Welcome to The Chefs' Warehouse First Quarter 2017 Earnings Conference Call. [Operator Instructions]. I'm now going to turn the conference over to your host, Mr. Alex Aldous, General Counsel and Corporate Secretary for The Chefs' Warehouse. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and John Austin, CFO. By now, you should have access to our first quarter 2017 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA, as well as both historical and estimated modified pro forma net income and modified pro forma earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in other companies' similarly titled non-GAAP financial measures. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance. And therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's press 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, go over our first quarter results in detail and review our 2017 guidance. Then we will open the call up for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you for joining our first quarter 2017 earnings call. We continue to demonstrate our ability to grow sales and margins at a very healthy pace during the first quarter. We're especially proud of our performance this quarter in spite of weather challenges related to the consistent yet uncharacteristic rains in California, where approximately 1/3 of our business is located, as well as a significant snowstorm in March in the Northeast, in addition to the Easter calendar shift negatively impact sales on a year-to-year basis. A few highlights from the first quarter include 5.7% organic growth in net sales. Specialty sales were up 8% over the prior year, excluding the contribution from MT, our last acquisition. This was driven by unique customer growth of approximately 4.7%, placement growth of approximately 5.8% and case growth of approximately 6% versus the prior-year first quarter. Gross margins improved 40 basis points, driven by a 26 basis point improvement in specialty and a 42 basis point improvement in our protein division. During the first quarter, margins returned to more historical levels in our Del Monte business. Compared to the fourth quarter, our gross margins improved 15 basis points sequentially. The challenges from our ERP conversion last year continue to dissipate, which has allowed us to focus on rebuilding sales and start rationalizing operating expenses, all while still focusing on delivering superior customer service. We continue to be on track to move one of the Del Monte facilities into our new CW facility in Union City, San Francisco later this year. As I said on the last call, in 2017, we expect to continue to build on the outstanding performance of our specialty division and continue the positive momentum in our protein businesses. We continue to invest in our people, technology, particularly related to our e-commerce platform rollout, which we intend to accelerate this year. We believe this technology would both help drive efficiencies as well as improve our customers' access to information and the overall experience with Chefs'. During the quarter, we hired a new Chief Information Officer, Mr. Tom McCurley. Tom joins us from Crane Company, where he was the CIO. We believe his extensive expertise will help bring us into a new era as far as technology goes, and we could not be more excited about some of the initiative he's working on to improve efficiencies and data transparency. We also promoted Ms. Ellie Thomas, who ran operations in our New York branch, to Executive Vice President of Operations. Ellie will use her experience of running our largest distribution center over the last 2 years as well as over 25 years of experience in the distribution industry as the basis to unify and improve operations across all our distribution network. And with that, I'll turn it over to Mr. John Austin to discuss more detailed financial information. John?

Thanks, Chris, and good afternoon, everyone. Our net sales for the quarter ended March 31, 2017 increased approximately 10.3% to $287.7 million from the $260.8 million for the first quarter ended March 2016 -- March 25, 2016. The increase in net sales was the result of organic growth of approximately 5.7% as well as the contribution of sales from the acquisition of M.T. Food Service, which added approximately 4.7 -- 4.6% to sales growth during the quarter. As we expected, we had nominal inflation during the quarter of approximately 0.5%, driven by modest inflation in specialty of roughly 1.1%. Deflation continued to be a headwind in our protein business, which approximated 0.6% in the quarter, but continued to moderate compared to 2016. Our expectations for 2017 are that our specialty category will be modestly inflationary for the year, while proteins will continue to be -- protein deflation will be moderate, but remain deflationary for the full year. Gross profit increased approximately 12.0% to $73.9 million for the first quarter of 2017 versus $66.0 million for the first quarter of 2016. Gross profit margins increased approximately 40 basis points to 25.7% from 25.3%. Our gross margins in our specialty division increased approximately 26 basis points, inclusive of the impact of the MT acquisition, which had a slightly lower margin profile than our Chefs' margins. Gross profit margins increased to 42 basis points in our protein division, as we expected. Overall, we're very encouraged by the improvement we're seeing in that segment of our business. Total operating expense increased approximately 16.8% to $70.8 million for the first quarter of 2017 from $60.6 million for the first quarter of 2016. As a percentage of net sales, operating expenses were 24.6% for the first quarter of '17 compared to 23.2% for the prior-year first…

[Operator Instructions]. Our first question is coming from the line of Ryan Gilligan with Barclays.

You mentioned that the onetime impact that hurt sales. Can you maybe talk about the run rate that you finished the quarter at and where you are so far in the second quarter?

Sure. Well, again, we had some crazy weather out West, actually all the way from Vancouver into San Francisco, and we battled some snowstorms here in the East Coast. But we executed really well. We were really happy with the performance of sales at the unit level, all the way up to the operating level, Ryan. And April was really strong. So I think the calendar shift with Easter, the weather getting better, we -- I was very excited actually to see such a strong April. And we're very excited to see our new customer openings and our penetration of our existing customers in our hybrid selling all starting to accelerate. So I think Chefs' is really positioned right now taking market share and being the choice of the independent chefs' distribution. It's a pretty exciting April.

That's great. That makes sense. And I guess, sales are obviously very strong. I guess, can you talk about operating expenses, and if maybe there can be an inflection point at some point this year, where operating expenses stop deleveraging as a percent of sales?

Sure. I'll take the first part of this. We added a lot of routes. So we've had, really, a lot of strong growth in a lot of our new areas, Indianapolis, Nashville, all across the mid-Atlantic, even in New York. So we chose to add routes to make sure we were satisfying the strong demand that we were seeing. So we really added more expense than I originally -- I thought we would have to add to service to that clientele. So as those routes start to fill up now, that's where we're going to get the leverage. So I'm hoping second half going into the fourth quarter, and especially going into '18, I don't anticipate adding a lot more equipment. That's our biggest expense, is a truck and a driver. So over $150,000 a year or so. I think those investments really start to pay off second half and going into '18.

I think the other thing, Ryan, that I'd probably add to Chris' comment is first quarter is obviously our seasonally lightest quarter. So the pure expense ratio that you see, I'm not sure I would translate that obviously to the full year. But we do start -- expect to start to get some leverage in the latter part of the year as we continue to leverage that infrastructure.

The next question is coming from the line of Chris Mandeville with Jefferies.

So can we just start off with the actual -- the slight guidance raise. Is that all largely just due to possibly an updated inflationary outlook? And if so, can you just remind us again on the overall number? I heard you break it down by segment, but just the overall number, if you will. If not, is there something else maybe just you're seeing some greater momentum, as you mentioned, in April as it relates to overall sales trends and how that may progress throughout the year with some better margin performance?

Yes. I think inflation and deflation is coming in line with what our expectations. If you remember the guidance we gave at the beginning of the year, we expected modest inflation in specialty, which I think bore out in the first quarter. We do expect or did expect that deflation in protein would start to moderate throughout the year. And we are actually seeing a little bit of an inflation currently, but I think all of the reports that we read is that it returns to a deflationary impact for the full year. We might see a little blip in that. But I'd say more of the guidance is just is how our case counts and organic growth is strengthening. So I think inflation, deflation's pretty much as we expected it and pretty solid performance on the case growth.

Yes, we're seeing great penetration. We're starting to cross-sell. I think every year, that's going to get better and better. And we have a lot of new customers coming onboard. So I think that our investments in salespeople and in routes and in new territories are all starting to bear fruit.

Okay. And then, I guess, with respect to your digital efforts in the pilot up in the Northwest, any update on early results to what you're seeing? And I know you mentioned that you want to accelerate the process this year, but how quickly can we actually anticipate that rollout?

Yes. I think we're going at a pace where we're comfortable. We want to make sure that the customers' expectation and experience is what they want to see because, really, I don't think there's a question that customers are going to gravitate more and more, ordering online, whether it's texting, e-mailing or coming through our portal. So we just think it's very important to build a best-in-class system because that's really -- they're still -- my belief is they're still going to call the salesperson. The salesperson is still calling, but the salesperson is becoming a consultant. And the trends that we're seeing -- we have over 250 customers a week right now in Chicago placing their orders online. In the Northwest, the number is lower because we started with a lower base, but every week, that continues to grow. So I think that without a doubt, the future is more and more customers are going to gravitate to placing their orders online. But we still see the big demand for a face-to-face Chefs' Warehouse representative to talk about product and service and have a face to the relationship.

Okay. And Chris, you actually mentioned earlier in the call the cross-selling opportunities. Are there any green shoots on that front quite yet to which you could kind of articulate?

Well, our branded products are starting to be cross-selled -- every day, they get better, where we have our protein -- or offering our protein offerings. We still don't have a cut shop on the East Coast, but we continue to sell our Allen Brothers and Michael's branded products through The Chefs' Warehouse sales system. So that continues to grow every day the same way there -- it continues to grow in Ohio. So we expect that, that was part of -- it is our plan. And it continues to be our plan, because I think once we have the relationship, we continue to be able to cross-penetrate and sell more products to our customers. It's showing up in our penetration per customer. So if you really dig in and you really realize what Chefs' is building, we own Qzina, one of the leading pastry companies in the country with a lot of branded products. And now we own Michael's, Del Monte and Allen Brothers on top of 15,000-plus specialty items from all our divisions. And you start to see where we are creating, I'd call it now, a sales highway. And it's really just a matter of training and trust and execution and getting the IT stuff. The simpler we make it for the customer to order, they're rewarding us with more and more products. So I'm really excited to see that, the investments and -- in IT and service are paying off. And we still have a ways to go. The IT project is never-ending, and it can always be improved. But we did announce we have a new CIO. I'm really excited to get him onboard and dig into some of these projects. And our goal is, again, is to make it really transparent for a customer in any territory to be able to order products from all our divisions. And that's our ultimate goal.

Our next question is coming from the line of Kelly Bania with BMO Capital Markets.

I was wondering, maybe, John, if you could elaborate a little bit on the operating expenses. I think you did talk a little bit about just adding the routes in Indianapolis, Nashville, New York. But as you look at those buckets that you called out, occupancy, freight and so forth, regionally, are those concentrated in any area, such as Chicago? Just trying to kind of understand the source of kind of the expense growth. And then, I guess, related to that, as you think over the next couple of years in terms of compensation and management infrastructure, do you feel like you're now complete there? I think the addition of the CIO is great. Is there any other positions like that or other areas that you feel like you need to fill over the next couple of years?

Yes. So maybe the first piece of that question is kind of where we're seeing some of those costs in our warehouse. So most of that increased cost is where we've added some capacity. So you've got occupancy costs and related personnel compensation just for warehouse pickers and all those kind of things in a lot of those new larger warehouses. So those are primarily concentrated in New York, Chicago, San Francisco and things like that. And on the delivery side, that's probably a little more broad-based, but there are certain markets where we've added a lot of new routes. Chris had mentioned Indianapolis and Pittsburgh and Nashville and some of those where those routes are not as efficient yet. As we grow those routes and further penetrate those markets, obviously, they tend to lever themselves fairly quickly. But that's -- so I'd say it's a little more broad-based. So it's a lot of new trucks. Fuel is up a little bit. It's up about 8 basis points year-over-year. That's a piece of that, that freight-out cost. But it's a lot of truck rentals, a lot of driver costs and things like that. So we're seeing, in general, labor costs, both in warehouse and delivery, up a good bit. On the management infrastructure side, I'll let Chris respond to that a little bit, but I think we have added a lot. I think we mentioned the CIO, we promoted Ellie Thomas to EVP of Operations. There are some other folks that maybe are not quite at that same kind of C-suite level. But there's a fair amount of infrastructure in -- even in just analysts and pricing managers and people like that. So it's kind of across the board, but it's a fair amount of investment.

Yes. With the kind of growth that we see, and we continue to expect -- 0.5 point in this business is a lot of money. So we basically have filled out our -- what I call is our corporate office with now with the -- I think technology eventually will allow us to get leaner. One of the big focuses now is how does Chefs' get leaner as it grows, but we're still lacking even more information to give to our managers. So promoting Ellie, we also created an operations department, okay, real estate. So we think that with that next wave of growth, we can manage it better. We can manage it leaner. Having the information now and giving it to all our division managers, we can manage margin better and start to really take out cost, okay, without jeopardizing service. So adding routes is easy. Filling them up, it takes some time. And now my goal is to make sure that now we really could start to leverage it over the next 24 months, and we're on a 36-month plan of how we want to grow. It is a more targeted growth, and it is a growth that is more -- pinpoint on how to utilize the overhead that we have built. So more products on these routes obviously gives us more leverage. And more boxes out of the same warehouses gives us more leverage. The lights are paid for. It doesn't cost more to open the building up. So it's really pushing more products now through the buildings and the routes to get that OpEx down.

Great. That's very helpful. And I guess, in terms of the online ordering, it seems like some of the bigger broad-liners are maybe a little bit further down the path on that front. I'm just wondering if you feel like you hear that from any of your customers that they're really asking for that or looking for that service from you, and what you think some of the smaller, other regional and specialty competitors that you maybe compete with or locally, where they are on that front, if you have any sense of their technology efforts?

Yes. I mean, obviously, we look at companies monthly that possibly want us to acquire them. So we get a really good picture of what's going on in the market. There's a lot of very basic systems. They call them online ordering. I guess, they're online ordering, but they're really basic and not what I'd call up to where Chefs' should be. And I think some of the very large broad-liners have a really basic order entry system, and I think they might be a little ahead of us...

1 or 2...

Yes, on the basic systems. But I think what we're building is, I call it, it's a 1, 2 type of offering. If you just want to place your order, that I think what's going to expand really quickly, we will be able to catch up to everybody. I think we're satisfied with what we see, and that's -- we're in the process of rolling out. But we're also rolling out a, I'd call it the system -- it's machine learning. You hear that terminology a lot. But we're taking the information, and we're going to that next step of taking the information of what our customers keep ordering or are looking for and creating an online kind of marketplace, where we can market to them. And long term, we think that we're ahead of most companies. And that really is going to give us the ability to start to leverage the sales force and not have as many customer service people, not have as many people period in the sales department because we think a lot of the mundaneness will go away, like I said, they're going to become more and more in a consulting role. So we are playing catch-up, I think, in some of the basic, but I think we're ahead in some of the more innovative online features we're going to be offering.

So would it be fair to say longer term, as the systems get more in place, that you probably will be able to have a leaner sales force, so you can really start to leverage their time, and they have more time to devote to being more kind of consultants? And if so, like how many -- what is the time line on that? Is that several years out? Or how do you think about that?

Yes. Great question. That's absolutely the goal. We think there's a lot of time that is unproductive. When you analyze any foodservice sales force, there's only so many hours that they can call on a chef -- especially us, that we call on chefs. They're really busy, and you can't call them during service. So we think by especially freeing them up with a lot of the mundane stuff, we think that we absolutely -- the opportunity to be leaner and lowering our cost of sales is one of the main things that we are focused on. Time line, again, I'm very encouraged what I see in Chicago. I think that the next upgrade in our system will start to exponentially start to see more and more people. I mean, we do a lot of surveys. We speak to a lot of our customers, especially the younger customers. I think that's going to accelerate. So I think that this year, we need another quarter, and then I'd see it starting to accelerate towards the fourth quarter. And I see '18, it's really starting to accelerate. And probably mid-'18, I think you'll start to see our sales costs and our existing business start to come down.

[Operator Instructions]. Our next question is coming from the line of Alexander Mergard with JPMorgan.

This is Alex on for John Ivankoe from JPMorgan. Just the first one is a housekeeping one. Do you still expect being in the range of $21 million to $21.5 million for the full year? And could you also give us an update on your CapEx guide as well?

Yes. We do expect D&A in that roughly $21 million ballpark. Our guidance for CapEx within the -- I believe, it was $14-ish million range, right? $13 million to $15 million range.

Got it, okay. And I recall in your fourth quarter earnings call, I believe $12 million of CapEx was quoted for 2017. So are there any additional investments that you kind of recently planned that weren't kind of initially included in your outlook heading into the year?

Nothing significant. There are some smaller investments that we're making, but I think it's -- again, I think we're going to be in that probably $13 million, $14 million range for the full year.

All right. Perfect. And then just one final question for me. So it looked like M.T. Food had about a $15 million run rate per quarter in the second half of 2016, and then contributed about $12 million in the current quarter. I know you talked about some seasonality with first quarter being sometimes the slowest. Should we look at that step-down just being part of seasonality? Or are there any kind of onetime occurrences that happened that may have kind of been a drag there?

Yes. Well, obviously, in Chicago, the weather is not the best in the winter. So first quarter is always the slowest. And Chicago is actually a little different. M.T. actually has a really good summer business, where in New York City, we actually slowed down. So we think that -- we think they'll track pretty well. The business is seasonal, kind of like a lot of our businesses.

Yes. I think the seasonality, I don't think there's anything unusual. There are a few calendar shift things that impacted things a little bit. If you remember, 2016 had a 53-week year. So kind of that New Year's week fell into last year, where historically it's typically been in January. Easter, which kind of bumped to April. So there are few things like that, but I don't -- there's no major kind of onetime kind of things other than these storms we talked about a little bit, which was a little harder to get our arms around. We think probably the storms in the Northeast impacted us by about $0.01 a share. And then on the West Coast, you had some very unseasonal rains that lasted for a long period of time.

It knocked out a bridge to Big Sur. We kind of lost that business for -- I don't think it's going to open until summertime. So yes, we probably lost another $0.01 or so there. But we're really excited about spring, summer, especially in Chicago, getting everybody trained. We're still in training mode. And everybody's learning the system, but we continue to invest there. We were short salespeople. We think the opportunity is tremendous, and the reception has been very positive. And the trucks are getting out. We're filling deliveries, and we're on the offensive. So we're really excited about Chicago.

It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Pappas for any additional concluding comments.

We thank everybody for joining our call today. A challenging first quarter with weather and some of the calendar comps, but we actually beat our expectation. And very happy to report it was a very strong April, and we're really excited about what we see and how Chefs' is growing. And I look forward to speaking to everybody in our next call. Thank you very much. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.