My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter 2018 Performance Review. [Operator Instructions] Melissa Napier, Treasurer and SVP, Investor Relations, you may begin your conference.

Thanks, Adam, and good morning, everyone. Thanks for joining us today for our first quarter fiscal year '18 -- 2018 earnings call. Joining me for today's call are Pietro Satriano, our Chairman and CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide a business update and speak about our performance in the quarter. We'll take your questions after management's prepared remarks conclude. [Operator Instructions] During today's call, and unless otherwise stated, we are comparing our first quarter results to the same period in fiscal year 2017. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our latest Form 10-K filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. And lastly, I'd like to point out that during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our press release. I'll now turn the call over to Pietro to get us started.

Thanks, Melissa. Good morning, everyone. Welcome to our 2018 first quarter call. In March, we hosted our first Investor Day, and we outlined some key initiatives and financial targets for the next three years. And since we'll be referring to some of these targets today and going forward, I thought it would be worthwhile to spend a minute or two reviewing the highlights from that day. So Page 2 is a summary of the three key themes we presented. First, with the industry, we talked about the attractiveness of the industry that offers plenty of opportunity for a profitable growth, both organically and through M&A, and our outlook continues to remain positive for the industry. In addition, the increased use of technology, the explosion of menu trends, and increasing role of private brands favors scale players and innovative players like ourselves. Second, we talked about our differentiation strategy, which we call Great Food. Made Easy, which is aimed primarily at customers in the independents, health care, hospitality sectors. These customers value our leadership and product innovation, and technology and in our selling model, and our volume outlook that you see on the bottom left reflects our ability to grow profitably with these targeted customer types. We're also very committed to growing gross profit per case through a number of initiatives that you see outlined here as well. And third, we are laser-focused on cost, in particular, in supply chain and shared services, two of the largest operating cost and opportunities in our business. These three themes from the Investor Day support our 8% to 10% EBITDA guidance for the midterm, and we will refer to some of these targets in this and future calls. Now let's begin our overview of the first quarter, and I'm now turning to Slide 3.…

Thank you, Pietro, and good morning, everyone. We had a solid first quarter that was slightly behind our expectations. Our pretax income increased $28 million to $63 million, and our adjusted EBITDA increased $9 million or 4.2% in spite of poor weather and continued inbound freight cost headwinds. The impact of weather was more widespread and extended later through the quarter then we had initially anticipated when we provided our Q1 outlook in mid-February. Let's walk through our results in more detail. On Slide 6, first quarter net sales were $5.8 billion, an increase of 60 basis points over the prior year period. We experienced 2.9% year-on-year inflation and mix impact for the quarter, offsetting the impact of inflation and mix on sales with a case decline of 2.3%, of which, as you heard, an estimated 150 basis points was attributable to weather and calendar. We saw a continued moderation in year-over-year inflation in the first quarter compared to much of 2017. The inflation was primarily in commodity categories such as beef, dairy and produce, which, as we've said, really only impacts the sales line. We also experienced modest inflation in several grocery categories. Now to gross profit performance, which you see on Slide 7. We delivered very strong gross profit results. For the first quarter, gross profit was $992 million, which is essentially flat to the prior year in dollars on a GAAP basis. It was up $10 million or 1% on an adjusted basis. The elements of our strategy focused on gross profit rate expansion continue to make very good progress, with gross profit per case up a very strong $0.19 per case this quarter. In the quarter, specifically related to the freight headwind, which negatively impacted our adjusted EBITDA by roughly 300 basis points, we experienced very…

[Operator Instructions] Our first question comes from Edward Kelly of Wells Fargo.

So I wanted to ask about the case growth. Could you provide a bit more color on the cadence of the case growth throughout the quarter, what you're seeing so far in the second quarter, particularly as it relates to the independent and health care, hospitality channel? And then as part of this, if we think about your guidance, it doesn't look like your outlook for Q2 through Q4 really changed at all, particularly as it relates to sort of like case growth. I guess is that correct? And then can you help to bridge us to the full year 1%? And I want to make sure that for the second quarter specifically, we're in the right spot as it relates to your customer segments.

Okay. So I'll start, Ed. I'll talk about our outlook for independent restaurants on qualitative basis, and then I'll let Dirk do the bridge that you asked about. So our outlook for independent restaurants remains positive and strong. The factors behind that is A, our normalized growth rate, which we do our best to estimate. And what I would say is if you look at the last few weeks, which are the first few weeks that are really clean for the year, even the beginning of Q2 had some weather challenges, we are back to the type of growth rates that we have had for the last several quarters in 2017. The other -- if you look at also what industry analysts are saying, their outlook for independents has not changed. And as we talk about, we look at our metrics for growing, penetrating the lost customers, new or lost penetrating customers and there to -- when we account for weather or take those markets out of the equation, very consistent picture. So from an independent perspective, that is kind of some of the underlying color that supports the outlook that Dirk described in terms of same or better than last year. Dirk?

Sure. What I'll add is for health care and hospitality, we expect a little bit of acceleration from the normalized number we talked about in Q1, and then we expect the second half of the year for health care and hospitality to return really to a more 2% to 3% normalized growth rate. Also, our all other, as we begin to onboard new customers already in Q2, we will improve from where we were in Q1 and still expect to approach flat in the back half of the year. So all in, Ed, I think that means that from Q2, we expect Q2 volume to be roughly flat, maybe up a little bit from prior year. And our half two outlook, like I said, remains unchanged, returning to solid case growth, getting us to that 1% for the year.

Dirk, when you say Q2 volume flat to up a bit, are you talking organic or total?

Total because at this point actually, M&A doesn't have near as big of an impact in Q2, but it is total.

And then just one follow-up on freight; you mentioned freight getting a bit better. It seems like maybe even from internal sort of like management standpoint. Can you just elaborate? Are you having more success beginning to pass this through? Or are there other efforts to mitigate it?

Yes. So two things; one, the industry has gotten somewhat better. So the demand-supply imbalance that we experienced in Q4 is a little bit better. Still worse than prior years but better than what we saw in Q4. And then secondly, to your question, we -- our main efforts which are twofold around, and certainly we have the freight allowances from vendors that reflect underlying industry cost. And then secondly, we're optimizing our freight lanes as changing freight landscape. Those changes have started to take effect, and that's why we're seeing our freight income coming out of Q1 to be in a much better position than we did coming into Q1.

Your next question comes from Vincent Sinisi from Morgan Stanley.

Just going back to the case growth, of course, more on the planned exit. So kind of to Ed's question, as you mentioned, kind of the 1Q a bit below and maybe a little softer start with the weather in 2Q is obviously the top line guide adjustments. So hopefully, if we're now back to kind of more normalized levels there on the planned exit side, was 1Q right in line with what you expected from that? And are we now essentially done? Or do we have a little bit more spillover into 2Q?

Vinnie, this is Dirk. So Q1 other than the weather components, it really came in where we had expected to come in sort of for in all other and in general for total growth. I'd say the assets are largely behind us, and as I made reference to earlier, we're beginning to onboard more profitable new customers in all other and hospitality, etcetera, already in second quarter, and so that really gives us the confidence to make the statements we have about our continued acceleration and growth through Q2 and the balance of the year.

And then, maybe just if you can give some update, unless I missed it, just on the e-commerce side. Just give us a quick update where you are as a snapshot at the end of the quarter in terms of percent of sales, customers that's coming on from that, and any updates post the Investor Day that might be worth noting?

So as you can see from the chart, Vinnie, I think the exact number for e-commerce penetration is around 55%. So up slightly from where we've been, and we're continually -- we continually have new releases with some enhanced functionality, and we continue to work on ensuring that -- as I've said in other calls, we have many sales reps in many markets that are approaching 70%. So we're really focused on getting adoption in those markets and in those -- with those TMs that were below where it should be, and in our estimation, that's the gap between where we are and the 70% we see in some markets is more of an internal adoption than a customer adoption opportunity.

And your next question comes from John Heinbockel from Guggenheim Securities.

So Pietro, let me start with where do you currently stand on capacity availability across the network? And I ask from the standpoint of will national account culling -- imagine it would be an ongoing process, right, as you free up room for independents. Is that fair? Is the trick really sort of managing the pace of that so that you try to get to flat case growth and that all other as opposed some of the chunkiness we've seen in the last year or so?

Yes. So as we've said before, John, capacity is not necessarily the determining factor driving these exits. There is always a market or two that is filled with good business, and those are typically the first markets that we have on the list for a path for expansion. And we typically do a couple of those a year. So far, the exits that we've initiated really have been prompted by a look at the profitability of these customers, whether it was negative or low. And as Dirk intimated, the effort really is to place those with more profitable customers in the all other segment. And given that the reason we've said that Q1 really reflects them out because we believe we're nearing the end of this culling, and it'll be more than offset by the pipeline of customers with better profiles that we are pursuing and see in the pipeline.

Okay. And then maybe another topic or two separate ones. If -- where would be the new business manager hiring process or initiative, when does that begin to pay off in independent case growth? When do we see that? And will it be noticeable? And then where are you with the rollout of the Pronto initiative?

Okay. So the -- so as we've talked about over time, the team-based selling approach reflects a couple of desired outcomes. One is to focus, to concentrate our customers amongst our best sellers, and that's why the number of sellers has come down over time. And secondly, to support those sellers by, what we call, the sales support team. We put in a consistent approach to specialists and other sales support over the last two years, and the addition of new business managers is really the last leg of that stool. And that will be complete by the end of this year. In terms of the impact on sales with independent restaurants, what we would say is that initiative, along with the introduction of routines, along with the talent work we're doing, along with continue to evolve our technology, all of those support our midterm guidance of 4% to 6%. It's part and parcel of a number of initiatives that support our outlook. Do you want me turn the Pronto or do you have a follow-up on...

No, no, that's fine, that's fine. Yes, Pronto.

So as we talked about at Investor Day, Pronto is something -- is a bet that doesn't necessarily get reflected in the midterm guidance as one of three bets we are making along with CHEF STORE's foods direct in terms of getting better share of wallet amongst our core target customers. Pronto is around densely populated geographies where the long trailers aren't necessarily suitable, where customers have small storerooms and don't necessarily have the ability to take less frequent delivery. We are now in three markets in the U.S., and we continue to be very pleased with the results in those three markets. We are still very much in kind of prototyping, learning mode before we move to a more systematic expansion of that model.

Your next question comes from John Ivankoe from JPMorgan.

Maybe a follow-up on that; your independent organic case assumptions of 4% to 6%. How do you get to the high end? I think even in the first quarter, the fully adjusted number was 4.2%. And, I mean, you certainly didn't get to 6% in 2017. So are you expecting somewhat of a uplift from a macro perspective? Or I mean, if you can highlight how you can take that amount of share in order to get to 6% at the higher end in fiscal '19 and '20?

Okay. So the first thing is that's a range that applies to the three-year period of the midterm, right? So you would expect to see us step our way there over time in the balance of the midterm more than this quarter or next quarter. In terms of how we get there, it's not premised on a change in the macro environment. We believe the macro environment is positive and consistent, and part of the reason there is a range, of course, that could be cause the macro environment may change. It may change in a negative fashion. The way we get there gets to -- as we look at our ability to execute in a more consistent fashion across our markets, that's where we see an opportunity. Acts 1 and Act 2 of this company's transformation were really about great food made easy and being leaders in technology, leaders in product innovation, leaders in our selling model. As we look over the next three years, it's really about leveraging continuous improvement and becoming better execution. We believe that as a result of that, as we see that take hold, the journey we're on, we'll see both dividends on the volumes side as a result of that execution and also on the cost side of things.

Okay. And the follow-up, the promotion that was a 50 basis point negative lap in the first quarter, could you remind us what that was? And are there any laps for us to consider for the rest of '18?

No. At this point, it was predominantly Q1. We continue to refine our approach as we went through the year last year. So we don't expect much of an impact in other quarters.

Your next question comes from Marisa Sullivan from Bank of America Merrill Lynch.

I just wanted to ask about the case and revenue growth numbers. What is the M&A contribution contemplated in the revised outlook for 2018?

So the balance of the outlook is consistent with the way we frame it for the full year. It does not assume incremental M&A transactions. So it is assumed based on the deals we've completed to date. So the approach we've taken is consistent with probably what we did in February.

And then I know you touched a little bit on freight getting better. Is there -- what's just the outlook as we move into the summer? I know there was some commentary from one of your competitors that it may get incrementally worse. Is that how you are seeing it? And any kind of further commentary on how we should think about freight in the second quarter and second half?

So I think if you look at some of the industry forecasts, they call for it to be similar to maybe improve a little bit. What I would say is with the forecast, whether it's right or not, I think that the key thing for us is we are much better positioned as a company and then -- to deal with it because of the progress that Pietro made reference to on the success we've had in working with our vendors and changes in some of our internal processes to better optimize our lanes. So at this point, the forecast doesn't look like it gets worse, but if somehow things change, and it did get worse, so we're well positioned.

And just one last one really quick. I just want to clarify I think in earlier comment, you mentioned that you've seen quarter-to-date the independent case trends kind of improve back to the 4% to 6% range. Is that correct, what you're seeing quarter-to-date?

We have seen it improve in recent weeks as it resulted to more what we've achieved organically in the last few quarters. So we've seen that bounce back.

Your next question comes from Karen Short of Barclays.

So, I guess, I just want to take a step back to the Analyst Day, and what I'm curious about is and I mean, you did a firm, more or less, a firm guidance for the quarter and the year at the Analyst Day. So, I guess, I'm kind of wondering did anything kind of catch you by surprise towards the tail end of the quarter that kind of may be worse-than-expected weather because, obviously, your EBITDA growth this quarter was lower than expected?

So what I would say is the weather did continue further through the quarter and very widespread than we'd expected. If you remember, we had guided that back in February, we expected to be roughly 5%, and we finished at 4.2%. So not a lot of weather for that to make that small of a difference. So other than that, not much played out differently than what we had expected really coming into the quarter and more at the Investor Day.

And then just thinking about inflation, I missed this if you said it. What are your thoughts on inflation for the rest of the year? And, I guess, I'm also just wondering how should we think about LIFO? Because the number was quite a lot larger, obviously, and then we add it back. But it was quite a bit larger than I would have expected. So any color there?

Sure. So the 2.3% inflation that we saw in the quarter as you see is trending relatively in line with the 2% we had called for the year. And at this point, we don't see a whole lot of difference from what we had expected for the year in that 2% range. And I'd say from a LIFO perspective, to the extent you do have modest inflation, that would mean continued modest LIFO charges. I think that's the one thing about that line is it can be volatile from time to time based on inflation or deflation and really doesn't necessarily indicate the poor health of the business.

And then just last question for me; I guess the M&A landscape in general has kind of seemed to be a little slower than, I guess, any one would have expected when tax reform kind of first came about. Maybe any color there on what you're seeing?

So it's definitely been a -- we haven't had the expected announcements on our end that we'd expected. I don't think it has anything to do with tax reform, at least that's not what we're seeing. There were, in fact, a couple of deals that we were pursuing that we chose to walk away from, just didn't like we saw under the cover once we got in there. So I think from an M&A perspective, I'll take the question from the industry to ourselves, Karen. In terms of our outlook for M&A for the year, expect it to be towards -- we've always said three to five. At this point, for 2018, I would call two to three from the low end of the range, but we don't see anything in the pipeline, the number of active conversations we're having and our expected close on those conversations as we typically have, don't see anything to take us off the midterm guidance that we've given of three to five per year. The 2018 will probably be a slower year on that front.

Then would you -- so basically, you said you walked away from a couple. But is there anything else that you would attribute slight fullness to? Is it quality of the assets is just maybe not quite as robust? Or just less interest in selling?

Doesn't seem to be. Still lots of targets, still a target-rich environment, still folks interested in having conversation. What we find is sometimes, because there's not a lot of good data and these are small companies, sometimes you don't really know what -- on your target list whether companies materialize as you would expect them to; so in our minds really, no change in our outlook. As we've always said, it's good to be a little bit lumpy, and this 2018 is going to turn out probably to be a little bit of a slower year than others we've had and others we expect in the future.

Your next question comes from Kelly Bania from BMO Capital.

Just wanted to clarify and make sure I understood the guidance, maintaining the 6% to 8% EBITDA growth, should we really expect the low end of that given the revisions to sales in case? Or is that range still fully achievable? And are you also still expecting gross profit growth of 4% to 5% in 2018?

What I'd say is, at this point, I wouldn't infer the low end. I think we feel very confident in the 6% to 8% range and really when we factor in really the impact in this one quarter of volume and not a large impact on the full year, and then we look at that in conjunction with other areas of our business, we're still confident in the range. What I'd say is the overall gross profit for the year is similar to what we're achieving in the first quarter. We like that we'll be at the lower end of the range for Q2 because as we've talked about, we're in sequential acceleration throughout the year. But for the year overall, still feel very good.

So, I guess, just further on that, I mean, what -- is there an area where things are coming in better and expense -- better-than-expected, I guess, expenses? Or is that the way we should think about it?

Just really across the business, it's -- when you look at the impact on volume, it doesn't take much different performance than -- whether it's gross profit, OpEx, etcetera, to really mitigate some of that. And what I'd say is just the health and a number of other areas really mitigate the impact.

And then just one other one; given how large the decline in all other was and the exits there, there's a big mix impact, I believe, on the overall business. So can you just help us understand kind of what the underlying run rate for, if you can, at least gross margin and expenses? If you take out -- if you try to isolate kind of that mix impact?

Sure. So I'd say is -- so on the OpEx side, it's a smaller impact. Really, the bigger impact is really around the things we called out just from the sheer math of the lowercase volumes of the fixed-cost leverage component plus the weather. On the gross profit side, it really reinforces we've talked about the power of mixing customers with the right target customers. Kind of our $0.19, roughly 40% or so of that comes from the combination of the exits plus the growth with the more profitable customer types; so clearly showing up.

And your next question comes from Greg Badishkanian from Citigroup.

It's actually Fred [ph] on for Greg. We've seen better trends from the casual dining indexes over the past few months. Can you just talk about what you're seeing in that category? Do you think we're sort of in early stages of a recovery? Or is it still a little too early?

Yes, it's hard to tell, to be honest. We are more focused on independent restaurants because that's a target for us in terms of the capital dining with shopping in all other as one of the different types of concepts we see in the all other. And what I would say is what we see from our internal numbers and the all other segment in terms of same-store sales and around customers, typically in line with what we see with external benchmarks.

And then entering the year, there was some talk across the sector about a more normalized pricing environment for some of those national accounts. Have you seen any signs of that?

It's hard to say because every one of these larger accounts has a very unique situation, and it's typically an RFP-type situation, which is one of the reasons why -- sorry one of the reasons why it's less attractive to us than the independent business. We've seen some isolated instances of customers having perhaps a different appetite from a pricing perspective but I would say it's not sufficient to generalize.

[Operator Instructions] Our next question comes from Judah Frommer from Crédit Suisse.

Maybe first on just getting back to the freight issue. I mean, you called out vendors as someone you're able to maybe push back a little bit on both on freight as well as for a gross profit driver in terms of vendor management. So kind of can you give some color on just how conversations with vendors are going in this environment, where it seems like they need to be the ones that are pushed back on?

Yes, I wouldn't characterize as pushing back, and I would go back to -- or I think it was our last call where we talked a bit about how the freight environment works, right? So if the vendor delivers on their truck, then there's no impact from a freight perspective unless they modify their price to us in which case, that gets passed on to the customer with different timing depending on whether it's contract or not. The issue has been where we -- when we manage the freight, and it's not on our trucks, it's on external carriers. The spot market going up as a result of the tightening of capacity is what's had an impact on us. And so when we pick up, we have an allowance. Think of it as revenue from the vendor and so what we do is we need to sit down, and we visit that allowance based on the changing market conditions. And those conversations happen periodically. It's just because the shock to the industry was so significant in Q4 of last year, there were far more conversations that needed to happen in a short period of time, and those conversations were of a greater magnitude than typically is the case, which is why we've referred to as an important lever in terms of getting to the freight income line back to earth has been historically, And I believe now, we're -- while the industry still has its capacity challenges, those freight allowances I was referring to reflect the tighter industry that we're experiencing.

And then maybe just changing gears quickly, anything on the technology front in terms of competitors' assets? Is there anything cropping up in the industry where you see more competitive environment in the customer-facing technology? Or do you feel you're still well ahead of the curve there?

So we believe we're still ahead of the curve. I think part of the customer experience we had at our Investor Day where people had a chance to talk to our folks in the field who present our technology or even to customers, they would tell you the customers that -- we have the chance to look at different alternatives, they would say that we still have a significant lead in terms of our technology and the features of our technology. Obviously, our competitors talk about technology much more than they used to. But as you also know, any company that has innovation as its focus is always focused on uncovering the next generation, next series of pain points to inform next generation of technology. So while competitors are doing some of the things that we did three or four years ago, we're on to the next wave and series of enhancements that makes it easier for our customers to do business with us.

Your next question comes from Ajay Jain from Pivotal Research.

Yes. I had a question on the impact of the planned exits of some of your multiunit customers. Maybe you already called this out, so I apologize if that's the case. But can you confirm that what the relative sales impact was from those customers leaving? What the impact of the lost sales was in Q1?

We haven't specifically quantified the impact to that, but I will tell you is that the bulk of the decline in all other is driven by the exits. So that gives you, I think, a good sense of the impact on the broader business. And like I said, we have the bulk of those exits behind us and continue to -- we'll improve from the Q1 low.

And were those customer exits all contemplated at the time you gave your preliminary guidance a few months ago? Or was any of that impact unexpected like based on competitive activity, for example?

No, they were all expected. The primary impact on the volume difference from what we had expected a few months ago was really the continuation and widespread nature of the weather throughout the quarter.

And I think, Dirk, you mentioned that you're expecting more normalized trends in health care in the back half of the year. But to the extent that there was a more broad-based slowdown in organic case growth this quarter, I'm just wondering if there was anything else apart from weather that's behind the sales decline in the other customer segments, specifically in health care and hospitality.

Not really. The way I would think about that as we've talked about, health care and hospitality tends to be a lot of larger customers. And so from time to time, it can be lumpy, and it's not as consistent as other areas. So where you saw, we had stronger growth last year in certain parts of the year, this quarter just happened to be one of those where we lapped. And will be, in fact, beginning in Q2 or Q3 -- beginning to onboard some new customers as well and continue with our growth because that remains a very important part of our growth strategy going forward.

And we have no further questions at this time. I'll turn the call back over to Pietro Satriano for any closing remarks. Please go ahead.

Thank you. So just in closing, as we said, solid results, in line with our revised expectations given the headwinds. We remain very confident in our strategy and very confident in the outlook that we have shared with you going forward. I'd like to take this opportunity to thank our 25,000 employees, who have committed to helping our customers make it every day. And I would like to thank all of you for joining us today. Thank you.

This concludes today's conference call. You may now disconnect.