Greetings, and welcome to The Chefs' Warehouse Third Quarter 2019 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, sir.

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 2019 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, go over our third quarter results in detail and review our 2019 full year 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 2019 Earnings Call. Our team delivered solid third quarter revenue and gross profit performance. While year-over-year unit volume growth remained below our typical range due to changes in product mix and continued cycling out of lower-margins, high-volume placements, organic revenue growth continued to meet expectations and our team delivered a positive gross profit to adjusted operating expense spread in the quarter. During the quarter, we also continued to invest in growth. We added seasoned sales and category specialist talent to both our East Coast and West Coast regions. We also continued to invest in our brands, our customers and supplier partners via targeted marketing events across our expanding geography. A few highlights from the third quarter include: 4.5% organic growth in net sales, specialty sales were up 5.8% organically over the prior year, which was driven by unique customer growth of approximately 3.9%, placement growth of 3.1% and specialty case growth of 3.2%, organic pounds growth in center-of-the-plate was approximately 0.9%. While sequentially higher than the second quarter of 2019, product mix changes continue to drive specialty case growth trends in the third quarter. On a year-over-year basis, as compared to the third quarter of 2018, this represents a shift from higher volume dairy category cases to lower volume, higher revenue per case categories, such as specialty oils and vinegars, as well as pastry and bakery products. Looking on a two year basis, third quarter specialty case growth averaged approximately 4.6% and specialty organic revenue growth averaged 6.8%. Center-of-the-plate pound growth compares to a strong third quarter of 2018 and continues to cycle through attrition of some higher-volume, lower-margin placements. Gross profit margins increased approximately 25 basis points. Gross margin in the specialty category increased 24 basis points,…

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended September 27, 2019, increased approximately 9.8% to $396.9 million from $361.5 million in the third quarter of 2018. The increase in net sales was the result of organic growth of approximately 4.5%, as well as the contribution of sales from acquisitions, which added approximately 5.3% to sales growth for the quarter. Net inflation was 2.1% in the third quarter consisting of 2.5% inflation in our specialty category and inflation of 1.5% in our center-of-the-plate category, versus the prior year quarter. Gross profit increased 10.9% to $102 million for the third quarter of 2019 versus $92 million for the third quarter of 2018. Gross profit margins increased approximately 25 basis points to 25.7%. Specialty inflation was driven by above-average increases in cheese and dairy categories with pastry and bakery products showing a mix of moderate inflation and deflation. Significant inflation in certain primal center-of-the-plate meats, particularly prime tenderloins was partially offset by deflation in lower and middle meat cuts. Total operating expense increased approximately 11.8% to $91.3 million for the third quarter of 2019 from $81.7 million for the third quarter of 2018. Excluding the impact of the earn-out adjustment, third quarter total operating expenses increased 11.1% versus the prior year quarter. On an adjusted basis, and as a percentage of net sales, operating expenses were 20.3% for the third quarter of 2019, relatively unchanged as compared to the prior year quarter as increased operating cost related to our investment in Texas and in additional sales and business development talent were materially offset by lower distribution-related costs as a percentage of revenue. Third quarter year-over-year gross profit growth to adjusted operating expense growth was a positive spread of approximately 80 basis points. Operating income for the third…

[Operator Instructions] The first question comes from Andrew Wolf of Loop Capital Markets. Please go ahead.

Thanks. Good afternoon. Hi. So, on the quarter, I just wanted to…

Hey, Drew.

On gross margin and profits, Chris, I think you had commented in September that, prime beef was or parts of it, some of the prime was at record-high prices. It looks like you managed that okay or did that impact the quarter getting – passing that through? And what is the outlook? I know the prime market can kind of vary quarter – pretty quickly.

Yes. So prime has been a headwind. It's finally more prime. So, I think the availability of total prime was like a 2% and if I am not mistaken, I think it's now more 7%, 8%, 9%. So, availability is starting to increase until we get through probably mid-December. Tenderloins have held pretty high at record prices and I don't think – I mean, they are going to break. It's a question of when we get back to some normality. But we've been managing through. It's definitely been a headwind and we look forward to more availability and more normality and we have – every time that we see a market like this, Andrew, we look at it as an opportunity to rethink it for the following year and come out with new programs and things that we could offer our customers more solutions to put stake on the menu at more affordable prices. So we've learned – again, we've learned a lot in this process. And I think it's going to make us better marketers in the future.

Okay. And just sort of a follow-up, from what I remember, Allen Brothers' catalog business and online business is pretty heavy this quarter. Does that impact the quarter? I mean, or can you raise those prices to the catalog customers, retail customers ahead of...

Yes, it's a balancing act. We try to get ahead of it, because that product is frozen. So, we try to get ahead of it when we - during the year, as we see markets that we think are very favorable, we are able to make buys. So, you don't have to wait till the last minute to buy that at record prices. So, we do get way ahead of that.

Andy, the retail is not a huge percentage of our overall revenue.

No, I realize that. On the operating costs, could you just sort of either, if you would, quantify the kind of deleveraging you got out of Texas and L.A.? And when and if you don't want to quantify it, maybe at least answer when and how that turns into leveraging? Is it obviously, it's volume driven, but timing and what kind of events? How would the normal flow go? And how would an event like a tuck-in acquisition impact?

Yes. Sure. So, from a leverage perspective, the L.A situation is just a duplicate rent until we move in. So we are adding that back. And from an operating leverage perspective, we did generate operating leverage from a gross profit to adjusted OpEx perspective. In terms of Texas, really, the costs there are building the team, going through the transition, over the summer of the ERP system, we've built sales and business development talent; we've added to the warehouse; we've added to the distribution platform. So that's basically just ramping up the business really ahead of the revenue growth, which will come over the next couple of years. We expect Texas to move closer to breakeven next year. Obviously, it won't be breakeven this year, but we didn't expect that. And in terms of L.A., we will definitely have the room for fold-in acquisitions. We expect to move into that facility in the third quarter of 2020.

Okay. Thanks. And if I could just ask about guidance, just in one part in sales, I think it's like a $20 million spread for the fourth quarter. It's like 5% variability. So I am – it seems pretty wide. Is there choppiness in the market? Or are there – are you looking that you might have some attrition? I am just trying to understand…

No. It's consistent, Andy, with the – it s consistent with the way we've guided in the past. We have narrowed it from roughly a $40 million or $50 million spread as we go through the year. We tightened it last quarter and it's consistent with the way we've tightened it in prior years.

Yes. And always, the fourth quarter, Andy, it's always strong. The question is whether, when – how does Christmas and New Years fall? How does it affect people leaving? We had real surprises this year with the way the 4th of July week went and some of the Jewish holidays and Labor Day, it just seemed the way the holidays fell this year, they really affected our business. We did much less business than a normal week. So we – when we look at our past quarters, we had – our trends were strong on where our forecasts were and the holiday weeks really were disappointing. It seemed almost the economy is too good and people just take the whole week off. So, looking at the fourth quarter, I think we are optimistic with, our customers look strong. Spending is – spending seems to be well, but you just don't know about the weather and how the holidays affect it.

Okay. Great. Thank you.

Sure. Thanks, Andy.

The next question comes from Christopher Mandeville of Jefferies. Please go ahead.

Hi, this is Blake on for Chris. Just on the guidance again, I know you tightened the EBITDA a little bit. Was that just because we are entering the fourth quarter? Or was there anything to read into versus your expectations? Hello?

We raised the midpoint of our gross profit dollar guidance just to reflect the improvement in gross profit margin and gross profit dollar growth that we've seen throughout the year. And we look for that to continue. And then, we raised adjusted OpEx to reflect the OpEx pressures that I went through earlier. So that's really the guidance changes.

Got it. Can you talk about your exposure to European imports? And any impact you expect from tariffs?

We haven't seen really any impact to-date. If you look at the list of items, they are very specific to certain locations and very unique specifications. And given that we have over 50,000 SKUs, we benefit from that diversified portfolio of products. We also have a significant private-label portfolio that gives us a lot of flexibility in the supply chain. So, we are working with our customers and supplier partners. We are working with all the stakeholders involved to make sure that we can provide our customers with the right value and pricing. And so, right now, we don't estimate anything...

Major.

Major in 2019.

Great. That's good to hear. Last one, have you seen any impact from the fires in California on your business?

Yes. Well, obviously, it's devastating to watch. We experienced this I think it was, last year and the year before. It seems to be the new norm, unfortunately. We pray for everybody's safety and we get through this, but there is an impact. At this point, it's hundreds - hundreds of thousands of dollars, I would say, of probably lost sales. So, I think we always kind of put in a piece of our forecast knowing that there is going to be some fires. So we're praying that this thing gets put down to bed pretty soon and everyone is safe. We can get some normality.

It's very recent in the quarter. I think we'll know more if this thing extends. But generally, it gets calmed down fairly quickly.

Thanks a lot.

[Operator Instructions] The next question comes from Kelly Bania of BMO Capital Markets. Please go ahead.

This is Steve Caputo on for Kelly. Just looking at your organic growth trends, if you could highlight anything that was outside of your expectations for the quarter that would be helpful.

Within the ranges that we expected, the July 4th shift was a very weak week for us that a lot of people left for the entire week and then the hurricane in Florida. We think those two combined cost us a couple of cents in terms of the top-line. Other than that, the cadence of the quarter was generally as expected and our organic growth is right around mid-single digits kind of in the ranges that we expected.

Thank you.

This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Chris Pappas for any closing remarks.

Yes. We thank everybody for joining us on our earnings call. Our team did a great job. It was a good quarter. Sales was strong, profitability was strong and we look forward to a strong fourth quarter. And everybody joining us once again, thank you very much, and thank you for joining.

Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.