The Chefs' Warehouse (CHEF) Q1 2019 Earnings Call Transcript

CHEF earnings call for the period ending March 31, 2019.

Motley Fool Transcribing
Motley Fool Transcribing
May 2, 2019 at 1:24AM
Consumer Goods
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The Chefs' Warehouse (NASDAQ:CHEF)
Q1 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to The Chefs' Warehouse first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, general counsel and corporate secretary for The Chefs' Warehouse. Please go ahead.

Alex Aldous -- General Counsel and Corporate Secretary

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 first-quarter 2019 earnings press release.

It can also be found at www.chefswarehouse.com under the investor relations section. Throughout this conference call, we'll 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 first- 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?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Thank you, Alex, and thank you all for joining our first-quarter 2019 earnings call. Building on our 2018 performance, we started 2019 with continued strength in customer demand and good execution by our teams in the first quarter. During the quarter, we delivered solid organic growth, expanded our customer base and executed on a key acquisition in the center-of-the-plate category with the acquisition of Bassian Farms. We generated strong year-over-year top line and gross profit growth, despite challenging weather in our West Coast and Midwest regions.

I'd like to thank our entire team for delivering The Chefs' Warehouse premier product and experience to our customers as we continue to make progress on technology and market expansion initiatives. A few highlights from the first quarter include 5.6% organic growth in net sales, specialty sales were up 6.6% organically over the prior year, which was driven by unique customer growth of approximately 6.2%, placement growth of 5.2%, and specialty case growth of 5.2%. Organic pounds growth in center-of-the-plate was 3.1%. Gross profit margins increased approximately 30 basis points.

Gross margins in the specialty category declined 39 basis points as compared to the first quarter of 2018, while gross margins in the center-of-the-plate category increased 106 basis points year over year. In addition, gross profit dollars grew approximately 13.4% versus prior-year first quarter. In a moment, Jim will provide more details on margins in a few moments. As we announced in February, we are excited to add Bassian Farms to our growing Northern California markets and The Chefs' Warehouse family of companies.

Bassian will focus on delivering high-quality natural, sustainable, local and antibiotic-free center-of-the-plate products to our growing customer base in the Bay Area and beyond. We have already begun combining production operations and over time, we'll realize further operational and distribution synergies throughout integration. We welcome Lee, Dan, and the entire Bassian team to The Chefs' Warehouse and we look forward to growing our Northern California market together. We continue to progress on multiple systems and operational process improvements during the first quarter.

We initiated the process of converting our Texas operations to our ERP platform. This go inside with our move into our new Dallas facility, we expect to complete this conversion this summer. Our Philadelphia ERP conversion is scheduled to begin later in 2019 with our West Coast sites coming on in early 2020. Customer adoption of our e-commerce platform continues to grow.

As of April, we estimate sales on e-commerce and mobile platform represented more than 11% of total organic revenue and 15% of all specialty orders placed online. Additionally, more customers are using the mobile platform to communicate orders as approximately 18% of online revenue came via mobile. During the quarter, we continued our roll out of truck scanning across our distribution centers. Our Chicago distribution center was live in the first quarter and New York went live in April.

While early in the process, initial results have shown year-over-year reduction in errors and credits on a per cases basis. Our Northwest Ohio and Florida markets will follow with implementations during the remainder of '19. In addition, SmartDrive camera technology has been installed in our New York fleet during the first quarter with several other markets under way in the second quarter. We continue to make progress on several facility expansion projects, as of mid-April, 2019, we begun operations out of our new distribution center in Dallas, Texas.

The 85,000 square-foot of freezer, cooler and dry space provides us with considerable capacity to grow this important new market. Additionally, during the first quarter, we signed a lease for our new facility in Los Angeles and expect to begin design and buildout in the second-half 2019. In the near term, we are focused on finalizing site selection for our new facility to support our growth in Florida. Once again, I would like to thank all of our teams for delivering a strong first quarter and helping to build The Chefs' Warehouse platform we have today.

The continued dedication in serving our customers allows us to focus on continuous improvement in the near term and at the same time, make the investments required to deliver the long-term growth. With that, I'll turn it over to Jim to discuss more detailed financial information. Jim?

Jim Leddy -- Chief Financial Officer

Thank you, Chris, and good afternoon, everyone. Our net sales for the quarter ended March 29, 2019 increased approximately 12.1% to $357 million from $318.6 million in the first quarter of 2018. The increase in net sales was the result of organic growth of approximately 5.6% as well as the contribution of sales from acquisitions, which added approximately 6.5% to sales growth for the quarter. Net inflation was 1.3% in the first quarter, consisting of 1.4% inflation in our specialty category and inflation of 1.3% in our center-of-the-plate category versus the prior-year quarter.

Gross profit increased 13.4% to $90.2 million for the first quarter of 2019 versus $79.5 million for the first quarter of 2018. Gross profit margins increased approximately 30 basis points to 25.3%. While inflation and deflation by protein category was a mixed bag in the first quarter, continued enhancement in our pricing and sourcing practices and our center-of-the-plate category contributed to first-quarter margin improvement. Year-over-year specialty margin, while remaining at a historically strong level, was impacted by significant inflation on larger categories such as cheese and baking ingredients as well as some impact from product mix.

Total operating expense increased approximately 13.9% to $84 million for the first quarter of 2019 from $73.8 million for the first quarter of 2018. On an adjusted basis, as a percentage of net sales, operating expense -- expenses were 21.6% for the first quarter of 2019, compared to 21.2% for the prior-year first quarter.The majority of the year-over-year increase in operating expense as a percentage of revenue is attributed to facility-related costs associated with our investment in the Texas market and other acquisitions completed over the past year as well as timing of certain corporate-related costs versus the same period in 2018. This was partially offset by lower distribution and selling-related costs as a percent of revenue.Our operating spend in the quarter was in line with our expectations. It is important to note that in the context of the year-over-year comparison, the first quarter of 2018 generated a 130 basis points of operating leverage as measured by a percentage of revenue as compared to the first quarter of 2017.

In terms of our outlook for the remainder of 2019, the comparisons to 2018 on a quarterly basis ease significantly. This was reflected in our updated full-year guidance released earlier today. In addition, our updated full-year guidance shows improvement in our expected gross-profit dollar growth to adjusted operating spend growth as compared to our full-year 2018 results, as well as through our original 2019 guidance given in January. Operating income for the first quarter of 2019 was $6.2 million, compared to $5.7 million for the first quarter of 2018.

The increase in operating income was driven primarily by increased gross profit, offset in part by higher operating expenses. As a percentage of net sales, operating income was 1.8% in both the first quarter of 2019 and the first quarter of 2018. Interest expense decreased to $4.6 million versus $5 million for the prior-year first quarter due primarily to lower effective interests charged on the company's outstanding debt and the conversion of two equity of the $36.75 million of convertible notes during the third quarter of 2018. Income tax expense was $0.4 million in the first quarter of 2019, compared to $0.2 million for the first quarter of 2018.

The increase in income tax expense is primarily due to higher pre-tax income versus the prior-year first quarter. Our GAAP income was $1.1 million or $0.04 per diluted share for the first quarter of 2019, compared to net income of $0.5 million or $0.02 per diluted share for the first quarter of 2018. On a non-GAAP basis, adjusted EBITDA was $13.2 million for the first quarter of 2019, compared to $12.1 million for the prior-year first quarter. Adjusted net income was $1.4 million or $0.05 per diluted share for the first quarter of 2019, compared to adjusted net income of $0.8 million or $0.03 per diluted share for the prior-year first quarter.

We ended the first quarter of 2019 with $17.3 million in cash. In March of 2019, Moody's upgraded Chefs' corporate credit rating from B2 to B1. As of the end of the first quarter of 2019, net debt to adjusted EBITDA was 3.4 times. Turning to our guidance for 2019.

Based on the current trends in the business, we are updating our financial guidance to be as follows: We estimate that net sales for the full year of 2019 will be in the range of $1.56 billion to $1.61 billion; gross profit to be between $399 million and $409 million; net income to be between $28.4 million and $31.4 million; GAAP net income per diluted share to be between $0.95 and $1.05; adjusted EBITDA to be between $89 million and $93 million; and adjusted net income per diluted share to be between $0.97 and $1.07. This guidance is based on an effective tax rate of approximately 27.5% for 2019. Our full-year estimated diluted share count is approximately 30 million shares. Thank you and at this point, we will open it up to questions.

Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Renato Basanta with Barclays. Please proceed with your question.

Renato Basanta -- Barclays -- Analyst

Good evening and congrats on the nice quarter.

Jim Leddy -- Chief Financial Officer

Thank you.

Renato Basanta -- Barclays -- Analyst

Hey. So first, can you just talk about the cadence of case growth in the quarter? I think you referenced some January weather issues on your last call, and obviously, March is an important month. But you also, I think, had some easy comparison March. So I guess, first, if you could talk about the cadence of sales in 1Q, what you're seeing quarter to date and any regional color that will be helpful.

Jim Leddy -- Chief Financial Officer

Sure. So yes, I think on the Q4 call, we talked about other than the polar vortex at that point, we hadn't really seen anything out of the ordinary in terms of our case and volume growth. I think the quarter was pretty steady across the quarter, March was a very strong and for us. We had pockets of weather, the significant rains on the West Coast, you had the government shutdown for a little bit in the Mid-Atlantic region.

And then, you had the polar vortex in the Midwest. Other than that, other than those kind of pockets of weather, we had pretty steady as expected volume growth throughout the quarter.

Renato Basanta -- Barclays -- Analyst

And quarter to date?

Jim Leddy -- Chief Financial Officer

You're talking about April in Q2? Well, I mean, other than the Easter shift, we haven't really seen anything quarter to date that we would call out as compared to Q1.

Renato Basanta -- Barclays -- Analyst

OK. That's helpful. And then just curious on the gross margin. Your specialty grosses were down about 40 bps and then center-of-the-plate about 100.

I know you mentioned some of the inflation, I think, in cheese and baking, but can you just talk a little bit more about some of the drivers there going forward? You had some harder comparisons coming up in center-of-the-plate. So wondering if you will expect a reversal there and then maybe an improvement in specialty. Any color on the puts and takes there would be helpful.

Jim Leddy -- Chief Financial Officer

Sure. So just in terms of the quarter and the 39 basis points, about half of that was product mix primarily from acquisitions -- acquisition wrap. So the business that we're building in Texas has lower than our average across our total business in specialty margins. And so that's providing a little bit of a year-over-year drag.

And the rest of it was, as I said, we had pretty broad-based inflation across our categories in specialty. But in some of our larger categories like cheese and baking and pastry ingredients, we saw 4-plus percent inflation in the quarter and that's really the balance of it. But I would add is that, when we look at our specialty gross-profit margin in Q1, it's at our historically strong levels from an overall level perspective. So we're pretty happy with the performance in the quarter.

Renato Basanta -- Barclays -- Analyst

OK. And then just on the corporate expenses timing, can you just give us some context there, maybe help quantify the impact? And if we should expect a commensurate reversal in 2Q?

Jim Leddy -- Chief Financial Officer

Sure. So in terms of corporate, it's mainly driven by the corporate-related benefits that we recorded in Q1 of 2018 and we are comping against than. We did had a little bit of carryover of elevated medical expenses in Q1, this past Q1 of 2019, not at a level we saw in Q4 but still higher than our historical level. This is driven by claims, the variable portion of it, our fixed medical cost on a per employee basis are still fine.

I mean it's really just the claims related, but it's mainly driven by the comp portion of that. That was about half of the 40 basis points of operating leverage impact. The other half was, as mentioned in the prepared remarks, facility-related expenses, mainly related to the acquisitions that we completed after Q1 of 2018.

Renato Basanta -- Barclays -- Analyst

OK. Great. Thanks for the color and best of luck.

Jim Leddy -- Chief Financial Officer

Sure. Thanks.

Operator

Our next question comes from the line of Chris Mandeville with Jefferies. Please proceed with your question.

Chris Mandeville -- Jefferies -- Analyst

Good afternoon. Just a follow-up on Renato's question with regards to inflation. Can you just review, I think, you mentioned that there was a bit of a mixed bag on center-of-the-plate. What exactly transpired there specifically within the categories? And I suppose pork has been quite topical of late, so what are you seeing within that protein and how you think about that going forward?

Jim Leddy -- Chief Financial Officer

Yes. In general, it was a mixed bag, we had inflation in certain higher end and preamble cuts like sirloins and tenderloin and even the higher end choice and some of those categories started out deflationary, but became more and more inflationary as we progressed through the quarter. And then on the low -- middle and lower end meats, we actually experienced a lot of deflation. So it was generally a mixed bag.

As I mentioned in the -- in our prepared comments, some opportunistic and improved buying practices as well as improved margin management, and we are able to take advantage of some of that deflation and drive higher margins. We also had the benefit of a good comp this quarter. In terms of pork, I don't have any specific thoughts on it right now.

Chris Mandeville -- Jefferies -- Analyst

OK. And then correct me if I'm wrong here, but I believe fuel cost were a fairly sizable headwind to you in 2018. So how did that look year on year in Q1? And how are you thinking about that for the remainder of the year?

Jim Leddy -- Chief Financial Officer

Yes. I mean it started out looking really good, but if you've paid attention to diesel prices, they stayed elevated. When you look at it year over year, it was roughly flattish. The real benefit we would see within the second half of the year if fuel prices were to stay at the level that we were seeing earlier in the quarter.

But the recent rise kind of mitigated that. Obviously, we don't know what's going to happen in the second half of the year, but if there is any benefit from the year-over-year comp on fuel, it will happen in the second half of the year.

Chris Mandeville -- Jefferies -- Analyst

And presumably that would be upside to how you're calling out guidance today, is that fair?

Jim Leddy -- Chief Financial Officer

I mean our guidance is a range that would cover, I think, that level, unless there was a cratering in gas prices. And I don't know if anybody sees that on the radar right now.

Chris Mandeville -- Jefferies -- Analyst

OK. And then just the last one for me as it relates to the guidance range -- or excuse me, the guidance raise. Is that just purely a function of the Bassian Farms acquisition or are there any maybe minor offsets or minor incremental items to consider within the call it $3 million EBITDA increase?

Jim Leddy -- Chief Financial Officer

Yes, sure. Thanks for the question. The change is almost purely Bassian. And then think about our guidance following Q1 being effectively unchanged from our original guidance.

So our original guidance, we guided to year over year on a full-year basis, improvement in both gross-profit margin and operating leverage as a percent of revenue, as well as the gross profit dollar to adjusted opex GAAP. That has improved with the addition of Bassian. But going back to my remarks, Q1 is really comp-driven from an operating leverage perspective. And we were still on -- we are still on track to meet our full-year guidance, and obviously, it's improved slightly with the addition of Bassian.

Chris Mandeville -- Jefferies -- Analyst

Good. Thanks guys.

Jim Leddy -- Chief Financial Officer

Thanks Chris.

Operator

And our next question comes from the line of Andrew Wolf with Loop Capital Markets. Please proceed with your question.

Andrew Wolf -- Loop Capital Markets -- Analyst

Thanks. Just want to talk on the gross margin on the center-of-the-plate. So it sounds like there was a little bit of opportunistic profit in there, but just wanted to ask you sort of systematically in terms of systems processes, just better management practices. How much more is there to go on this business? I'm not talking about 100 basis points a quarter, but just is there something systematically that's going to continue to make this business reach a profitability level that's where you wanted to get or is it approaching that?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Yes. I think, Andy, when we got into center-of-the-plate a few years back, we said it was a new business for us. And it was about building the team, building the information, the transparency that we had at Chefs' into the protein business and we will get better every year. And I think that we're starting to see that.

I still think we have plenty of room to keep improving. So we had a shift in management, John Pappas actually is overseeing the protein division and the changes that they've been making, they keep getting better and better. So we are a specialty protein company. And we're starting to, I'd say, act and execute more, introducing a lot of new product lines and more in line to help Chefs' seized the business with lots of choices, lots of antibiotic, hormone free, lots of loco, lots of [indiscernible].

So we keep -- we're making it more and more of a branded company, more like the rest specialty of CW. So I'm extremely optimistic of where protein is going and I think the best years are coming. Management team continues to get better. We have great people and I think they're just getting better and better and I'm really excited about that division.

Andrew Wolf -- Loop Capital Markets -- Analyst

That sounds good, Chris. Is there a scale advantage at this point toward buying and things like that local due to sort of specialty nature of it or is there some scale advantage of it?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

I think the scale always helps. So I think as we scale, there will be a benefit. But the big scale, specialty is in the new markets where we're small. It's really -- the logistics is killing everybody in the trucking business today, we saw a big increase, it's kind of stabilized, but really the big advantage of getting bigger is, you get better freight rates and it adds up to a lot of money.

So I think as we continue to scale, we will get the tailwind in the freight cost.

Andrew Wolf -- Loop Capital Markets -- Analyst

Great. That's kind of a good segue. The other question I wanted to ask is kind of in the similar vein as if you could maybe give us just a thumbnail sketch of where you're at in Texas, I know it's not that big yet, but I know you've talked about in the past as potentially one of your bigger markets in sometime in the -- as you grow continue to grow the business. So as you put in this new facility, what can you go from what to what? And sort of what's your -- kind of where do you think the business gets in a few years?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Yes. Again, I think Texas is top three. Every time I fly over Texas, I realize how big it is and lots of hungry people would like to eat out. So it's a perfect market for Chefs' Warehouse.

So we just actually moved into our new facility by a week ago I believe. So I'd say, in the first inning and for this year, it's -- again, it's building, it's hiring sales reps, it's adding product, it's a lot of training. So we'll continue to grow, I think we'll have a good growth here. But really, we're looking at Texas that every year it gets better and year four and year five, it starts to really start to throw off the kind of returns that we're expecting.

So it's a long-term investment, I'm optimistic just like I was in San Francisco and Chicago, a great tuck-in would do wonders. So we'd love to see us find a good tuck-in or two now that we have the space. But at the same time, we keep marching, we got a great management team and we are hiring, signs everywhere, Chef is hiring in Texas. So we're hunting for talent and we continue to put great people into the organization and I think next year, yes, again, next year is a big step forward.

And then year three, four and five we'll start to reap the benefits.

Andrew Wolf -- Loop Capital Markets -- Analyst

Just the last question, maybe for Jim and I might have missed this, but what kind of inflation expectations do you have baked in into the guidance really into sales guidance?

Jim Leddy -- Chief Financial Officer

Yes. Sure. So we haven't really changed our outlook. So I think in -- when we reported in February, moderate inflation on a total level and that's kind of 0% to 2% on the specialty side and then flattish to 1%.

Averaging out to kind of flat to 1% on a full-year basis, kind of very similar to what we saw in 2018.And so if you look at our top-line guidance as it's been updated, it implies kind of 9% to 12% top-line growth. You think about that as organic growth of 5% to 7% with about a point of inflation in there and then M&A with the inclusion of Bassian on a prorated basis and then the wrap from last year's acquisition is about 4% to 5%. So that kind of breaks down the top-line guidance as it's been updated.

Andrew Wolf -- Loop Capital Markets -- Analyst

Great. So it's neutral year over year. If you had your[inaudible] where would you like to see inflation, about 2% to 3%? Like where's the sweet spot where add your sales, but doesn't squeeze your margins too much?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

I think 1.5% to 3% as long as it's not all at once and with some volatility is the perfect environment for us to operate in.

Andrew Wolf -- Loop Capital Markets -- Analyst

That's it for me. Thank you.

Operator

Our next question comes from the line of Kelly Bania with BMO. Please proceed with your question.

Kelly Bania -- BMO Capital Markets -- Analyst

Good evening. Thanks for taking my questions. Just a couple more on Bassian Farms. Are you planning for or expecting any attrition there? And just with a couple of months now, just maybe how you're feeling about how that's going and how it's being integrated into the Chefs' family? And then you talked about some synergies, maybe just expand a little bit on what areas you see those are in and the timing on those?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Sure. Great questions. Yes. So Bassian was a great addition to Chefs'.

It was a perfect cultural fit. So we gained a great well-trained sales force and owners that are experts and actually were in line with Chefs' as marketers and brand builders. So the only attrition -- I mean it's more of a growth story, Kelly, over the next five years, we expect the combination to have a great growth of Chefs' Bassian. In the short term, maybe where there's some overlap, the customer may choose to bring some -- another purveyor in just to have more competition usually happens.

But we are really optimistic that we can grow their customers. And they can help grow ours with some of the lines that we've acquired with the acquisition that are perfect fits to our customer base. So let's say maybe first six months getting into the shoe and getting the shoe to feel comfortable and then I really expect it to be a growth story.

Jim Leddy -- Chief Financial Officer

And Kelly, just as we mentioned in the prepared remarks, we've already combined production operations. So we're getting a limited amount of synergies already there. And then, as Chris mentioned, it is an eventual fold in, we are being thoughtful about that process to make sure it goes very smooth. And we're looking at their footprints in distribution and facility within the context of our overall San Francisco platform.

And so that work is being done now. So there are future operational distribution synergies down the road, we're just being very thoughtful and -- about it and it will come in over the next year or two.

Kelly Bania -- BMO Capital Markets -- Analyst

OK. Great. And maybe just another one on Texas. Just -- can you help us think about how the expenses maybe ramped there as you start to hire and grow out the new facility? That will be helpful.

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Sure. Yes. It's built into the guidance, so '19 is an investment year. So as I tell the rest of the team, we're carrying Texas on our back right now but the potential is so enormous.

So I think we've built in, adding tremendous amounts of SKUs, new salespeople, managers that's all built into the guidance for 2019. And I think 2020 as we start to get the rewards in 2021, '22 we expect it to really accelerate.

Jim Leddy -- Chief Financial Officer

And then Kelly, I'll just add that, I talked about earlier that about half of that 40 basis points of deleverage was Texas and acquisition-related facility cost. And that's really just a straight line impact of having it in Q1, whereas the bulk of the revenue growth comes in the higher revenue quarters that follow. So that's basically the impact year over year.

Kelly Bania -- BMO Capital Markets -- Analyst

OK. Great. And then maybe just the produce category, you had talked about maybe kind of starting a little bit with that, I think, in the New York city market, maybe just if you've learned anything with that? Or what you think that category could bring to Chefs'?

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Yes. Again, as I look at Chef, I think I've laid it out the way Chef looks say, five years from now, I think fresh has -- at least $0.5 billion of increased sales, I think, comes from the fresh division. It's a division that we are just touching on now. We're seeing the acceptance from our customers and the opportunity really to leverage the sales force and the relationships and the truck routes.

We think that the customers want Chefs' to carry fresh. So we're really excited about what we're going to do organically in our growth. And what we could also in fold-in and acquisitions that could really add to the whole Chefs', we call it the Chefs' family of offerings. So we're really excited about fresh.

Kelly Bania -- BMO Capital Markets -- Analyst

Perfect. And last one for me, you talked about the truck scanning and the reduction in errors and credits. And so I was curious if you think about, as you roll these out to the remaining markets, what's the impact of that? Is that a gross margin or an expense benefit? And is that a meaningful thing that you can maybe size up for us?

Jim Leddy -- Chief Financial Officer

Yes. I mean it's very early innings, this is a -- we've been scanning onto the truck for a year or so now, and now we're just rolling out the off-truck scanning. We are seeing some benefit, the benefits will come in both opex and gross profit. So we'll have better inventory management as a result of reduced errors and returns and things like that.

And it'll help us better manage the overall warehouse expense in terms of whether it's over time or hour. So it just contributes to overall efficiency. I don't know whether -- we want to still roll this out and get a better sense of what we're learning from it and there's a lot of training involved. So we're not in the place where we're going to be quantifying it but we may down the road.

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Yes. It's kind of a must do, Kelly. So when -- as I tour our operating units and talk to customers and salespeople and I think part of the reason you see such strong organic growth for us is really our service levels and something that you can't measure. But I think that one of the reasons that we do have such great royalty sides, our great people and our incredible products is at that our service levels, our service levels are better than our competitors and that's what I'm hearing from customers.

And I think the scanning process and getting an order delivered correctly, really goes a long way. I think you can't underestimate customer satisfaction. How they reward you is they give you more business. So as we add categories and ask customers for more categorial growth, it's hard to ask them when you're not delivering what they want already.

So it's just an important factor to get the delivery, to take the order correctly, use the better technology for taking the orders and online helps with that. And then actually, picking and delivering it correctly goes a long way for asking a customer for increased category growth, which is really key to our growth. So we're very excited about it.

Operator

Thanks. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Chris Pappas for closing remarks.

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Yes. Well, we thank everybody for joining us on our first quarter call here in the rainy Northeast. So we are looking forward to the sun starting come out this spring and a great second quarter, and hopefully, everybody joins us for our second-quarter call. So thank you very much for joining and have a great evening.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Alex Aldous -- General Counsel and Corporate Secretary

Chris Pappas -- Founder, Chairman, and Chief Executive Officer

Jim Leddy -- Chief Financial Officer

Renato Basanta -- Barclays -- Analyst

Jim leddy -- Chief Financial Officer

Chris Mandeville -- Jefferies -- Analyst

Andrew Wolf -- Loop Capital Markets -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

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