Chefs Warehouse [CHEF] Conference call transcript for 2023 q3
2023-11-01 15:04:11
Fiscal: 2023 q3
Operator: Greeting, and welcome to The Chefs' Warehouse Third Quarter 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.
Alex Aldous: Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and Jim Leddy, our CFO. By now you should have access to our third quarter 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we'll 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 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 on the SEC website. Today, we are going to provide a business update and go over our third quarter results in detail. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?
Chris Pappas: Thank you, Alex and thank you all for joining our third quarter 2023 earnings call. Third quarter business activity improved sequentially within the quarter, following a softer than expected July in August, primarily due to the placement of the 4th July holiday observed higher than anticipated overseas travel. Coming out of the summer season, the demand and pricing environment improved as more typical seasonal trends emerged. As we moved into September, we saw a significant sequential improvement and gross profit margins across our markets, and we expect this trend to continue as we move into the fourth quarter and new year. I would like to thank our teams across Chefs' Warehouse for delivering strong growth and customer acquisition, placement growth, and volume growth during the quarter. We remain focused on providing our customers with the highest quality products and high-touch service as we continue to grow categories, integrate our recent acquisitions, and drive organic growth across Domestic and International markets. A few highlights from the third quarter as compared to the third quarter of 2022 include; 7. 1% organic growth in net sales. Specialty sales were up 8.2% organically over the prior year, which was driven by unique customer growth of approximately 10.8%, placement growth of 14.2%, and specialty case growth of 9.1%. Organic pounds in center-of-the-plate were approximately 6.6% higher than the prior year third quarter. Gross profit margins decreased approximately 29 basis points. Gross margins in the specialty category decreased 84 basis points as compared to the third quarter of 2022, while gross margins in the center-of-the-plate category decreased 104 basis points year-over-year. Jim will provide more detail on gross profit margins in a few moments. During our second quarter call, we highlighted the near-term growth related operating cost increases associated with the significant investments we have made infrastructure capacity to facilitate future organic growth as well as the elevated level of acquisitions we have made over the last few years. These expenses relate primarily to operating costs associated with facility expansion, higher acquisition related transition costs, and insurance expense associated with our significant growth over the past 12 months. Our expenses related to our core warehouse distribution and sales operations, excluding these growth related investment costs remain in line with our expectations and historical trends. We expect the impact of the near-term elevated expenses will lessen as we move into 2024 and 2025. While not a complete list of cost reduction and operational efficiency-related efforts currently underway, I would like to highlight a few of the more impactful projects and work streams aimed at contributing to expected operating leverage in 2024 and 2025. These include our anticipated opening and consolidation of multiple protein processing plants into the Northern California facility we expect to open in the first half of 2024. We expect to consolidate trucks, routes, and operating more efficient operations, utilizing an optimized labor force and technology platform with increased capacity for future growth. We expect to continue to grow our digital capabilities and have recently added our processed protein products to our online ordering platform. This adds to improving efficiencies in our customer support and sales operations. We expect to reduce acquired growth transition and integration costs going forward, and we expect to begin to see the organic growth leveraging our recently added capacity in Southern California, in Florida, Philadelphia, and other fast-growing regions where we have recently expanded distribution capability. Our overall strategy for growth going forward has not changed. Three primary pillars of our unique growth model, which includes the integration of recently acquired companies, cross-category and cross-platform selling, and driving future operating leverage through the capacity investments we have made as we grow and scale. As we target to average 4% to 6% organic growth over the next two years, we are adapting our capital allocation models as follows. We expect to gradually reduce capital expenditures to approximately 1% of revenue over the next two years to facilitate higher free cash flow conversion. We are targeting two a half times to three times net debt leverage by year end 2025. And our Board of Directors has authorized a two-year share repurchase program up to $100 million of shares. We are targeting $25 million to $100 million share repurchase by year end 2025. The ultimate total repurchase, if any, will depend on our success in expanding our ability to allocate cash towards repurchase via amendment to our term loan maturing in 2029, which is currently underway, market conditions and free cash flow generation over the timeframe. In terms of acquired growth going forward, we expect to take advantage of potential accretive opportunities that may present themselves within this two-year targeted capital allocation framework. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?
Jim Leddy: Thank you, Chris and good morning everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended September 29th, 2023, increased approximately 33.2% to $881.8 million from $661.9 million in the third quarter of 2022. The growth in net sales was the result of an increase in organic sales of approximately 7.1% as well as the contribution of sales from acquisitions, which added approximately 26.1% to sales growth for the quarter. Net inflation was 2.3% in the third quarter consisting of 1.6% inflation in our specialty category and inflation of 3.1% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 31.6% to $207.7 million for the third quarter of 2023 versus $157.8 million of the third quarter of 2022. Gross profit margins decreased approximately 29 basis points to 23.6%. Gross profit dollar growth in margin during the quarter were primarily impacted by the weaker-than-expected summer season as compared to a strong summer season in 2022. As Chris mentioned, margins improved as we moved through the quarter and our September gross profit margins with a highest month year-to-date in 2023. Selling, general and administrative expenses increased approximately 37.9% to $179.6 million for the third quarter of 2023 from $130.3 million for the third quarter of 2022. The primary drivers of higher expenses were higher depreciation and amortization, primarily driven by acquisitions, and higher compensation and benefit costs, facility and distribution costs associated with higher year-over-year volume growth and the impact of certain acquisitions. On an adjusted basis, operating expenses increased 34.8% versus the prior year's third quarter and as a percentage of net sales, adjusted operating expenses were 17.9% for the third quarter of 2023 compared to 17.6% for the third quarter of 2022. Operating income for the third quarter of 2023 was $25.5 million compared to $22.1 million for the third quarter of 2022. The increase in operating income was driven primarily by higher gross profit and lower other operating expense, partially offset by higher selling, general, and administration expenses versus the prior year quarter. Income tax expense was $6.8 million for the third quarter of 2023 compared to $3.1 million expense for the third quarter of 2022. The higher effective tax rate in the third quarter of 2023 was primarily driven by a $2.1 million charge in the current period for return to provision adjustments related to prior year tax returns. Our GAAP net income was $7.3 million or $0.19 per diluted share for the third quarter of 2023 compared to net income of $8.3 million or $0.21 per diluted share for the third quarter of 2022. On a non-GAAP basis, we had adjusted EBITDA of $50.3 million for the third quarter of 2023 compared to $41 million for the prior year third quarter. Adjusted net income was $13.7 million or $0.33 per diluted share for the third quarter of 2023 compared to $16.4 million or $0.41 per diluted share for the prior year third quarter. Turning to the balance sheet and an update on our liquidity. At the end of the third quarter, we had total liquidity of $182.9 million, comprised of $33.1 million in cash and $149.8 million of availability under our ABL facility. During the quarter, we prepaid $20 million on our term loan maturing in 2029. The remaining balance as of September 29, 2023 was $277 million and total net debt was approximately $668.1 million, inclusive of all cash and cash equivalents. Turning to our full year guidance for 2023. Based on the current trends in the business, we are providing our full year financial guidance as follows; we estimate that net sales for the full year of 2023 will be in the range of $3.35 billion to $3.425 billion, gross profit to be between $797 million and $812 million, and adjusted EBITDA to be between $188 million and $196 million. Our full year estimated diluted share count is approximately 45.7 million shares. For reporting purposes, we currently expect our senior unsecured convertible notes to be dilutive for the full year and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you. And at this point, we'll open it up to questions. Operator?
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question we have is from Alex Slagle of Jefferies. Please go ahead.
Alex Slagle: Thanks. Good morning. Question on the guidance, just curious how much of the EBITDA guide change was from the August dynamics versus the change in the 4Q outlook? It sounds like when we last spoke at the beginning of August, the gross profit trends were under some pressure still from the shifts in seasonality and volatility in certain proteins and continued a little longer, I guess, through August before getting better in September and October. And I guess, was this the source of the reduction in the EBITDA guide?
Chris Pappas: Yes, thanks, Alex, for the question. It was a little bit of both. Definitely the, as you mentioned, and as we mentioned, July and August were weaker than expected. We didn't get the benefit really of the price inflation as product mix essentially offset that. So we didn't get the gross profit dollar growth we expected to offset, to generate the expense leverage on expenses. And the second piece is really the impact of our insurance renewals. We are building in Florida, California, and those rates have gone up exponentially. We had our insurance renewals during the third quarter, so we flowed through the elevated growth-related expenses that we talked about in our prepared remarks. So it was about 10 or 12 basis points on the impact of the summer, and then another 10 or 12 basis points on the impact of the elevated growth expenses. That's basically the adjustment to the guidance.
Alex Slagle: Got it. And with the shift in your capital allocation outlook, it's now providing room for buyback and more modest leverage targets versus historical levels and perhaps some other options out there with the converts. I mean, how does this impact your longer term view on sales growth, which I think previously incorporated five to 10% growth from M&A and. if there's any implications on the longer term sales and the views that you provided earlier in the year?
Chris Pappas: Yes, I think, again, I think we've always said, Alex, that we're pretty optimistic. The game has kind of shifted now with rates going so high. We bought a lot over the past 12 months, especially that we're -- we're taking, I would say, a little pause to better integrate. We have all these new buildings. We have some buildings that were unexpected, that kind of fell in our lap, that were opportunistic. So we have so much right now that unless there was an overwhelming deal that was transformative or something that just made so much sense, there's always ways to finance those. We thought that a better application of capital right now is to focus more on organic growth, continue to improve our systems, integrate the companies that we have bought, and really drive the bottom line until rates become more attractive again.
Alex Slagle: Makes sense. Thank you.
Chris Pappas: Thanks, Alex.
Operator: The next question we have is from Mark Cullen of UBS. Please go ahead.
Mark Cullen: Good morning. Thanks so much for taking the questions. Why don't you just start off with inflation, get your take on how the cadence played out, and if there's any lingering issues with any particular categories this quarter.
Chris Pappas: Thanks for the question, Mark. Inflation has kind of played out throughout the year as we kind of expected, more driven by the base effect. I think we've said before, we've seen some deflation in certain categories versus the crazy prices you saw last year. But overall, it's been a story of disinflation as we've gone through the year. We've gone from 4% or 5% in the first quarter to really 2%, 2.5% this quarter. We kind of expect that trend to continue. Obviously, we have 55,000 products in our warehouses. So there's -- products that are inflation, slightly inflationary, deflationary, but. On an aggregate basis, inflation has really been disinflation this year, but with deflation in certain categories that were obviously overshot last year.
Mark Cullen: Okay. Great. And then just given the current economic backdrop, are you expecting to see more of your growth over the next few quarters take place from expanding penetration of your existing accounts or from adding new business?
Jim Leddy: I think it's both. I mean, we've seen a very healthy pipeline of new business. Restaurateurs open restaurants. That's what they do, right? So, our really good customers are continuing to open restaurants. So, that drives, the replacement. We average about 7% to 10% of attrition through just natural leases coming up or all sorts of different reasons. So we always need those new openings, but yes, there's a major focus with the. The businesses that we've been developing, we're in the produce business now, we're heavily into the protein business. I think the reason that we're outperforming really the market in our growth, I think we do have industry leading growth, is because the way we do go to the market, that we are cross-selling and introducing all our new categories into markets that we didn't have those categories. And I'm pretty confident that's going to continue and really. That's our business plan, to continue that cross-selling, continue to grow all the markets that we've entered. And eventually we think there'll be a tailwind, and that's where we really get that big pop. And that's kind of our history for almost 40 years.
Mark Cullen: Got it. Thanks so much and good luck guys.
Operator: The next question we have is from Peter Saleh of BTIG. Please go ahead.
Peter Saleh: Great. Thanks for taking the question. I was hoping you give us a little bit of an update on some of the larger acquisitions and the integration of those acquisitions, maybe Greenleaf and Hardee's that you made earlier this year. Can you just give us an update on where you stand with those acquisitions? And then more specifically with the Chefs' Middle East, my understanding is when you acquired that brand, it was in need of additional capital for expansion with your updated guidance on CapEx can you just kind of square for how that looks and how much capital you can put into that brand going forward? Thank you.
Chris Pappas: Sure, Peter. I think we'll start, I'll start backwards and then I'll let Jim opine a little bit on that. But yes, when we bought Chefs' Middle East, we knew that they were going to be constrained on space. That was part of, how we, how we assessed the value. And it's a great company. It throws off great free cash flow. And the plan was to use that, part of that money to fund the expansion. So I think that's business as usual and that addition is already being built. We expect them to continue to grow and that business to continue to prosper. Greenleaf is a much different kind of acquisition. A company that we've known for over 15 years, great brand in San Francisco. It complements the way we go to market in San Francisco probably our second largest market right now when you combine all the businesses that we own in Northern California. And that's kind of, they run a great business and we're just letting them continue to run it, with Chef integrating slowly. So again, we can get that crossover sell. They have a lot of clients that the other Chef companies don't have. So we're introducing. more and more products to those customers and vice versa and that's kind of more of a steady eddy and hopefully continue to grow over the next 10 years as a great business. Hardee's was an entry into Texas where we had a very small footprint, another great company, huge footprint throughout almost all of Texas. And that one I'd say we're still in the first inning. We're still, getting to know each other. We're starting to integrate slowly management teams, accessing their customer base. We opened up Allen Brothers Texas over the past year. So that plant is finally open and glad to say that. It's doing better than expected. It's starting to sell more and more premium Allen Brothers types proteins to the Chef to the CW customers as well as the Hardees customers. And the CW business, which is pretty small compared to our other markets, is starting to get lots of traction, opening up customers every single day, and starting to penetrate more and more of the Hardee's customers. So it goes back to why we bought Hardee's, right? To access Texas faster, it's such a big state, and we're very excited about the, the long-term growth of Texas.
Jim Leddy: And Pete, I'll just add on the CapEx question and the guidance. So the project is underway. We're already spending money on it. We're funding it out of the cash flow that CME generates. The CapEx is in our current 2023 CapEx guidance and is also in the capital allocation plan that we announced earlier. And so -- just wanted to comment on that.
Peter Saleh: Great. And then just a follow up, we've heard some evidence that maybe the higher end consumer, the higher income consumer is starting to trade down a little bit and manage their check to a certain degree with maybe cheaper entrees and cheaper alcohol. Are you guys seeing any evidence of that and your numbers? I mean, your sales numbers are pretty good. Just trying to see if there was any evidence that consumers are actually down?
Chris Pappas: Yes, I mean, we're not in the alcohol business. So I don't think we can really comment on that. What I've seen over the past almost 40 years is usually when the economy slows down some, people usually, I'd say the overall mass market probably drinks a little bit less expensively, right. But that's why from the food side, historically, we could see a little bit. I mean, we probably saw a little bit over the summer. I think the summer was, very different than most summers. There's so much, I say, travel, our customer's customer. What we kept hearing was our customer is in Europe, right? So, we're busy, we're not as busy as we'd like. We had the smoke from Canada, which shut down a lot of the outdoor cafes which hurt us during the summer. It was a thousand different things that were going on. We had lots of rain and then we had heat. So it was a really funky summer. And as we started coming into September, we started to see more, I would say normalization of sales. And then going into October, it came in strong. So from where we sit, we think business is pretty good. We think most of our customers are doing pretty well. We think the pipeline going into the fourth quarter looks good. We're hearing about lots of parties, lots of bookings. So are people cutting back a little bit? Wouldn't be so surprised, but I would say overall, our customers are doing pretty well.
Peter Saleh: Thank you.
Operator: The next question we have is from Todd Brooks of Benchmark Company. Please go ahead.
Todd Brooks: Hey, thanks for taking my questions. First, just Chris or Jim, on the growth algorithm for the next couple of years, part of getting the efficiencies out of these new facilities that you've added, you've talked about tuck-in acquisitions and how valuable they can be kind of building volume through this new capacity that you've added. If we think about that 4% to 6% organic growth and I think historically 5% to 10% from acquisition, does the new plan imply that we're at the 5% end of growth through acquisition or do you see a period of digestion here where we may even be a little bit lower than 5% growth from acquisition?
Chris Pappas: Yes, that's a tough one. As we know, things can change. I would say, again, in this kind of environment, we're talking about today, we're much more focused on digesting all the acquisitions that we've done the past, say, 24 months, and driving more revenue to the same customers and continuing to open customers and start to push volume into the new warehouses we built. Doesn't mean we can't do some really smart fold-ins that the volume adds to lowering our overhead into these new facilities and driving greater EBITDA to the bottom line. I think the message is more, right now, our job is to allocate capital and probably the best allocation of capital right now is to grow more organically. Unless there's a phenomenal, phenomenal deal that makes unbelievable sense for us and our shareholders we would rather put the put the capital to work hiring more salespeople and really Pushing the organic growth which we're really good at to drive mid to maybe high single digit growth organically. So I think we're going to play the ball where it lies right now.
Todd Brooks: That's helpful, thanks. And then Jim, you talked about working to drive leverage to the business and really focused on digestion. If we're not muting, EBITDA margins with acquisitions for the next couple of years. I guess, how would you want us to think about the pace of EBITDA margin improvement as you're really working towards integration and digestion of what's been acquired over the last two years?
Jim Leddy: Yes, I think, the kind of two to three year and five to six year plan that we laid out, we reiterated on the Q2 call. I think that's still in play, with the target of, mid-sixes towards seven over the next five years. Adding Hardee's, which is a big revenue produce company with a lower EBITDA margin to booted us on a full year basis by 10 or 20 basis points this year. So if you exclude that based on the midpoint of our guidance, our core business is back towards 6%. And I think, as Chris mentioned, we're going to focus on improving and integrating the significant amount of acquisitions that we've done. So I think definitely the $4 billion target of top line and growth and 6% plus, adjusted EBITDA margins are, I think, between the organic growth, the capital allocation plan that we've laid out, we've made the significant investments in M&A and infrastructure. We're going to continue to grow, we're going to continue to build some facilities, but at a more moderate pace. And our most profitable growth is organic growth into the capacity that we've invested in. So I don't think it's materially changed, and as Chris mentioned, we'll take advantage of accretive M&A opportunities that work within the capital allocation framework that we've laid out. So I think the fact that we're at kind of our peak investment cycle, and we're going to start mining those investments, aligns well with generating more free cash flow, strengthening the balance sheet over the next couple of years, and potentially, market conditions allowing allocating some more of our cash, our capital, to returning some value to shareholders, depending on market conditions, et cetera.
Todd Brooks: That's very helpful, thank you both.
Jim Leddy: Thanks, Todd.
Operator: The next question we have is from Andrew Wolf of C.L. King. Please go ahead.
Andrew Wolf: Hi, good morning. Thanks, Jim. That last answer on Hardee's was kind of where I was going to ask you, but I still want to kind of, you're kind of getting us to the 35 basis points or so lower, you've done margin guide for the year. And, it's obviously a little more than that for the fourth quarter, but, I mean, I appreciate the bridge, but could you kind of frame it in terms of expectations? I assume the summer, you didn't have crystal ball in the summer. And I would assume also the insurance maybe was a surprise. So, but what about, Hardee's and the acquisitions in general? Are they could you frame whether they were a little sort of as a group or individually maybe Hardee's just a little more diluted than anticipated? And maybe for Chris, if that is the case, I would assume this is nothing like what you went through many years ago with the protein business. But, any qualitative view on where, how you expect the produce to become not just strategically helpful for cross-selling, but a pretty profitable part of the business? Thank you.
Chris Pappas: Yes. I'm I'll shoot first, Andy. I think business, it's pretty much tracking, except for the funky summer, I think it's tracking to expectation. Most of our businesses, I mean, business is fine. We had the headwind with some of the costs. We took on an extra building, because we got a good opportunity down in South Jersey to really consolidate. We were desperate for space for that Pennsylvania and New Jersey market, take pressure off of New York and our Maryland facilities. So, when we bought Hardie's, I mean, it's not up to the EBITDA producing level of what we expect from our Chefs' businesses, but we kind of knew that, and it was kind of built into the price, when we bought it. So, nothing unexpected there. I think to explain, why we're not going to hit maybe the -- we have really high expectations this year is like Jim said more headwind with the expenses, so yes a little bit of funkiness during the summer then September came back strong October's coming in pretty strong so overall our customer is doing fine. We've been talking for years and years and I believe in a higher-end customer base usually does better than most than most other sectors of food away from home and we're extremely diversified. I mean people think that we're know, they know us for, selling super high-end products, but we sell, what we call upscale casual, which is doing really well. And I think our mix and our diversified customer base has proven to be really resistant. So I think it's like a little Goldilocks. I think it's a little bit more than expected on the expenses due to the new buildings that we've taken on. We've never bought 12 companies in a year. So we had a lot of integration. I think that we underestimated the integration cost of those businesses. But I'm blessed to say that we're tracking pretty much to expectation with a little headwind on the expense side and a little funkiness of the summer.
Jim Leddy : Yes, Andy, I'll just add in terms of your question as it relates to Chris articulated it well, but the guidance, Chefs' Middle East and Greenleaf and even Hardie's performing pretty much as we expected. We did report the non-core customer that Hardie's lost. We took an impairment for that when we reported in the second quarter. So that impacted us a little bit, but it was not the material driver of the change to guidance. It's really been, as we articulated, the higher level of integration and transition costs and primarily the higher cost of insurance risk in places like Florida and California where insurance companies literally don't want to insure you. And that has come in higher than expected. We don't expect that level of expense increases to continue in 2024 and 2025. So that's why we're highlighting them as growth expenses that have impacted our guidance this year.
Andrew Wolf: Great. Thank you both. One follow-up, Jim. I want to make sure I heard you right. Did you say that September had the best gross margin rate for the year?
Jim Leddy : We had our highest gross profit margin month of the year. Yes.
Andrew Wolf: And is that sort of a seasonal expectation or is that something we can kind of bake into the models that gross margins are kind of snapped back?
Jim Leddy : As you move into the fourth quarter, gross profit margins historically have gone higher. That's primarily driven by the holiday season. But I think, coming out of the summer, our teams just did a great job of focusing on gross profit dollar growth, and, the market seemed to kind of normalize, as Chris mentioned, and as we mentioned in our prepared remarks, we've seen that trend continue into October, So obviously, we can't predict the future, but it did feel much better coming out of August and into September.
Andrew Wolf: Thank you. Appreciate it.
Operator: The next question we have is from Kelly Bania of BMO Capital Markets. Please go ahead.
Kelly Bania : Good morning. Thanks for taking our questions. I was wondering if we could just go back to the sales outlook here because we're talking about a little bit of a weaker than expected summer, but we're raising the sales outlook. So can you just help us understand what component of sales you're raising is this just M&A or other factors maybe can you just elaborate on that?
Jim Leddy: Yes, I think I think look I think the summer I think as we've talked about it, it didn't fall off a cliff. It just felt, as Chris uses the word, a little funky. It was softer than we'd expected, but overall, our organic growth has been very solid. The main issue for us in the near term has been on the expense line related to the growth related expenses. So raising our revenue guidance is a combination of the strong organic growth that we've seen. We reported 9% case growth, double-digit new customer and placement growth. So, organic growth hasn't been our issue. It's really been the gross profit margin headwind that we had during the short couple of months in the summer, as well as the expenses.
Kelly Bania : Okay. And Jim, can you help maybe quantify some of these expenses here, whether it's, I heard you call out really facility expansion, integration, insurance, maybe just give us some dollar amounts to work with in terms of how much that is pressuring this year, how much of those continue into next year, when we should start to see those cycle? Can you help us kind of work through the map here on that?
Jim Leddy: Yes. I mean on the full year update on a full year basis, it's pretty much the impact of the summer is about, as I mentioned, 10 basis points or 12 basis points and the impact of the growth related expenses about the same, about 10 basis points or 12 basis points. And then you had Hardie's dilution being about 10 basis points or 15 basis points. That'll take you from 6.1% down to 5.7%, which is the midpoint of our guide. Chris mentioned a number of, just highlighted a few of the work streams and projects that we have that will come to fruition over the next two years. A lot of it is related to consolidating facilities in the northeast, in the northwest. We've already consolidated two facilities the past two months into our new facility in Florida. So, we have a number of projects underway that the investments we're making in our digital platform will create more efficiencies. So we'll have some additional rent coming online next year, but we anticipate that those work streams and projects will more than offset that, and so we don't expect to have that level. Obviously the back half of next year will be more of a leverage opportunity than the first half, just given what we've seen in the back half of this year.
Chris Pappas: Yes. I think to frame it a little bit more, Kelly. We’re talking about a few million bucks, right. So you imagine -- I think we had 12 companies to integrate in a very short period of time. And I think we maybe just underestimated the amount of like travel, every team has to travel there. We have to set up. We're doing computer integrations, you have the IT team, you have the ops team, we have sales training, so a lot of that is a one-time headwind. Some of the insurance costs is going to linger, but again, as we start to grow into those buildings, so we opened up Florida, which was a tremendous undertaking, it's a most modern building we can't wait to show it off that cost a was delayed and then it caused other expenses, so you could say those are one time. I think they might be one time but the accountants might argue a little differently, so we had a lot of headwinds on the expense side, integrating all those companies, opening those buildings. We did not expect to open another building, between Maryland and New York, so we kind of got lucky finding one. Commercial warehousing is a tight market, so if you find something that fits your filters, you kind of had to grab it. So that was a big expense that we didn't see coming, but we're very lucky we got the building. We're getting closer to opening up our Richmond building in Northern California due to COVID. That building was heavily delayed. Once that's open, we're consolidating multiple plants, we've taken out, a big amount of duplicate overhead. It's going to allow us to really, continue to be the leader in that market. So I hate to say we kind of have good problems because we are growing, continuing to grow so fast, you see the organic growth is extremely healthy, so I don't really worry when I have so much new business coming in and customers are choosing us, to supply them. I could handle a little expense headwind and I'm glad summer's over. I love summer, but it was a very strange summer. All we kept hearing from our better customers were their customers were in Europe. So it was still that revenge travel, I think. You look at all the airlines and everything that was happening at the airports with the unbelievable exodus of Americans going to Europe and everywhere else they were going. So we felt it was just still a rebalancing from COVID what we felt we saw it during the summer. And as we started getting into September we saw a big normalization again of what kind of forecast we had. It continued into October, and hopefully, it continues for the rest of the year and it is going to be a pretty strong season. Kelly, we lose you?
Kelly Bania : I'm here. Can I ask one more about the fourth quarter? Your gross margin guidance seems to imply a pretty wide range with the low end implying a pretty significant deceleration in the gross margin if I'm doing this math correctly. So is that a possibility? It sounds like what you're seeing on the gross margin line is very encouraging at this point, but maybe just walk us through how much conservatism is in there, if there's any factor that that could impact gross margins or just trying to leave some push in there?
Chris Pappas: I think it is more just getting to the full year guidance. It’s probably what 10 basis points or 20 basis points gap there. So I don't think there's anything significant there. I would say, we generally have a little bit stronger gross profit margins versus the prior three quarters in fourth quarter. I don't think there's much different. I think if you look at our implied guidance, our full year, what we expect right now, our full year gross profit margins will be very similar to last year. And last year was a very strong year for us, especially the back half of the year. So I don't think there's anything specific to call out there.
Kelly Bania : Okay. Thank you.
Chris Pappas: Thank you.
Operator: The next question we have is from Ben Klieve of Lake Street Capital. Please go ahead.
Ben Klieve : All right, thanks for taking my questions. I have a couple on your capital allocation outlook. First, regarding CapEx, I'm wondering if you can characterize some of the CapEx-related projects that you were considering that may no longer be on the table given the lower targeted spend.
Chris Pappas: I don't think it's a matter of we removed projects from the future spend. It's a combination of we're kind of at the peak of the recent spend. The projects that are coming online next year we're already spending money on are in our current guidance. We expect to have obviously higher revenue. And so as a percent of revenue we feel pretty good about, I think, this year we're probably going to come in somewhere around 1.5% of revenue. We had originally forecast closer to 2%. So we expect to just kind of gradually bring that down towards 1% and then maybe even slightly lower than 1% beyond that in 2025 and 2026. And that'll help us level up free cash flow conversion so we can allocate more cash towards the balance sheet and potential share repurchase.
Ben Klieve : Got you. That makes sense. Perfect. And one other, you talked about classy problems, one of your classy problems historically has been investment into working capital to fund the, just the exceptional growth rates you've had. I'm wondering, as you consider the various levers to boost your free cash flow, do you think there's any kind of material operational changes that can be made to extract cash out of your working capital balance or are you running that about as lean as you can at this point?
Chris Pappas: I think there's always opportunity. I mean, our teams always work on reducing shrink and inventory management. That's a continual process. And then we've added some talent in the organization to really help us with that. Obviously, we've brought our DSOs down from pre-pandemic levels. We're kind of in the low 30s. So we continue to work on that. I would say the working capital will be driven by our growth. And so we don't expect to grow 30% in 2024 and 2025, like we're going to grow this year over 2022, or an average of 25% since the pandemic. That's kind of above average growth. And even what we've guided to long-term is nowhere near that. So, obviously, our working capital was a tailwind during the pandemic, and it's been a headwind since we've grown significantly coming out of the pandemic, but we expect that to normalize as we go forward, and that's part of the free cash flow conversion bump that we'll expect over the next two years.
Ben Klieve : Got you. That makes sense as well. Very good. Well, I appreciate you guys taking my questions. I'll get back in queue.
Chris Pappas: Thanks, Ben.
Operator: There are no further questions at this time. I would like to turn the floor back over to Chris Pappas for closing comments.
Chris Pappas: Yes. Well, we thank everybody for joining us on our earnings call. I think the Chefs' team did a phenomenal job managing through the summertime and into the fall. We don't expect less. So we do thank everybody for all their hard efforts and we thank everybody for listening in and we look forward to our next earnings call. Thank you, have a great day.
Operator: This concludes today's teleconference. Thank you for joining us. You may now disconnect your lines.
