Greetings and welcome to the Chefs' Warehouse Fourth Quarter 2017 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, Chief Government Relations Officer and Corporate Secretary. Please go ahead.

Thank you, operator. Good afternoon, 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 fourth 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 Company's 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 by 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're going to provide a business update, go over our fourth quarter results in detail and review our 2018 guidance. Then we will open up the call for questions. With that, I'll turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our fourth quarter 2017 earnings call. Despite the devastating fires in California and the unfortunate tragedy in Las Vegas, our customer base remained healthy and we continue to our positive momentum into the fourth quarter. Considering these challenges, our business recovered relatively quickly, and we continue to support those in needs in those markets. Overall, a healthy business and customer environments supported to continued solid organic growth in the fourth quarter. As a reminder, we are comparing the fourth quarter of 2017, a 13-week fiscal quarter, to the fourth quarter of 2016, a 14-week fiscal quarter, and as such, will present certain results, both as reported and on a pro rata 13-week comparison. A few highlights from the fourth quarter on a prorated basis include 7% organic growth in net sales despite the impact of the California wildfires. Specialty sales were up 8.5% organically over the prior year. This was driven by unique customer growth of approximately 4%, placement growth of over 5% and specialty case growth of over 4.4% versus the prior-year fourth quarter. However, case growth was negatively impacted by approximately 1.4% as a result of our planned attrition at MT Fruits. Pounds growth in our protein division fell slightly by 0.6%. However, excluding the impact of the California fires rose 2%. This represents sequential improvement versus third quarter of 2017. Gross margin is decreased approximately 20 basis points to 70 basis point increases in specialty, offset by 190 basis point decrease in our protein division. We are extremely pleased with our team's performance on the specialty margin improvement despite over 4% inflation. As a reminder, gross profit margins in our protein division rose 84 basis points in the fourth quarter of 2016 and protein experienced 2% deflation in…

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended December 29, 2017 increased approximately 12.2% to $357.1 million from $318.4 million, which represents a prorated 13-week net sales for the fourth quarter of 2016. Net sales on a reported basis, 13 weeks compared to 14 weeks, increased 4.1%. The pro rata increase in net sales was the result of organic growth of approximately 7% as well as the contribution of sales from the Fells Point acquisition, which added approximately 5.3% to sales for the quarter. Inflation was approximately 3.1% in the fourth quarter, consisting of 4.2% inflation in our specialty division and inflation of 0.7% in our protein division versus the prior year quarter. Inflation in the quarter, especially in our specialty division, continues to outpace our expectations in 2017, and we are pleased with our ability to produce solid gross profit margins despite this headwind. Gross profit increased approximately 11.2% to $92 million for the fourth quarter of 2017 versus a prorated $82.7 million for the fourth quarter of 2016. On a reported basis, comparing 13 weeks to 14 weeks, gross profit increased 3.3%. Gross profit margins decreased approximately 20 basis points to 25.8%. We are pleased with the solid performance by our team in driving specialty margins, higher despite 4% inflation. As Chris mentioned, lower margins in our protein division were partially driven by the prior-year comparison. Total operating expense increased approximately 14.9% to $76.6 million for the fourth quarter of 2017 from $66.7 million for the fourth quarter of 2016. The increase in operating expense is primarily driven by the gain recorded in the fourth quarter of 2016, relating to the change in the fair value of the Del Monte earn-out liability, offset in part by the additional week in the fourth…

Thank you. [Operator Instructions] Our first question is with Ryan Gilligan with Barclays. Please proceed with your question.

Hi. Thanks for taking the questions. Can you go over the puts and takes for gross margin in the quarter? You call that higher inflation as weighing on gross margin, but you actually have nice gross margins in core specialty, which is where all the inflation was?

Sure. Hey Ryan. This is Jim. So obviously, you highlighted specialty, 70 basis points on 4% inflation. The 190 in protein, about half of that is the comp versus the prior year strength. The impact with Napa, where we actually have a pretty high in margin protein business, was about 25 to 30 basis points as well. And really, we saw continued inflation. It was a bit of a story of two worlds on the protein side, in fact, in terms of inflation. We saw significant inflation continuing in prime, and we saw over 10% inflation in seafood, whereas other categories of prime - sorry, other categories of protein, we saw either less inflation or actually deflation. So the headline is 70 basis points inflation doesn't really communicate that. So those were the puts and takes on that.

Got it. That's helpful. And then can you just talk about your ability to pass through cost increases to your non-contract customers? And then can you just remind us what percent of sales are contracts?

Yes. We include a lot in the - we call it, really core independent customer, and then our groups are - we kind of lump in our hotels and our GPO business, it's about 20% of our business. So I think we did a really good job passing most of the inflation on again. The headwind really was that we just had a really, really incredible headwind in some of the prime products, really - it was a great quarter, could have been even a better quarter.

I think I would also add that X Fells, we actually saw organic revenue growth of about roughly 4% on a 13-week basis in protein, and some of that was driven by mix. The fourth quarter 2017 versus the prior year fourth quarter, we sold a higher amount of higher dollar of protein items driven by some of our shift in our customers' mix. And so where we saw the offset there, those tend to be at slightly lower gross profit margin, and we saw the offset in operating leverage, improved operating leverage.

That makes sense. And then just I guess, with guidance implying flattish gross margins for next year, does that imply that those prime headwinds that you guys saw in the fourth quarter will go away in 2018?

We don't expect to see the same level. I mean, we can't predict when there are scale to the issues or the hockey stick likes spikes that we saw in kind of Q3, and then there was a little bit of a hangover of that into Q4. We can't predict that, but I wouldn't say that we expect it.

The experts are - I mean, if you listen to the experts, they're saying that there' will be enough cattle this year that you should not see this kind of crazy inflation that we've been experiencing.

Got it. That's really helpful. Thank you.

Thanks.

Our next question is with Chris Mandeville with Jefferies. Please proceed with your question.

Hey. Thanks for taking my questions. Chris, the last several quarters now you guys have actually been showing really nice gap between your gross profit dollar growth and your operating expense growth. I'm just curious do you guys, or how you think about your capability or ability to continue to go and expand the gap between the two line items as you actually further leverage some of these facilities, which are bringing on incremental sales?

Yes. Well, I think that - people who have been following us since our IPOs, you know that we grew real quickly. We did a lot of acquisitions, we built a lot of facilities. And we've said, eventually when Chef grows up, it's going to start to get leveraged on its operating expenses. And I think now for the last two quarters, we're starting to live up to our expectation and I think we should continue. It's a story of - we got great growth, we have great customer growth, we're getting crossed over growth through our categories, and we're starting to leveraging all the overhead that we added on this past few years to build the platform and the facilities and all the trucks that we've added, the people, the infrastructure, so I expect to continue to leverage the platform and add more volume and more dollars flowing through to the bottom line.

Yes, Chris, I would just add on that, well extreme inflationary periods can make it a little bumpy in quarters, if you look at our midpoint of our 2018 guidance would imply that that's gap improves over 2017.

That's helpful. And then or even in the press release, you mentioned some of the planned attrition is it relates the Chicago, is there expectations for any incremental attrition in 2018, or is that now behind us?

Regarding the MT attrition, we expect to lap that in kind of Q2, maybe early Q3 part of that attrition related to the move and earlier in 2017. So we probably won't fully wrap that until Q2 2023, but it's obviously declining. The was negative 1.6 in Q3, it's 1.4 this quarter, so we're looking forward to building that back.

And as Chicago grows, which it is, obviously, it starts to eat up the attrition that we experienced from last year.

Okay. And then just maybe the last one for me. I may have missed it actually, but did you call out what your expectations were on CapEx for 2018?

Yes. We're looking at staying kind of close to that 1% range might be a little bit higher, little bit lower, but $14 million to $16 million on CapEx in 2018. That's what we're planning right now.

Okay. That's it for me. Thanks guys.

Thank you.

Thanks.

Our next question is with Kelly Bania with BMO Capital Markets. Please proceed with your question.

Hi, good evening. Thanks for taking my questions. Just wanted to first ask about interest expense, your guidance was a little over there than I would've thought and really, you just did the restructuring on the facility there, but any other debt paydown plans or what are you assuming for interest rates there, maybe just any color on that?

So obviously, we modeled in the reduction in the term loan rates, the 75 basis points, and we modeled in roughly 4 Fed hikes of 25 basis points over the year. So averaging out to about 50 basis points in the floating component. So still overall, that gets us plus you got to remember, we delivered the balance sheet by about $13 million in 2017, so we have a lower level of debt. So that combined with the repricing, then we've modeled in kind of what the market was predicting on the Fed.

Great. That's helpful. And then some of your distributor peers are calling out some higher inbound freight, mostly on the third-party side, just curious if you're experiencing that are managing that many different way but just didn't hear your call it out?

Yes. It's less than 5% of our cost, and we sold a little bit of pressure in the quarter, but it wasn't anything that would require us to call it out. Where we saw a little bit of pressure was in that 20 basis points or so decline or increase in related to our transportation in OpEx, and that was really few and a little bit of outbound freight and some geography on leases shifting from depreciation into OpEx, that was really it.

Great. And then just last one on the sales force, some of your other peers are kind of growing that just curious how you feel about the size of the sales force and plans for maybe this coming year in 2018 and the next couple of years?

Yes, I mean we continue to invest in sales. I think as an inflection point - certain point, where as we do more business online, we rolled out our phone app, we rolled out the online app, we'll continue to improve that and make it a better customer experience. And the plan is that, that will free up sales people to do more sales force and to do more product presentation, and you'll start to get more leverage on your sales force, you'll be able to get more production. The order entry system will kind of eliminates hopefully, more of their time behind their desks, which improves their time out in the street, but we continue to add salespeople, especially in territories that we feel we're underserved, and we add specialists because we're starting to cross-sell. So as we introduce the categories, we like to bringing in focus on really just launching those categories and making it more part of the DNA of that territories. So I think we gave our guidance. It's kind of all-in there and nothing really unusual or anything that I would say right now is a change in plan.

Great, thank you.

Our next question is with John Ivankoe with JPMorgan. Please proceed with your question.

Hi, thank you. The question actually is on e-commerce. I think you said in your prepared remarks that it's currently, 8% of orders, is that correct?

No. What we said on the 8% was that in January, we launched our mobile app in late November and in January, 8% of our online sales, which refers to the $850,000 run rate per week, 8% of that came in January through mobile.

Okay, all right. Thank you for that clarification. I'm sorry for getting that wrong. And you did talk about previously. I think something like $100 million run rate by the end of fiscal 2018 that you kind of expect, I guess I'll just call it broadly e-commerce as opposed to mobile, so let's just call it, we're making digital as equally as their word. So just an update on that, I mean do you think is that a conservative number? Is it an easy number? And if we were to think about what the right mix is for Chefs' Warehouse over time in terms of what is a service-intensive and your professional selling organization versus digital? I mean, what really are your longer-term goals with what digital should be as a percentage of sales for The Chefs' selling platform?

Yes, good question, John. We're seeing is - we're still in the very early stages. Serving so many smaller restaurants, I don't think we're ever going to get to a 100%, getting everybody to order an additional platform. Customers that either order late are modeled little different and they're big national food distributors. So we're much more flexible. We're easier to do business with. We take orders most past their cut of times. So, if I could get to 50% online, I think that would be a great number, and getting our very large customers, our large hotels either through EDI or having them into their orders. So we're still in the process of getting our sales onto our enterprise system. So that's taking a little focus away from the big push to getting more and more customers online. I do think there's an inflection point. I think that in certain point, again as the younger generation starts to take over more of the ordering in our customers, they'll start to enter their own orders. But right now, we're still seeing a tremendous amount coming over on email and text. And it's a nice migration online, but I think once we are done, really, with our sales screens coming over to the enterprise system. I think that we'll see an acceleration. So the $100 million numbers is still the number that we're going for this year, and then I think it starts to eventually pump it up.

And when that - so that sounds like that's a back-end effort. When does that sales screen migrate to enterprise system? I mean, if I'm quoting you correctly, I mean when will that be done with the timeline of that?

Well, it started a while ago. So we've been turning on company-by-company and right now we have to go live dates that sometimes get pushed back because we want to do another update as we enter our - we go into our bigger companies, where you get a tremendous amount of orders really late. So we really want to get it right. So but the plan is, by next year, to have just let everybody on the ERP sales platform, but I'd rather go a little slower and really get it right than push it too hard and get it wrong.

Thank you.

Thanks, John.

Thank you.

[Operator Instructions] There seem to be no further questions. So I'll now like to turn the call back over to Chris Pappas for closing remarks.

Great. Well, thank you for everybody for joining us on our earnings call. I'm really proud of our team, they did a great job, and they continue to push and make Chefs' the leading pervaded to the high-end independent restaurants throughout North America. And I look forward to speaking to everybody on our next earnings call. Thank you very much and have a good evening.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.