Greetings, and welcome to The Chefs' Warehouse Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Aldous, General Counsel and Corporate Secretary and Chief Government Relations Officer, for The Chefs' Warehouse. Thank you, Alex, you may now begin.

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 Third Quarter 2018 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 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 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 and update our 2018 guidance. 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 2018 earnings call. In third quarter, we experienced continued momentum in both organic case growth, revenue performance by the unseasonably wet weather across our network, and especially in the Northeast. I would like to thank the entire CW team for solid execution and for producing strong top line and gross profit dollar growth, amidst a deflationary price environment, and a challenging summer weather season. A few highlights from the third quarter include: 4% organic growth in net sales; specialty sales were up 7.7% organically over the prior year, which was driven by unique customer growth of approximately 5.7%; placement growth of 4.8%; specialty-case growth of 6%; organic pounds growth in the center-of-the-plate 4.3%; and gross profit margin increased approximately 56 basis points. Gross margin in the specialty category declined 32 basis points as compared to the third quarter of 2017, while gross margins in the center-of-the-plate category increased 139 basis points year-over-year. In addition, gross profit dollars grew approximately 13.7% versus prior year third quarter. Jim will provide more detail on margins in a few minutes. I would like to thank our pricing, sales and operating teams to driving strong organic growth, and taking advantage of the deflationary environment to drive gross profit dollar growth and margin improvement in the third quarter. In relation to some technology, we continue to drive adoption of our e-commerce platform and mobile app amongst our customer base. We are now over $2.6 million revenue per week run rate going through our Internet platform and roughly 20% of all online sales in third quarter came through our mobile App. In the quarter, we completed the ERP sales order entry module implementation in Ohio Valley region, which represents a number of our fastest-growing markets.…

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended September 28, 2018, increased approximately 11.2% to $361.5 million from $325.1 million in the third quarter of 2017. The increase in net sales was the result of organic growth of approximately 4% as well as the contribution of sales from acquisitions, inclusive of Fells Point, which added approximately 7.2% to sales growth for the quarter. Net deflation was 0.1% in the third quarter, consisting of 1.8% inflation in our specialty category and deflation of 2.6% in our center-of-the-plate category versus prior year quarter. Gross profit increased 13.7% to $92 million for the third quarter of 2018 versus $80.9 million for the third quarter of 2017. Gross profit margins increased approximately 56 basis points to 25.4%. The increase in margin was primarily driven by deflation in certain center-of-the-plate categories, and as Chris mentioned, a great job by our teams in driving both margin improvement and strong gross profit dollar growth. Total operating expense increased approximately 16.1% to $81.7 million for the third quarter of 2018 from $70.4 million for the third quarter of 2017. On an adjusted basis, as a percentage of net sales, operating expenses were 20.2% for the third quarter of 2018, compared to 19.8% for the prior year third quarter. Excluding the impact of the earn-out fair valuation adjustment, the primary drivers of year-over-year operating expense growth, increases in distribution and warehouse labor costs were partially offset by leverage on our corporate infrastructure. We estimate deflation and product mix combined impacted the year-over-year comparison of the operating expense as a percentage of revenue metric by 20 basis points. We are very pleased with our team's ability to drive positive gross profit dollar growth to adjusted operating expense growth of roughly 40 basis points. We…

[Operator Instructions]. Our first question is from Sean Kras with Barclays.

It looks like case growth decelerated a bit to your stacked basis in the quarter, and I know, it was particularly strong in the prior quarter, but maybe you can just speak to some of the puts and takes for this quarter?

Hey, Sean, this is Jim. There weren't -- we had pretty broad case growth across our network. We didn't really see any particular pockets that were particularly stronger than others. I think we performed as we expected. And that was actually despite, as Chris mentioned in his prepared remarks, quite a bit of wet weather, especially in the Northeast. So we felt pretty good about the quarter in terms of organic growth.

Yes, it makes sense. Thanks for that, particularly on the weather. And then to follow-up then, just also, just on sales. Just looking at fourth quarter implied guidance at the midpoint for sales, it seems like a little bit of a slowdown there. And I know, that seems like deflation is picking up. But I guess, could you may be a help us understand that a little bit better in terms of what that driver is?

We really just tightened guidance. We brought the upper end of guidance up and the lower end down, just very slightly. And it's really just flowing through the -- we had a pretty significant impact on deflation and product mix this quarter on top line. And so it's just really flowing that through and tightening the guidance.

Okay. And then maybe just one more, if I can. Just early thoughts on how the new ERP sales module will help drive just top line and gross margin, gross profit dollars just based on experience in other markets.

Yes, well, I did -- we said before and -- I don't think it says that it will last forever. I think, everybody is developing better online tools. But customers who do come online, usually order more items and the margin is a little better than people that -- actually, we take the orders by, let's say, telephone. So that's right -- that's really encouraging. But really what -- allowing customers to come online, they do tend to shop more, and it does free up customer service and the sales department to do other things besides process orders, which is time consuming. So it's really encouraging what we see, and the benefits that the salespeople are actually benefiting from, more free time to go out and call on customers, show new items and open new business.

Our next question comes from Andrew Wolf with Loop Capital Markets.

Yes, the case growth slowing was interesting in that the unique customers and the placements actually accelerated sequentially. Is there anything to be read into that? Does that mean that same-store sales are slowing or maybe some of the independents are closing? Is that how we should interpret that? Or is that -- or is there too much noise in that to take something out of that?

No, Andy. I think, 6% case growth, we're pretty happy with over 4% pounds growth year-over-year in center-of-the-plate. Happy with the organic growth, I think, it aligns nicely with our placement growth and new customer growth. I mean, we're constantly driving both new customer growth and penetration. You're going to have -- it's not going to be a straight line every quarter. There's puts and takes to seasonality and then there's just year-over-year comps that kind of add some noise. But overall, we're pretty pleased with the organic growth during the quarter.

Yes, Andy, this is Chris. We probably lost about 40 days in our club business due to the excessive rain in the Northeast. So overall, to see specialty sales up 7.7%, I'm extremely happy with that. And the pounds are finally growing in our protein division. So as I said earlier, we're entering the fourth quarter. We have momentum. We have a maturing management team. We're -- I think that the sales team and the operations team are all doing a great job. I'm really excited at what I see.

Okay, good. Then I wanted to just ask you about the gross margin contraction in the specialty side. It was about half of last quarter, and I think last quarter you said you had a tough compare. What do you think is going on, was it -- this quarter? Was it product mix or some of the acquisitions coming in at lower margins? And when do you think specialty, specialty gross margin get -- starts to improve or expand?

Yes, I think -- look, we did have some close to double-digit inflation in a very big category of ours, which is bakery and pastry. That some of it -- and some of it is product mix. But nothing really other than that to call out there. I mean, we're pretty happy with the level of gross profit margins that we're pacing to for the full year, and we're on track to -- year-to-date we're actually total company tracking 10 basis points better than 2017, and we're on track to drive improvement for the full year per our guidance.

[Operator Instructions]. Our next question comes from Kelly Bania with BMO Capital Markets.

Just wanted to ask first about operating expenses, just accelerated a little bit this quarter, and even when you adjust out the adjustment that you mentioned. And I guess, you called out distribution and warehouse cost there. So just curious if you could elaborate what's maybe changed there and how we should think about that kind of going forward?

Sure. So just on the percent of revenue metric, as I mentioned, the comp versus significant inflation last year and deflation this year is really what drove that, that's taking out the earn-out fair valuation. But fuel was actually the biggest headwind for us this quarter, ex-acquisitions we had 25% to 30% price year-over-year. If you look at fuel prices, last summer was kind of the low end of the year. And this summer of this Q3, we estimate it's going to be the high end. So we don't think that, that's going to repeat in Q4. Just given if you look at the cadence of fuel prices, last year they peaked in Q4. They ramped up in Q4, and we don't see that happening again in -- as we look at Q4 right now. So I think, the Q4 comp eases, but we did see a headwind in fuel. And in terms of warehouse, most of that is geography. It's really -- we added Fells production to our warehouse line last year, we haven't fully lapped that, and we had offsets in other costs. So it was really just -- really just calling out the geography there.

Okay, that's helpful. And I guess, I know it's early for '19, but anything -- is there anything that you're seeing in your business either on the cost or top line side that makes you think that there's no reason that you can't reach some modest EBITDA margin expansion next year as well?

No. I think, look, we're on track. If you look at the midpoint of our guidance, we're on track to achieve 150 basis points or so, potentially even better than that in gross profit dollar to adjusted OpEx gap. And our goal next year will be to further improve that. And we don't see anything looking out right now, either into Q4 or into next year that would make us think that we wouldn't be able to continue to improve that gap.

Yes. I mean, we're really excited at what we see, Kelly. Our team is maturing. We've got new geography. We finally have some pounds growing in the right way in protein, as we shore up that team and make it better, and continue to cross sell. And we're mostly through a lot of the sales conversion on the ERP, which was -- no matter what, it was a major distraction and we're pretty excited about next year.

Perfect, that's very helpful. And then just one, other one for me, I think, it was last quarter that you characterized the upscale casual restaurant backdrop is very healthy and maybe there is some noise from weather this quarter. But just curious, if you're seeing or hearing anything different from your customers, especially with all the market volatility that we've had in the last month? Any comment there would be helpful.

Yes, we're pretty spread out. Our business goes from, like you said, upscale casual. Party season is coming. So I think, people are spending money. It's an affordable luxury. It's not like you have to go get a mortgage. So we have not seen anything to tell us that anything is changing, but the positive outlooks that we've had.

Got it. And then maybe just any comment on the outlook for inflation and deflation. Sounds like the categories have some very different trends or the two divisions really have some different trends. So just any comment on how should we think about that going forward?

Yes. Sure. I mean, it's early in the quarter, but I would -- the way we look at it now, specialty seems on the path to kind of similar level of inflation, slight moderation given the comp in Q4 of 2017. I think, we had roughly 4% specialty inflation then, so probably some slight moderation. And then with center-of-the-plate, we're still going through price normalization versus the spikes last year, but the comp does ease. So I would say, kind of, more moderate deflation to kind of flattish inflation type of outlook.

[Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to Chris Pappas for closing remarks.

So thank you to everybody for joining us on our third quarter call. We look forward to having you on our -- on the fourth quarter. We hope everybody has a great holiday season. And thank you very much. Thank you.

Thank you.

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