Interesting pitch. Do you have any idea how many different items they do distribute ? For distrubutors, my rule of thumb is that the more items and the more customers, the better thfme business. One customer with 50% is not optimal..
Congrats on an effective write-up, and I'm intrigued to take a further look.
just a few surface level questions/pushback.
1. Normalized 10% ebitda margin seems fat nowadays. in the last 2-3Y, specialty food providers are increasingly inclined to work directly with large retails (e.g. Kroger iirc), thus put margin pressure to distributors. Is Y16/17 ~10% margin still a good indicator for its earning power?
2. projected high ebitda -> cash flow due to non material CapEx: what moat does the Co has to keep the margin and maintain/grow sales while no substantial CapEx is expected?
3. by looking at 2Q3Q YoY data (only), the turnaround story so far is cutting money losing biz, improving op margin story. right? what give you confidence that the expanding good biz story will pan out? (not sure if that's similar mgt skill sets)
Hey, thanks for your nice words and the questions:
1) I believe it should be. Two things are pointing towards it: Management goal is to reach $100m with $10m in EBITDA. Recent technology shift from US Foods should be positive for their margins (see commentary on Q3 Call).
2) They are focused on specialty food, a niche which is underserved by broadline food distributors. Moreover, since it is a platform, they are profiting from the connections to the vendors.
3) As I set, the thesis evolves by time and stock price. Currently we are still just waiting for the company to post their B2B profits and become debt free. Growth will be evakuated once, the first phase is completed or the stock is trading at $1.20+
Hi Sebastian - Thanks so much for the write up. Ultimately, I found myself coming to the conclusion after my own research that I would just need to get comfortable with the reliance on US Food. My view is that new management is quality and would not allow that relationship to deteriorate. I believe that the company, if it were to operate as an AVERAGE distributor would command a much higher multiple, not asking them to be the new blue chip of efficiency. And I've found through another investment in OSCR that strong management moving from high quality large companies, to smaller ventures, is not for fun, but rather they see the value that others are missing. That paid off with OSCR, and hopefully it will here as well. Thanks again.
I'm curious about how you buy their capital-light story. It seems their current solution is serving the pan-Chicago area with their own logistics, while serving nationwide customers on US Food's network, so they don't have to do much incremental capex. But as they grow their business further, as they hinted the capacity of existing warehouse does have hampered the growth of the B2B business, would they achieve it by leveraging broadliners? Maybe that will make them even more rely on a couple of key customers. CHEF seems to have built their own logistics, that model makes more sense IMO.
Let’s see, how it will develop. They talked about revamp their drop-shipping vendor base. Until we get to the "growth" phase of the B2B business, there is still some time. I think even the current set-up (US Food + Chicago) should be able to take them to $6-8 million in EBITDA. Everything else is speculation at this point.
I think you missed the outstanding notes as well as leases for your EV calc. Really like the point with the strong management and incentivization. However, Chefs Warehouse has EBITDA margins of about 6% and is of significantly bigger scale. Therefore, I question the ability of IVFH to generate margins beyond 10%. We will see where this management can take us but historic growth has also been considerably lower compared to Chefs', which somewhat justifies the multiple.
The notes are related to the RE in Pennsylvania. The warehouse has an appraised value of $18m. Paying down the related $8.8m notes, it should net them $10m in cash before fees.
Chef has always had lower margins, IVFH on the other hand had 10% margins on the B2B Business and management also aims to reach this margin again.
Hi Sebastian, for the 10% EBITDA margin in history, I looked it up a bit and found the main reason for the hike of profit from 2015 to 2016 & 2017 was the cut of 'non-cash compensation'. That is to say, either the shareholder took a share from the then management's mouth, or the expenses were paid to the management and booked in advance so the profit looked better in 16 & 17. In this sense, the former management team seemed to be well-incentivized, too. (They even took shares on leaving their positions!) And the new team will have quite a lot 'non-cash compensations' going forward. (I admit I lover their rhetorics a lot.) Does that make you think twice on your margin assumptions? (I'd comfort myself by arguing only when the stock price performs well would they get the money, so everyone wins in this case.)
But that does not change the fact, that the business is able to earn 10% EBITDA margins. Regarding the "non-cash compensation" going forward. I took the fully diluted share count, including all possible Stock options.
Very interesting write up. Thank you for it. I have to look deeper. At first glance, I think that the margin will influence the valuation of this company the most. When I look at CHEF, they have EBIT margins of 3% to 4%, the average of this segment is around 4%. Do IVFH have any advantage over the competition that they should have bigger margins?
They do not disclose margins for their subs, but from my current understanding, I think that the relationship with US foods has quite high margins for them. So I think the bigger margins are maybe down to the drop-shipping business model.
very interesting idea here @sebastian. thanks for sharing. ive got enough to dig in for myself which is the type of idea generation that is valuable imo. cheers!
Fantastic read! I really like the dynamics of having two “income” sources, one of them sort of hiding the more profitable one by being, well terrible. However, it does make me wonder how anyone manages to find this given you’d have to spend quite some time researching a relatively “uninteresting” company. Really impressive in any case!
Because the bad business will be shutdown, so when someone looks at this company in 1-2 years, he will see only the earnings of the B2B Business and the business will be screenable.
the 16% drop in foodservices sales is concerning
There was a change in the technology platform used by a key customer. It was addressed in the Earnings Calls
Interesting pitch. Do you have any idea how many different items they do distribute ? For distrubutors, my rule of thumb is that the more items and the more customers, the better thfme business. One customer with 50% is not optimal..
Over 7000 different products. Yes the high customer concentration is a bummer, otherwise it would be basically a perfect set-up in my opinion.
This is such a great write up! the incentive plan is exactly what I like to look for, I’ll definitely have to dive deeper into this one.
Thank you, appreciate it!
Yep it's basically a "show me your incentive and I show you the outcome" situation.
Congrats on an effective write-up, and I'm intrigued to take a further look.
just a few surface level questions/pushback.
1. Normalized 10% ebitda margin seems fat nowadays. in the last 2-3Y, specialty food providers are increasingly inclined to work directly with large retails (e.g. Kroger iirc), thus put margin pressure to distributors. Is Y16/17 ~10% margin still a good indicator for its earning power?
2. projected high ebitda -> cash flow due to non material CapEx: what moat does the Co has to keep the margin and maintain/grow sales while no substantial CapEx is expected?
3. by looking at 2Q3Q YoY data (only), the turnaround story so far is cutting money losing biz, improving op margin story. right? what give you confidence that the expanding good biz story will pan out? (not sure if that's similar mgt skill sets)
thanks,
Siyu LI
Hey, thanks for your nice words and the questions:
1) I believe it should be. Two things are pointing towards it: Management goal is to reach $100m with $10m in EBITDA. Recent technology shift from US Foods should be positive for their margins (see commentary on Q3 Call).
2) They are focused on specialty food, a niche which is underserved by broadline food distributors. Moreover, since it is a platform, they are profiting from the connections to the vendors.
3) As I set, the thesis evolves by time and stock price. Currently we are still just waiting for the company to post their B2B profits and become debt free. Growth will be evakuated once, the first phase is completed or the stock is trading at $1.20+
thx for sharing.
Hi Sebastian - Thanks so much for the write up. Ultimately, I found myself coming to the conclusion after my own research that I would just need to get comfortable with the reliance on US Food. My view is that new management is quality and would not allow that relationship to deteriorate. I believe that the company, if it were to operate as an AVERAGE distributor would command a much higher multiple, not asking them to be the new blue chip of efficiency. And I've found through another investment in OSCR that strong management moving from high quality large companies, to smaller ventures, is not for fun, but rather they see the value that others are missing. That paid off with OSCR, and hopefully it will here as well. Thanks again.
Thank you for the great idea!
I'm curious about how you buy their capital-light story. It seems their current solution is serving the pan-Chicago area with their own logistics, while serving nationwide customers on US Food's network, so they don't have to do much incremental capex. But as they grow their business further, as they hinted the capacity of existing warehouse does have hampered the growth of the B2B business, would they achieve it by leveraging broadliners? Maybe that will make them even more rely on a couple of key customers. CHEF seems to have built their own logistics, that model makes more sense IMO.
Let’s see, how it will develop. They talked about revamp their drop-shipping vendor base. Until we get to the "growth" phase of the B2B business, there is still some time. I think even the current set-up (US Food + Chicago) should be able to take them to $6-8 million in EBITDA. Everything else is speculation at this point.
Thanks for the nice write-up!
I think you missed the outstanding notes as well as leases for your EV calc. Really like the point with the strong management and incentivization. However, Chefs Warehouse has EBITDA margins of about 6% and is of significantly bigger scale. Therefore, I question the ability of IVFH to generate margins beyond 10%. We will see where this management can take us but historic growth has also been considerably lower compared to Chefs', which somewhat justifies the multiple.
The notes are related to the RE in Pennsylvania. The warehouse has an appraised value of $18m. Paying down the related $8.8m notes, it should net them $10m in cash before fees.
Chef has always had lower margins, IVFH on the other hand had 10% margins on the B2B Business and management also aims to reach this margin again.
Hi Sebastian, for the 10% EBITDA margin in history, I looked it up a bit and found the main reason for the hike of profit from 2015 to 2016 & 2017 was the cut of 'non-cash compensation'. That is to say, either the shareholder took a share from the then management's mouth, or the expenses were paid to the management and booked in advance so the profit looked better in 16 & 17. In this sense, the former management team seemed to be well-incentivized, too. (They even took shares on leaving their positions!) And the new team will have quite a lot 'non-cash compensations' going forward. (I admit I lover their rhetorics a lot.) Does that make you think twice on your margin assumptions? (I'd comfort myself by arguing only when the stock price performs well would they get the money, so everyone wins in this case.)
But that does not change the fact, that the business is able to earn 10% EBITDA margins. Regarding the "non-cash compensation" going forward. I took the fully diluted share count, including all possible Stock options.
Very interesting write up. Thank you for it. I have to look deeper. At first glance, I think that the margin will influence the valuation of this company the most. When I look at CHEF, they have EBIT margins of 3% to 4%, the average of this segment is around 4%. Do IVFH have any advantage over the competition that they should have bigger margins?
Good question, I have not looked into Chef that closely to answer it. But I will come back to you
They do not disclose margins for their subs, but from my current understanding, I think that the relationship with US foods has quite high margins for them. So I think the bigger margins are maybe down to the drop-shipping business model.
very interesting idea here @sebastian. thanks for sharing. ive got enough to dig in for myself which is the type of idea generation that is valuable imo. cheers!
What about Chefs Warehouse? Are they a direct competitor?
Yeah, in terms of food offering there are the closest competitor imo
Interesting business, great write-up, thanks.
Fantastic read! I really like the dynamics of having two “income” sources, one of them sort of hiding the more profitable one by being, well terrible. However, it does make me wonder how anyone manages to find this given you’d have to spend quite some time researching a relatively “uninteresting” company. Really impressive in any case!
Because the bad business will be shutdown, so when someone looks at this company in 1-2 years, he will see only the earnings of the B2B Business and the business will be screenable.
Loved the shift to the asset light business hidden by the loss making one. Also the incentives and new management looks great!
Appreciate the idea and will definitely add to my to-research list!
Congrats on the write-up and results!
Thanks
Love this. I worked with Bill for a couple years at Walmart on pricing strategy. Fantastic leader.
I enjoyed your analysis. It's rare to find those settings.
And the Mr market seems to share your view. Great call!
Thank you very much!