unique customers, placements and cases was very strong particularly in many of our markets on the West Coast and in South where we’re seeing double digit case growth where we believe our investment in regional management infrastructure is continuing to getting traction. In addition we begin our move into the new Bronx facility this month and expect to see fully operational in the first quarter of 2015. As per inflation we continue to see pressure in the dairy and cheese category which John will later. We also experienced inflationary pressure on margins and proteins particularly at Allen Brothers.

Margins at Allen Brothers were not consistent with our expectations this quarter due to deep any lag in passing goes rise in prices on to customers. We begin implementing solutions to improve care meat as well as our ability to pass on crossing -- in a more timely manner. We do believe that this acquisition will be very good for the long-term. The results maybe a little bumpy as we work on implementing best practices and better discipline within the business.

While the integration of both Allen Brothers Michael’s has been bumpy at time we believe that adding center-of-the-plate to offerings to our portfolio is extremely beneficial in the long run. Our research shows that customers that buy center-of-the-plate from us spend three times as much on our specialty items as other customers.

Our investments in people, processes and products continue to be bear fruit. The integration team which began to assemble in December is continuing to be a valuable addition. The team has been very involved in our system conversions and upgrades which we will continue to roll out through early 2015.

Our efforts in the Greater Chicago area are still progressing. As we said previously on April 30th we signed a new list for a 100,000 square foot distribution center which is expected to open by year end. We have also hired a proven market leader to lead our Chicago operation and have started to recruit season sales people in the region. We believe this market has a potential to be our third largest market and affords significant long-term opportunities.

There continues to be many options presented to us for acquisitions. We are actively looking at those that meet our criteria and believe that there are meaningful additional attractive opportunities for us to capitalize in 2014.

With our core business performing well, a plan to improve performance at Allen Brothers and the right people and processes in place we feel that we are positioned well for the future. We will continue to focus on building out our core markets and entering new attractive markets that we believe will have long term upside for growth.

And with that I will turn it over to John Austin to discuss more detailed financial information. John?

John Austin

Thank you Chris and good afternoon everyone. Our net sales for the quarter ended June 27, 2014 increased approximately 25.3% to 213.1 million from 170.2 million in the second quarter ended June 28, 2013.

The increase in net sales was the result of the acquisitions of Allen Brothers and to a lesser degree Qzina during 2013 as well as organic growth. These acquisitions accounted for approximately 26.0 million of our sales growth for the quarter or 15.3% acquired growth over the prior year second quarter.

Inflation increased 13 basis points sequentially and was approximately 5.4% for the quarter. As Chris noted, we particularly felt the uptick in inflation in the dairy and cheese categories as well as significant margin pressure in the protein category as a result of not passing through our increased cost.

As Chris noted earlier our organic (paste) [ph] growth adjusted for the impacted acquisitions improved sequentially to 3.4% in the second quarter. In addition our unique customer account and placements grew 8.6% and 4.7% respectively versus the prior year quarter.

Gross profit increased approximately 19.0% to 52.4 million for the second quarter of 2014 versus 44.0 million for the second quarter of 2013. Gross profit margin decreased approximately 129 basis points to 24.6% from 25.9%. The continued uptick in inflation and the challenge of passing those increases onto customers, pressured margins in our core specialty business slightly which decreased 24 basis points, again primarily in the dairy and cheese categories. However the increased mix in protein sales and the acquisition of Allen Brothers significantly impacted margins during the quarter.

Total operating expenses increased approximately 32.9% from 43.8 million for the second quarter of 2014 from 33.0 million for the second quarter of 2013. The increase was due primarily to the addition of acquired businesses during the past year as well as our continued investment in infrastructure. As a percentage of net sales, operating expenses were 20.6% for the second quarter of 2014 compared to 19.4% for the prior year quarter. The increase in our operating expense ratio is attributable to the higher net freight cost and catalog advertising cost at Company’s Allen Brothers subsidiary increased investments in management infrastructure and higher professional fees related to integrating our acquired businesses as well as the previously disclosed investigation costs related to Michaels’s.

Warehouse distribution and selling costs increased approximately 28.3% due to the Company’s acquisitions and the investments in regional management infrastructure, as well as the higher freight and promotional spending at Allen Brothers. This also includes approximately 405,000 of duplicate occupancy cost related to the Bronx facility. As a percentage of net sales, warehouse distribution and selling cost increased 34 basis points again primarily related to the higher freight and promotional spending in Allen Brothers.

G&A expenses increased approximately 43.9% to 14.0 million for the second quarter of 2014 compared to 9.7 million in the prior year quarter due in large part to the Company’s acquisitions. As a percentage of net sales G&A cost increased 84 basis points to 6.6% and the increase in G&A expense ratio relates primarily to the increased professional fees, infrastructure costs related to our purchasing integration teams and the addition of Allen Brothers. Adjusted for approximately 667,000 of unusual items related to the investigation and in integration cost, G&A expenses were up approximately 6.2% of net sales.

Operating income for the second quarter of 2014 was 8.9 million compared to 11.1 million for the second quarter of the prior year. Interest expense for the quarter increased to 2.1 million from 1.9 million for the second quarter of last year due to the higher levels of debt related to the Company’s acquisitions as well as the higher interest rate associated with the Company’s senior notes issued in April 2013.

Income tax expense was 2.6 million for the quarter compared to 3.8 million in the 2013 second quarter, and our effective tax rate was approximately 41.0% for the quarter.

Net income was 3.8 million or $0.15 per diluted share for the second quarter of 2014 compared to $5.3 million or $0.25 per diluted share for the second quarter of 2013.

On a non-GAAP basis, adjusted EBITDA decreased approximately 9.8% to 12.2 million for the second quarter of 2014 compared to 13.6 million for the second quarter of 2013.

Modified pro forma net income was 4.5 million and modified pro forma EPS was $0.18 for the second quarter of 2014 compared to modified pro forma net income of 5.5 million or $0.26 modified pro forma EPS for the second quarter of 2013. The decrease in modified pro forma EPS to the purchase the prior year was due in large part to the increase in number of shares related to the Company’s stock offering completed in 2013.

Please refer to our press release for the quantitative reconciliations of these non-GAAP measures to their most comparable GAAP measures.

In regard to our outlook for 2014, we’re adjusting our expectations to incorporate our first half results as well as trends we were seeing in the business. We estimate that revenue will range between 820 million and 840 million, adjusted EBITDA will be between 46 million and 50 million, net income will be between 14.3 million and 16.0 million and net income per diluted share will be between $0.57 and $0.64, and modified pro forma EPS to be between $0.63 and $0.71.

This guidance is based on an effective tax rate of approximately 41% for 2014 and an estimated diluted share count of 25 million shares.

With that operator we’ll turn it over for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session (Operator Instructions).Our first question comes from the line of Mark Wiltamuth from Jefferies.

Mark Wiltamuth - Jefferies

Chris then you can talk a little bit about your plan to kind of manage the meat inflation moving forward since the proteins are such a bigger part of the business now.

Christopher Pappas

Sure. We did a pretty good job in just that our divisions managing that inflation, unfortunately our recent purchase in Chicago we’re still in the infant stages of -- we actually do have a much bigger experienced management team that was joined us over the last few months and doing a pretty good job going forward managing a lot of that the price increases and trying to pass it along -- it's just we had unprecedented increases, [indiscernible] at an all-time high. So it’s kind of a -- but they always say it’s a once in a life time do you see something like this happen so quickly and sneak up on us, but it’s process, it’s putting in the procedures that we put in at Michael’s and they did a great job managing through this and our goal is to have the same process being executed in all divisions especially now at Allen Brothers and we’ll do a much better job in the future.

Mark Wiltamuth - Jefferies

And John on the margins, the growth margin decline in the quarter, how much of that was just the mix shift of adding the Allen Brothers to the mix versus failure to pass through margins?

John Austin

The overall change in margin was about a 129 basis points, 130 basis points, about 24 basis points of that was in our core distribution business. As we mentioned on the call there was primarily dairy, cheese inflation and just some margin pressure there. So the remaining 105 basis points I will come back to you with the split between failure to perform and just the overall mix I would order of magnitude it was probably two thirds performance, one third of mix.

Mark Wiltamuth - Jefferies

Okay. And if you can talk a little bit about we saw that filing that you’re looking, it looks like you’re going to raise $50 million of debt for Las Vegas, DC to talk about that a little bit and what kind of implications that going to have for expenses as we look out the next two years.

John Austin

Yes, actually it’s not that much, we amended our bank facility. We did, we had a cap of as far as other non-revolver debt in our credit facility until we expanded that a little bit to up to 15 million of debt to fund our Las Vegas facility. So we’ve already spent about 3.5 million of the 13.5 million for the Vegas facility. So that (construction)[ph] and will probably come between August and March of next year the way you expect to be up and running with our new Vegas facility probably by middle of next year on that target.

Operator

Thank you. Our next question comes from Andrew Wolf from BB&T Capital Markets.

Andrew Wolf - BB&T Capital Markets

Thanks, good afternoon. Chris the 10% case growth in the West Coast and I think you said the south; I guess you mean Florida, what’s driving that? Is that -- you mention management, are you adding sales people to and is it sort of new customer side or is it a penetration driver, can you give a little color.

Christopher Pappas

Andy it’s all the above, I think I said all along we’ve been making investments in people so we’ve hired regional vice presidents, we’ve hired sales managers, we’ve hired sales people. So the investment is paying a lot, we actually had a really good quarter, I’d say 21 out of 22 divisions did a great job and performed our new baby, obviously lagged a little bit but we’re very optimistic to get that up and running and to perform like the rest of our company.

So it is, the people are performing our systems, we’re still on the midst of completing our upgrade of our enterprise system. So lot of moving parts, we swallowed a lot and the new facilities are going to really help us in efficiencies and able to add new categories and that’s why we have been adding these people and they are starting to pay dividends.

Andrew Wolf - BB&T Capital Markets

And I guess as I try to back into what the other rest of the country did the east, New York and Mid Atlantic primarily, you get around maybe 2% case number or something like that. So first of all is that in the ballpark and secondly was that some of the hangover weather in April and has recent months gotten any better or is that just, is the region just depressed or is there something competitively going on?

Christopher Pappas

Actually the Northeast all divisions pretty much either at or above budget, so they perform really well, case growth was great, obviously more is better but the weather didn’t help us but we’re seeing some really good strong signs of penetration, our customers are doing well and our new sales staff is starting to perform. So we’re firing on most -- most pistons are really firing well.

John Austin

Capacity in New York obviously that’s where a lot of the future growth will come once we’re in new facility and can add some categories.

Andrew Wolf - BB&T Capital Markets

And just on gross margin, I think you called out originally said you couldn’t pass through the pricing increase, I think in protein. And that sounds to me like a competitive dynamic but later on you tried to referring to it more as a sort of underperformance. And so can you help me understand what did it point out [Indiscernible].

Christopher Pappas

Let me give you a little more clarity. I mean we always said 1%, 2% inflation is really healthy I think the quarter came in at about by 5.4%. So these are crazy numbers for the wholesale business to have that kind of inflation. So our core business passed along 99 point something percent, not bad in a market like this they did unbelievable job passing on the increases. The real headwind we had Andy was that part of the Allen Brothers business is still a very expensive product. And it gets to a certain point, where the customer is looking at you for some release that this is temporary and is asking you to share the pain because their menu prices are closer to [Indiscernible] out of that. But then you certainly seen they’re pretty high. So optimistically we thought it was not going to be till 2016 but it looks like the herd is catching up and lot of experts are leading us to believe that -- we'll get some release starting in maybe as early as early 2015. So with the crazy prices we saw and what we specialized on Allen Brothers which is the best plain beef in the world the price has just got to the point where we had to share the pain.

Andrew Wolf - BB&T Capital Markets

I know that that kind of sticky pricing is typical and I understand sort of the sticker shock even a high end shifts can get. Over time like over the next couple of quarters before supply catches up, and maybe pricing starts coming down is that pain sharing going to shifts I mean normally I mean statutory so a lot of it and then over time it gets passed. So do you think you’re kind of stuck?

Christopher Pappas

We’ve done a much better job the last few months catching up so we remain optimistic the rest of the year that we’ll get a balance. And nature finds way and we’re in business for a long time and it’s our job to find a way to be more profitable. So there is some mix shift, there is new customers, there is lots of ways that we’re working very hard to catch up. We’re buying better, we’re improving our sales force and management team so all those into mitigating the headwind that we’ve had.

Andrew Wolf - BB&T Capital Markets

Okay. And just last more of a housekeeping for John I think last quarter you said with Chicago is about 3 million investment mainly in terms of running through the P&L I should say, and mainly in terms of hiring sales people early and all that. Mainly hit in Q3 and Q4 is that still pretty much on plan as planned?

John Austin

I think we’re still on schedule. We’ve mentioned in the release we’ve hired the market president she is doing a terrific job. She has started to recruit people so we’ve got a number of people in the pipeline on that front. So I think yes the cadence of that impact will still be building third and into the fourth quarter. So yes everything is still on track were expected to be in the facility around year end so all that still progressing.

Operator

Thank you. Our next question comes from Karen Short from Deutsche Bank.

Karen Short - Deutsche Bank Securities

Just a couple of questions on guidance and then this quarter’s results, and so you indicated the quarter was in line with your expectations. So obviously we were off I mean we started off in terms of what I was looking for. And since your outlook hasn’t really changed so much just wondering when I look at the second half of the year are we kind of equally or is consensus coming equally too well in the third and fourth quarter or is there why not it’s more off than the other or any color you are willing give there?

Christopher Pappas

Yes, I think maybe the one point of clarification Karen is that I think our results in the second quarter were in line with the exception of Allen Brothers, that would be the…

Karen Short - Deutsche Bank Securities

Okay. And then I guess looking at leverage in general obviously we talked about this year being kind of a year of not transition but kind of building of infrastructure. But is there any reason why when we look to next year to the extent that your strategy is always going to be to three to five companies a year that you shouldn’t always be a operating leverage story. I mean obviously to Allen Brothers is it different story as it relates to the mix of the business. But is there any reason why in fiscal ’15 you wouldn’t or going back to being operating leverage three to five companies a year fair steady stable?

Christopher Pappas

I think…

Karen Short - Deutsche Bank Securities

And you’re obviously not getting the leverage now even though you have their…** based on revenue growth.

Christopher Pappas

Correct. So we’ve made a number investments, our view is the investments we’ve made, we should between $1 billion to $1.5 billion in revenue here with the G&A infrastructure that we have put but I’d be little bit more conservative probably getting into 1 billion to 1.2 billion. Our G&A starts to revert back to a more historic level. So that’s really what our goal is that’s what we’ve built the business around in our plan. So beyond that continuing to grow we can have a little bit of investment. But I think we will end up, I’m always characterize the operating expense leverage that warehouse. And transportation, there is stair steps so your leverage warehouse expense until you need to add a new facility and cost go up and you feel the warehouse start to leverage to the big stair steps.

Transportation is really a truck and driver so with their much smaller stair steps, selling are pretty correlated to volume, G&A is where there is an opportunity to leverage expenses and that I think is where

John Austin

I think our first goal Karen right now the way we’re entered the year and we’re looking out towards the next six months to a year. We built this platform. Obviously, we’re building a platform to grow exponentially but right now they still in the dark we add another $150 million to $200 million of volume, which obviously you can use that we done two acquisition and we’re growing very nicely organically. So when we can add that kind of volume all the numbers start to make more sense, we’re looking at more of the 7% EBITDA that is our first goal.

So we’re not that far away we’re just need, we had a little more luck with inflation and few other things we even look a lot better right now, we really focused on that number and filling in the dots so that’s our next I call the next step up.

Karen Short - Deutsche Bank Securities

In terms of infrastructure that you have or will have in order get back to the story of leverage, is the predicated on consolidating faculties in LA and France, Vegas, Miami or is just -- that you are in the process right now

Christopher Pappas

I think consolidating the Qzina facilities in San Fran, LA, New York and Miami that is certainly going to help. The G&A infrastructure is really leveraging that be a bigger volume. So trying to get to that $1 billion to $1.2 billion in volume.

Karen Short - Deutsche Bank Securities

Okay. And then I guess just last question then I’ll get back in the queue, what you are seeing right now in inflation and what’s your outlook for the remainder of the year if you saw [Indiscernible].

Christopher Pappas

I think we’ve seen I’d expect current trends to be for July to be in line with June. Our view at the beginning of the year was in placing kind of the 2.5% to 3%, when we saw the first quarter inflation as the 5.2% we were more closer -- today I’d probably say maybe it’s even 3.5 for the full year.

John Austin

I mean the good news is that everyone is getting use to it at this point so it’s not a daily battle, there is no magic food out there so the price is the price. So we’re hoping that it’s going to start to soften a little bit again a supplying demand so if demand slows down a little bit some prices will drop and that one we hopefully we get back a little bit out of that margin because we don’t have to pass it, we don’t have to drop it all one time.

Christopher Pappas

And for the second half, obviously, we start to last year when you’re really started to see it, start to creep up I don’t remember the numbers on top of my head, third quarter maybe just under 3%, we’re 3.7% or 3.8% in think in the fourth quarter. So that’s where you really started to see in terms of continue sequential update. And so hopefully we’ll start to lap that in the year-over-year inflation will start to soften from this 5% we’re seeing right now.

Operator

Thank you. Our next question comes from Kelly Bania from BMO Capital.

Kelly Bania - BMO Capital

Hi, good evening, thanks for taking my questions. Just curious first the follow up on expenses you call that the higher net shipping cost in catalog promotion cost I guess related to Allen Brothers, just wonder if you could remind us what’s driving that as there is any opportunity to kind of improve those cost and maybe you can quantify how much that is impacting expenses?

Christopher Pappas

Yes, I think first on the catalog expense, one of the things that we try to guide shareholders towards is that the catalog expense, your expenses as you mail the catalog so there is a lot of mailing that goes on in consumer direct business throughout the first three quarters when a lot of the sales from those come in the fourth quarter.

So overall catalog expense if you give you me a minute I’ll come up with that number. On an annualized basis we spend about $3 million to $3.5 million here on catalog, how much was in the quarter I’ll come back to but it’s probably 30% of that number close to $1 million.

John Austin

The profit from the catalyst business mainly comes from the fourth quarter. So right now we’re building we have the expenses without the revenue and then it catches up in the fourth quarter.

Christopher Pappas

50% of the B2C revenue is generated in the fourth quarter primarily in December but it’s all the fourth quarter. Shipping cost they just have an inherently obviously they’re doing a lot of consumer mainly they have actually a fairly national customer base and the wholesale business and so they’re outside shipping cost is an opportunity for us but they fairly high stand there too.

Kelly Bania - BMO Capital

Got it, that’s helpful. And then on the Bronx facility you mentioned you were starting to move in and I guess on track to be in there in the first quarter. Can you talk about how that’s going and what impact we should expect that to have on the expense line item for the rest of the year and into next year? We still going to be excluding that going forward now that you’re starting to move in.

Christopher Pappas

Well, we started moving in and we’ll continue to move in over the next few months. Our offices won’t be ready will sometime early probably first quarter of 2015. So we’re hoping to be fully operational operation wise and let the other warehouse as soon as probably I think our target goal is second quarter of next year. And obviously at that point we’ll have more efficiencies we don’t need all the double staff that we have right now moving trucks back and forth facility to facility do management team so I think we’ll get the expense, the big expense reduction in labor and operations probably starting second quarter of 2015.

Kelly Bania - BMO Capital

Got it, and then on the common IT platform expenses for Allen Brothers and Michael’s can you give us little more color on what that allow you to do in terms of benefits? And are there more costs related to that transition as well?

Christopher Pappas

There may be a few transactional cost so we’re basically we’re upgrading the system that’s currently at Michael’s to give us more granular data on margin right now we’d like to have more visibility in the margin like we do in our specialty distribution business. And so we’re upgrading kind of our perpetual inventory system and the ability to report margin at the SKU level more timely and daily, weekly, that kind of thing. We were then taking that same system and converting Allen Brothers system they’re on a kind of a prior legacy system from the same software developer and we’re upgrading that platform to the same platform. Our intent and our expectation is that we’ll have a lot more transparency around margin on a daily and weekly basis.

Christopher Pappas

That’s a great question and really a good analogy will be someone who needs glasses and is walking around and can’t always see things far away and you put on a really good pair of glasses and now everything comes into focus. So, the new system is very necessary for a company like us to manage all these divisions and we’re very much looking forward to that implementation and having the transparency and the upgrade ability to really manage margin much-much better in inventory. So, simply a great help.

Kelly Bania - BMO Capital

And the timing on that is…

Christopher Pappas

We expect before year end to convert and have that up and running at Michel’s we’ll implement the first wave of the system before year end at Allen Brothers probably won’t be all the way there it’s probably to be have it fully operational it will be early next year. But it’s good, it’s got a lot of resources devoted to it and it has been for the last three or four months but we’re getting close to finishing that project at Michael’s.

Operator

Thank you. Our next question comes from Scott Van Winkle from Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

So quick add-on on Allen Brothers we’re talking about passing through price and inflation et cetera and then sticker shock and is there any loss of volume that when you see prices normalize you expect to recovery as a result of this inflation. Are you seeing that today or the loss of volume is?

Christopher Pappas

Loss of volume in what way Scott I mean we’re not losing customers our top line is pretty healthy?

Scott Van Winkle - Canaccord Genuity

Well, I am just thinking the $60 one pound dry age steak doesn’t sell as well as to 40 pound?

Christopher Pappas

Again Allen Brothers I mean their core customer is a prime house so the good news is that when we get normality that customer is very loyal and the pressure is not everyday what is the price doing oh my god this is costing me $40 on my menu what am I going to charge the bad news is that they can’t change the menu that’s how they built their businesses and the rest of our business even our protein business the customer base they’ll take substitutes. And that’s what we love about our business the diversity with the 1,000s of products and diversity with 1,000s of customers this is a unbelievable boutique business which again we are extremely excited about the future of the brand. We just ran into an unprecedented period kind of shorthanded and we know that the future is going to be very bright for the brand.

Scott Van Winkle - Canaccord Genuity

Thanks and then on the new facility in New York fully operational first quarter of next year, what’s the time table to build out the offering from where it stand today to where envision it being with center of the play.

Christopher Pappas

We’re returning already we have our plan how quickly we can get the people in place the new divisions in place and get everything coming but if have to give you a time period I would say give the first half of the year to get into play then the second half of the year to really start improving, already we started to increase our business in the New York market with the Allen Brothers product. So that’s actually starting to take up very nicely, the wheels are emotion.

Scott Van Winkle - Canaccord Genuity

And one last one, the integration team that’s been assembled is that seeing also in charge of relocating in facilities and thinking New York, Chicago, the efforts in Las Vegas, is that fall into that responsibilities well actual physical relocations.

Christopher Pappas

That team is to integrate acquisitions and when they’re not doing that they’re training; right now most their time is focused on our project fusion integrated our upgrade in our enterprise system. So no, the physical move that we do that have local level and we haven’t seen that we assist the local operator in doing it, but that’s not their primary job.

Operator

(Operator Instructions) Our next question comes from John Ivankoe from JP Morgan.

Unidentified Analyst

Hi, thanks its Jordan. You touched on a timing a little bit but how big is the Allen Brothers business now and how much should be expected might contribute to the margins in the back half of the year in the fourth quarter specifically that might help us in inflation in the second half?

Christopher Pappas

Yes, it’s about a $22 million, $23 million business today, about 50% of that revenue comes in the fourth quarter, challenge with that business we don’t typically disclose kind of the granular bottom line margin in that business. The gross margins are meaningfully better than the wholesale market, but there is also a lot of cost obviously the catalog expense we talk about and shipping cost and things like that.

So it does significant show when you look at the cadence of Allen Brothers contributions are expected contributions obviously we’ve mentioned short of our expectation this quarter. I would say a line share of their overall profit, greater than 50% of their overall profit comes in the fourth quarter.

John Austin

What I can tell you is that those margins are much more insulated in the hotel business, we are able to merchandise in market in the catalog business there is a lot more flexibility and a lot more ability to protect your margin.

Unidentified Analyst

So that’s what you get settled in what I was going to ask about next which is just some color maybe on how you expect to build it out for instance like you mention catalog, so how you increase consumer awareness and then in terms of how your bench marking prices, what are kind of the competitors who are not that you might compare the pricing to determine where you want to price to see business.

Christopher Pappas

Allen Brothers is the Rolls Royce of that business I mean we do look at there are some people that do compete in the east business to the repetitive consumer but there were very loyal following and we’re investing to increase that the circulation specially online, actually we’re in the market right now to add in addition to that team to help us, we think the online, more of the online presence is still hasn’t been catch. So that’s one of the areas that we’re very optimistic that we really grow that business. And much less working expensively than the catalog business, obviously catalogs are very expensive so it’s a lot less money to do it online and that’s really where a lot of focus is going to go.

Unidentified Analyst

Okay, very helpful. The last thing I want to ask about was Chris you talk about making kind of investments in people from sale to managers I think particularly in western, southern market, so are you still seeing opportunities from an internal staffing standpoint and maybe even from customer demand standpoint as it relates to the uncertainty around the broad lines -- maybe upcoming broad lines.

Christopher Pappas

Chef is a very special company, it’s a niche player to huge market, we know who the big guys are, we like to think we’re much more nimble, everything we do has a purpose, there is the strategy of really focusing again on our core customer and all our metrics, very metric driven company or everything points that what we’re doing is working. So we continue to execute to that strategy, we’re penetrating, adding the management like I said earlier I think to Karen, we’re building this in layers and the first layer adding the management which can manage the different divisions we felt that these capability right now to go a 1 billion 1.2 billion is a sweet spot for this management team and that’s where a lot of the numbers G&A comes down and specially with the new facilities we start to get a lot of efficiencies. I would say imagine a truck going out if it’s a third full it’s not very efficient and then when it fills up as usually it’s very efficient and then when it’s you have too much demand you got need another truck you start all over. So, we’re at that point now that we’re very close we think that the next stage of growth that we’re prepared to manage and the next acquisition really brings us to that sweet spot and that’s our goal.

Operator

Thank you. At this time, we have no further questions. I will turn the call back over to Chris Pappas for closing comments.

Chris Pappas

Okay. Well, I thank everybody for joining us on this call today. We’ve made great strides in building out the platform needed to continue to growth rapidly as a young public company. I really look forward to a very bright future as Chefs builds out its national presence. And we keep strengthening our team. And I look forward to everybody joining us on our next quarterly call. Thank you very much and have a great day.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Chefs' Warehouse (CHEF) CEO Christopher Pappason Q2 2014 Results - Earnings Call Transcript

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