Chefs' Warehouse Inc
NASDAQ:CHEF
Earnings Call Analysis
Q3-2023 Analysis
Chefs' Warehouse Inc
The third quarter of 2023 showed a mixed financial performance for the company. While the net income per diluted share decreased to $0.19 compared to $0.21 in the same quarter the previous year, the adjusted EBITDA saw an increase from $41 million to $50.3 million. Adjusted net income per diluted share also saw a dip from $0.41 to $0.33. The liquidity front showed strength with a total of $182.9 million, bolstered by $33.1 million in cash and $149.8 million from an ABL facility. The company proactively managed debt, paying off $20 million of a term loan, leaving a balance of $277 million. The net debt stood at approximately $668.1 million.
The company foresees its full-year net sales for 2023 to reach between $3.35 billion and $3.425 billion, with an expected gross profit landing between $797 million to $812 million. Adjusted EBITDA is projected to fall between $188 million and $196 million. The anticipated diluted share count is roughly 45.7 million shares. These figures are set against a backdrop where senior unsecured convertible notes may have a dilutive impact on the full year, acknowledged in the fully diluted share count.
In a candid response to an analyst's inquiry, the executive team admitted July and August's performance was below expectations. A mix of low gross profit dollar growth due to an ineffective offset against price inflation and increased expenses were to blame for this adjustment. Further adjustments were caused by higher-than-expected insurance renewal rates in Florida and California, responsible for a shift in the guidance by approximately 20 to 24 basis points.
In light of rising interest rates, the company is slowing down on mergers and acquisitions—which were robust over the last year—to focus on organic growth and the integration of newly acquired assets. This is seen as a strategic move to drive the bottom line and await more favorable market conditions for future acquisitions. The company remains optimistic, prioritizing internal system improvements and integration over expansion through acquisitions until the rates are more enticing.
Throughout the year, the company experienced what it refers to as 'disinflation,' a gradual decrease in the rate of inflation. However, some categories did see deflation, particularly those that had previously peaked. The inflation rate dropped from around 4-5% in the first quarter to approximately 2-2.5% in the current quarter. Even with 55,000 products, the company has managed a delicate balance between inflationary and deflationary pressures.
The company is not merely relying on its existing customer base or new openings to foster growth. Instead, the strategy hinges on cross-selling and expanding market reach, particularly in the produce and protein sectors. With a robust pipeline of new business and a notable 7-10% attrition rate, cross-selling has been identified as a driving force for the company's outperformance in the market. This ongoing effort is expected to eventually result in significant growth—a 'big pop,' as the executive put it—and this approach forms the core of the business plan moving forward.
Chef Middle East, an acquisition known for its capital constraints for space expansion, has remained a high-priority asset with plans for financed growth using its generated free cash flow. With an established addition already in progress, continued growth is forecasted for Chef Middle East. Additionally, Greenleaf's acquisition has provided a valuable supplement to the company's existing market in San Francisco, supporting its strategy of slow integration and strengthened market positioning. These acquisitions highlight the company's focus on diversification and strategic expansion.
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Greetings, 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.
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 will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on 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?
Thank you, Alex, and thank you all for joining our third quarter 2023 earnings call. The third quarter business activity improved sequentially within the quarter, following a softer than expected July and August, primarily due to the placement of the 4th of 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 emerge. As we moved into September, we saw a significant sequential improvement in 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 in customer acquisition, placement growth and volume growth during the quarter. We remain focused on providing our customers with the highest quality product 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 '22 includes 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 play 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 in 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 expense to 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 process 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. Centered in the 3 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 in scale. As we target to average 4% to 6% organic growth over the next few 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 2 years to facilitate higher free cash flow conversion. We are targeting 2.5x to 3x net debt leverage by year-end 2025 and our Board of Directors has authorized a 2-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 the amendment to our term loan maturing in 2029, which is currently underway, market conditions and free cash flow generation over the time frame. In terms of acquired growth going forward, we expect to take advantage of potential accretive opportunities that may present themselves within this 2-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?
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 29, 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 a 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 for the third quarter of 2022. Gross profit margins decreased approximately 29 basis points to 23.6%. Gross profit dollar growth and 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 were the 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 benefits 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 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 expenses, 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 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 Instructions] The first question we have is from Alex Slagle of Jefferies.
The 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?
Yes. Thanks, Alex, for the question. It's a little bit of both. Definitely, 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're building in Florida, California, and those rates have gone up exponentially. We had our insurance renewals during the third quarter. And so we flowed through the elevated growth-related expenses that we talked about in our prepared remarks. So it was about 10 to 12 basis points on the impact of the summer and then another 10 to 12 basis points on the impact of the elevated growth expenses. That's basically the adjustment to the guidance.
Got it. And with the shift in your capital allocation outlook is 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 5% to 10% growth from M&A? And if there's any implications on the longer-term sales and EBITDA views that you provided earlier in the year?
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 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 makes 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. Makes sense.
The next question we have is from Mark Carden of UBS.
I wanted to 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?
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. And 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.
Okay. Great. And then just given the current economic backdrop, are you expecting to see more of your growth over the next few quarters to take place from expanding penetration of your existing accounts or from adding new business?
I think it's both. I mean we've seen a very healthy pipeline of new business. Restauranteurs 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 for all sorts of different reasons. So we always need those new openings.But yes, there's a major focus with 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.
The next question we have is from Peter Saleh of BTIG.
I was hoping you could give us a little bit of an update on some of the larger acquisitions and the integration of those acquisitions, maybe Greenleaf and Hardie'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 Chef 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?
Sure, Peter. I think I'll start backwards and then I'll let Jim opine a little bit on that. But yes, when we bought Chef Middle East, we knew that they were going to be constrained on space. That was part of how we assess the value. And it's a great company. It throws off great free cash flow, and the plan was to use part of that money to fund the expansion. So I think that's business as usual. And that addition is already being built. So we expect them to continue to grow and that business to continue to prosper.Greenleaf, much different kind of acquisition, a company that we've known for over 15 years, a 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 Chefs' 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 Eddie and hopefully continue to grow over the next 10 years as a great business. Hardie's was an entry into Texas, where we had a very small footprint. Another great company, a 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 type proteins to the Chefs – to the CW customers as well as the Hardie's 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 Hardie's customers. So it goes back to why we bought Hardie's, right, to access Texas faster in such a big state, and we're very excited about the long-term growth of Texas.
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. It's -- the CapEx is in our current 2023 CapEx guidance and is also in the capital allocation plan that we announced earlier. And so I just wanted to comment on that.
Great. And then just a follow-up. We've heard some evidence that maybe the higher-end consumer or 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 in your numbers? I mean your sales numbers are pretty good. Just trying to see if there was any evidence that consumers are actually trading down.
Yes. I mean we're not in the alcohol business. So I don't think we can really comment on that. Over the -- what I've seen over the past almost 40 years is usually when the economy slows down some, yes, 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 this summer was very different than most summers and so much, I'd say, travel, our customers' 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. We shut down a lot of the outdoor cafes, which hurt us during the summer. It was 1,000 different things that were going on. We had lots of rain and then we had a 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.
The next question we have is from Todd Brooks of Benchmark Company.
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?
Yes, that's a tough one. As we know, things can change. So 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 in 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 build.It 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 deal that makes unbelievable sense for us and our shareholders, we would rather 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.
That's helpful. And then Jim, you talked about working to drive leverage through the business and really focus 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 2 years?
Yes. I think the kind of 2-to-3-year and 5-to-6-year plan that we laid out, we reiterated on the Q2 call. I think that's still in play with a target of mid-6s towards 7% over the next 5 years. Adding Hardie's, which is a big revenue produce company with a lower EBITDA margin diluted 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 6% plus EBITDA -- 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 think -- 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.
The next question we have is from Andrew Wolf of CL King.
Jim, that last answer on Hardie'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 EBITDA margin guide for the year. And it's obviously a little more than that for the fourth quarter. But I mean the -- I appreciate the bridge, but could you kind of frame it in terms of your expectations? I assume the summer, you didn't have a crystal ball in the summer. And I would assume also the insurance maybe was a surprise.So -- but what about Hardie's and the acquisitions in general? Are they -- could you frame whether they were a little sort of as a group or individual and maybe Hardie's just a little more dilutive 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.
Yes. Yes. I'll shoot first, Andy. I think business is 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, New Jersey market, take pressure off of New York and our Maryland facility.So when we work with parties, I mean, it's not up to the EBITDA producing level of what we expect from our Chef 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 is 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 other sectors of food away from home. And we're extremely diversified. I mean people think that we're -- 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.
Yes. Andy, I'll just add in terms of your question as it relates to -- Chris articulated it well, but the guidance. Chef Middle East and Greenleaf and even Hardie's is performing pretty much as we expected. We did report the noncore customer that Hardie's lost. We took an impairment for that in -- 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 '24 and '25. So that's why we're highlighting them as growth expenses that have impacted our guidance this year.
And one follow-up, Jim. Did you say -- I just want to make sure I heard you right, that September had the best gross margin rate for the year. Is that?
Yes, it was our highest gross profit margin month of the year. Yes.
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 snap back?
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 markets seem 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.
The next question we have is from Kelly Bania of BMO Capital Markets.
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?
I think the summer -- I think as we've talked about it, it didn't fall up a cliff it just felt, as Chris used the word a little funky. It was softer than we had 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 we've been -- 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.
Okay. And can you -- 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 amount 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 math here on that?
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 or 12 basis points and the impact of the growth-related expenses is about the same, about 10 or 12 basis points. And then you had Hardie's dilution being about 10 or 15 basis points. That will 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 2 years. A lot of it is related to consolidating facilities in the Northeast, in the Northwest. We've already consolidated 2 facilities the past 2 months into our new facility in Florida. So we have a number of projects underway. 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.
Yes. I think to frame it a little bit more, Kelly. We're talking about a few million bucks, right? So you can imagine with -- 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 integration. You have the IT team, you have the ops team. We have sales training. So a lot of that is a onetime 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 our most modern building. We can't wait to show it off. That cost was delayed and then it caused other expenses. So you could say those are onetime. I think there 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, 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 during the summer. And as we started getting into September, we saw a big normalization again of what kind of forecast we had, and it continued into October, and hopefully, it continues for the rest of the year, and it's going to be a pretty strong season. Kelly, we lose you?
I'm here. Can I just ask one more about -- sorry, the fourth quarter. Your gross margin guidance seems to imply a pretty wide range with the low end kind of implying a pretty significant deceleration in the gross margin, if I'm doing this math directly. 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 could impact gross margins? Or just trying to leave some push in there.
I think it's more just getting to the full year guidance. I mean there's probably what a 10 or 20 basis point 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 3 quarters in the fourth quarter. I don't think there's much difference. 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 in the back half of the year. So I don't think there's anything specific to call out there.
The next question we have is from Ben Klieve of Lake Street Capital.
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.
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 or 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 '25 and '26. And that will help us level up free cash flow conversion, so we can allocate more cash towards the balance sheet and potential share return repurchase.
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?
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. And 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 '24 and '25 like we're going to grow this year over 22 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 2 years.
There are no further questions at this time. I would like to turn the floor back over to Chris Pappas for closing comments.
Yes. Well, we thank everybody for joining us on our earnings call. We think the Chef 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.
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