The Chefs' Warehouse, Inc. ($CHEF)

Well, good morning, everyone. I'm Mark Carden, the North American food retail and food distribution analyst at UBS. Thanks so joining us today. We are thrilled to have the team from Chefs' Warehouse with us. We have Chris Pappas, the company's Founder, Chairman, President and CEO; and Jim Leddy, the company's CFO. And we're going to dive into questions. And appreciate you guys joining us today. If you guys do have any questions throughout the presentation, please feel free to use iPad, and we can read them into the conversation.

But maybe to start, obviously, there's a lot that's going on right now with the consumer, and we'll get into the Middle East in a little bit, but we'll start more high level with the overall business. And you guys have operated a really resilient business. That's been holding up better for you guys than it has been for the broader food away-from-home industry at large. Just what's the latest on the state of your consumer?

So our customers' customer seems -- I've always thought that when we started the business 40 years ago, we went into different types of customer base, food service, trying to find our path. And obviously, we followed our passion, which was great food, selling to great chefs. And not a lot has changed in 40 years that customer's customer is very resilient. There's always conferences, there's always business dinners and luncheon. There's always high-end travel. There's always birthdays, bar mitzvahs, holiday parties. So it continues to be extremely resilient sector of food away from home. And it's -- I think we said -- we saw last year was a great year, and we said coming into this year, we just saw the momentum continuing.

Then at the end of the quarter, there was some talk about disinflation coming into play, and that has been a bit of a shift. But obviously, there's been a lot going on in the world today. Any shifts to how you're thinking about the inflation outlook over the course of the year ahead? And just how it could impact your broader margin structure?

Yes. It's a good question. We're very diversified not just regionally and categorically, but we have 90,000 SKUs going through our distribution centers around the country and in Canada and the Middle East. And within those, we might have hundreds of different products that we're a solutions company, we provide our customers with solutions, we import from over 40 countries around the world. So having that diversification allows you to really manage inflation and deflation very effectively. And if you have a weather event in Spain, you can use your private-label olive oil in Turkey or somewhere else to provide a customer with a really good solution. So things like tariffs, significant inflation, we saw pretty significant volatility in protein this last year. And then also on the deflation side, we saw dairy products highly inflationary last year and then deflationary this year. And yet we continue to manage that very effectively. And you may have significant inflation in certain products deflation. But if you look back in history, we always land in this kind of aggregate inflation environment of kind of 1% to 4%. And that's what you saw last year saw about 3% to 3.5% inflation company-wide despite tariffs, despite significant volatility and in some of those products like protein. And so I think our team has just become very effective at managing that.

And you touched on the point of tariffs. Obviously, we've seen a shift recently just with the courts tariffs, 10% to 15% global tariffs potentially going into place. How does this impact your sourcing strategy with some of the specialty products that you guys import? And just talk a bit about your detail approach your assortment and the degree of flexibility that gives you.

Yes. I mean it really doesn't change the way we go about -- we offer good, better, best, right? That's what Chef's Warehouse is known for, selling upscale casual to 4-, 5-star best restaurants, hotels in the world, right? And we leave it up to our customers. I mean we have over 1,000 people in our sales department. So of course, they're pitching what we'd like to sell. But ultimately, the customer makes the choice. And I think when you're dealing with $20, $30, $40, $50, $60, $70, $100 entrees that we're talking about, no one's not going to order something for a dollar. So that's why I really like our sector, and we continue to get better at every part of the business. So yes, nobody likes to see prices go up. Like Jim said, I'm amazed when I look at it because you hear the news, it's either massive inflation or it sounds like massive deflation. And then we look at it and like, it's like 2% overall because we sell such a giant mix of products. But the tariffs, I think the first round, our manufacturers, our farmers, growers; I think they passed on some, ate some of it. I think this time, it's -- we -- I think we're getting so used to it, we're like, okay, what does this mean now? And I think that we really don't know because the new tariffs replace the old tariffs, but a lot of products had tariffs anyway. So I think the difference is not something that is significant. And none of our departments, our category managers are panicking. Like Jim said, we offer -- olive is a great example. We import olive oil from Spain, from Italy, from France, from Greece, maybe from Tunisia, even from Argentina, from Australia. So we have lots of different options. And we leave it up to the customers, what profile they want. Do they want to save a dollar? They want to stay where they are? And I think after 40 years of building this thing, it works because we do have the solutions and the options for customers to make their choices.

Interesting. Was the customer as nimble as you would have expected, call it, a year ago just in terms of switching from maybe that olive oil that was maybe going from Italy to product from Italy to a product from Greece, that product from Tunisia?

I think the -- again, our group of customers goes from a really good takeout coffee shop that wants better croissant than a better assortment of things to sell. That's not $100 an entree, right? So customers like that may choose to change more of our middle- to higher-end customers. I think they play with their menus more than anything else. They're really good at it. A lot of our customers for -- we've been serving for 40 years. So if you start to pay attention to menus, they start to adapt, they'll go to market price on certain entrees, and they'll mix the menu up where they don't have to raise prices, even though some of their costs have increased on some of their entrees, and they'll have other appetizers, entrees, beverages that they can make back the $1 or $2. And they're really smart, they're entrepreneurial. Most of them are independent, and they find a way to make it work and keep their customers coming back and still make their profits.

Got you. And then another big event this year, of course, is the potential for higher tax refunds, potentially some more cash in consumers' pockets overall just from one big beautiful bill, solve reform. What's your take? Would you expect for that to have a material impact?

We don't -- I think we've gotten this question about the potential tax refund bump and also the World Cup. did we build that into our guidance? And the answer is no. We think it will be some upside. We saw that with some other events that happened. We see it when F1 comes to Vegas or to Miami, you'll see a bump, but they're temporary. So it will be good. It will be good for us, but we don't actually build it in.

Yes. I think until the war or whatever you want to call what's happening in the Middle East, I think we're cautiously optimistic. And like Jim says, we don't build it in, but we thought it could be a big bump because of the amount of people that were coming and they were going to need to stay in hotels or -- and they were going to need to eat and a lot of these people are celebrating, some more than others, depending on how your team is doing. But just from other World Cups and reading about the uptick where the games were, you would have to expect there was going to be a good uptick. So now TBD, I guess, we'll see how everything is playing out.

And maybe on that, obviously, a big subject with everything that's going on in the Middle East. You guys have a very successful business in the Middle East. I guess about 9% of your overall sales are international, with the Middle East being obviously a component of that. How should we think about the impact of recent events on your Middle Eastern business?

Good question. I just came back. I came back right before the bombs started falling. And I'm like, wow, if I was 30 years younger, I'd move here. It was so dynamic, the feeling, the amount of [ frame ] and building and new customers. Again, it's a small part of our business, but it's a very exciting part of our business. And it's amazing how resilient it was. Obviously, there was days that business was really impacted and then even during this, we saw really good days of business. So still a lot of people live there. Obviously, if they're hitting the airport with drones, it's not going to be a good day. But I think it's resilient. I think -- I mean, who has the tarot cards, but the amount of infrastructure and commitment in Saudi and Dubai and Qatar, again, we just finished some new facilities, I think that who knows how long this goes on. But I think there's so much money there committed to people that want to live there. It's clean, it's safe, it's got an unbelievable airport. I mean I get it. It took me a while to really understand like how is this city just blossoming and continuing to grow. And it finally made sense before the drones started coming, why so many people were putting their money there becoming a financial capital, tourism, obviously, clean, safe place, good schools, great medical. So I'm still very bullish on it.

Got you. It sounds like demand has fluctuated kind of on a day-to-day basis that.

Yes. I mean it was a lot better than I expected.

Interesting.

Yes. And now it's, of course, we'll see how this thing is playing out, hopefully, in the next week or so.

Got you. And then outside of the direct impact to your Middle Eastern business, obviously, big issues and implications from oil. How do you think about any incremental risk to your supply chain? And would you expect this to be material to your expense structure? How are you thinking about that?

We have some challenges on the supply chain, obviously, in the Middle East right now. But our team navigated that really well a couple of years ago when you had the issue with the Red Sea and you had to bring them around Africa, and they navigated that really well. And so we're in contact with them every day and assisting them in any way we can. But overall, our supply chain, we don't really see major issues. I mean, during COVID, you had a container coming across the Atlantic go from $1,500 to $13,000. That obviously came way back down. So that was temporary. We think -- I mean, we estimate that if there's anything, it's going to be somewhat temporary, but we don't see a macro impact to our supply chain right now.

Got you. Are you expecting any material implications to inflation from fuel costs going up?

Not really. I mean diesel prices kind of spiked up. They've leveled off a little bit. It's not our biggest cost, and we manage it centrally by managing through contracts with fuel suppliers. So we're obviously on top of it and our team -- our operating teams are working on it, but we don't see a huge impact right now.

Got you. Is a large percentage of the fuel price simply passed through? Or how does that structure tend to work for you guys?

We do -- in certain circumstances, we'll put a fuel surcharge on the invoice. It really depends on the market, the region, the customer. And it's something that we don't do lightly. It will be in a situation like maybe you had a few years ago where you had a spike in a -- significant spike for an elongated period of time.

We don't have a lot of contracts, but the ones that we do, there is a trigger where diesel passes a certain point, there's an upcharge on the invoice. So like Jim said, our drives, our trucks go 20, 30 miles -- you're looking at them all around New York. They're not going very long distances. It's really what the supply channels, what triggers the -- they'll look to see if they could put a surcharge on our deliveries for product. Again, we sell expensive boxes. So $0.20 surcharge on a $100 box is not going to be tremendously impactful.

Let's pivot over quickly to your sales force. You guys made a lot of progress pursuing a hybrid selling model with more customers using digital tools as well in recent years to kind of complement the face-to-face interactions from your sales force. Can you walk through a bit on just how this has changed your selling strategy and the extent to which it can impact how you think about headcount growth over time?

Yes. So again, we are celebrating our 41st year now, hard to believe. But the way we envisioned this business, because I guess we've been in it so long, and we speak to customers. We monitor our customer base. We see the interaction, and we see how the industry is constantly going to change, right? Technology is always going to change industries. But we saw how to use -- we've been using AI. We just called it something different. And obviously, our digital team is getting more and more of our customer base online. We saw that evolution coming. And we also saw -- I wanted to have an option where as we grew, because remember, we were mostly a Northeast company and then we started to stretch out and then stretch out all over the country and then went to east; how are we going to sell all these products? And watching all these other companies do it wrong in a way, gave us a map of if we're going to sell more categories and especially to the best chefs in the world, we have to be experts, we have to have the best of all offerings. And the people that we send there have to know what they're talking about. So we started putting together this puzzle a long time ago. So when people see our success right now in -- population growth is really not there, right? So you look at us growing round numbers close to 10%. You're saying, well, where is the growth coming from? It's not a surprise for us. I mean, we're happy about it, but it's come from a lot of tactical strategic investments over the past x amount of years, building our cut shops, so they were closer to the busy market. So we had the service, adding experts. We call it team selling. I think we started calling team selling before people knew what team selling was. Even I didn't know what it was, but I know it sounded good and I wanted to build the team. But having people that my experience growing up in the industry that nobody knows 20,000, 30,000, 80,000 items. I used to watch salespeople come into our accounts and especially from big broad liners, and they're selling at gas station, convenience stores, and they're selling at prison, they're selling hospitals, they're selling -- and then how do you walk in there and start talking about caviar and foie gras and some of the high-end ingredients, I'm like I don't think it's going to work. And I think for us to be successful, to be where the chef shop, we're going to have to have real departments with expertise and walk the walk. And it's more expensive, right? So you got to build the department, you got to acquire the talent. We had to buy certain businesses to get the talent, to get the expertise. And then we had to get the technology, the computer systems to integrate. Maybe they won't integrate 100% overall, but we have tremendous now ability to make it easier for the team to be able to sell and for the category managers to watch the inventory because it's not just making the sale, it's making sure that you have it. A lot of it is perishable. Is it going to make the truck? Is it going to slow up the truck? So every -- even my daughters say, "It sounds easy, Dad. You bring product and you sell it." I'm like really simple. I just snap your finger, the stuff comes in. And again, a lot of products are simple. But what we do is really hard, and that's why I wanted to make sure we built this moat around the business with all these categories and expertise. And it's not easy. And we like it that way because it makes it more difficult for anyone really to disrupt us. I mean we always have competition. There's always somebody selling something, and you're never going to sell everything. But I think our team, the more mature they get, the better trained they get, we have our Chefs' Warehouse University. We're upping that investment into better curriculums, how do you turn somebody into a Chefs' Warehouse expert? Not easy. No matter what your background, it takes time. So first year, second year, I always say, I don't want to talk to you to you being in 5 years, right? Because you're really not going to know what you're talking about. You'll know enough to make me upset, okay? Because it just to understand it all and the logistics side and the customer side, it just takes time. And that's why when I hear, well, people were adding reps. And yes, we're adding -- we're always adding reps. You don't want to lose mature reps. It takes too long to teach them.

It's interesting you bring up that 5-year point. Just as you think about that ramp from a maturity standpoint, I mean, is the biggest gain we hear from others could be from your 1 to 2? Is it 2 to 3? Is it not until you get to 5? How do you think about that curve, so to speak?

I think that it's -- I have a future [ son ] as a doctor watching them go through medical school and now residency and all that. I'm like -- they're not becoming doctors, but I mean, I would not want to go to a doctor who had 1 year medical school. I mean they know enough to be dangerous, right? They're smart, they're learning. But every year, they're going to learn more. And it's kind of the same when you're selling these many products and the complexity of logistics, supply chains. Things are constantly changing. Is it free range? Is it organic? Is it almost organic? Is it really organic? And on and on and on. So yes, the technology we have right now and with AI and building the information for customers, it makes their job so much more efficient and easier from back in the day when we wrote on a little card information for them and say, just read this to your customer and tell them all about this. Now you can go online, you can watch our videos. You can come to our shows. Our shows -- our New York show had, I think, 3,000 customers who came, and we had hundreds of vendors. So that's part of the education. But it's kind of like medical school. There's people that they finish the fourth year, then they go on to do a specialty. And that's kind of like our specialists. They're going further, they're going really deep in our cut plants. We want them on the floor. We want them to really learn how we cut the stakes or cut the seafood fillets. We have a tremendous amount of trips all over the world for them to go visit our farmers, our producers. So to become -- I say I want to give my lapel thing that said, you know what, I'm here for 5 years. I actually can go see Chris.

That's a big step. Maybe one more on the sales force before we pivot on. But just in terms of as you think about those AI tools that you guys have been rolling out and how they help salespeople understand your more complex assortment. You also talked about team selling. I guess the first part would be, how has uptake been on the AI tools relative to your expectations? Have people embrace them as quickly as you had hoped for? Has it been faster than expected? And then the second part is just when you think about team-based selling, is it still the same number of people on the team? Is it smaller team, so you just have more of them and you can reach more? How do you think about that interplay?

I think -- I mean, the goal is to do more with less, right? So that's why you're watching our EBITDA percentage -- EBITDA start to climb, climb, climb, we're getting leverage on our overhead. I mean it's not -- this is not brain surgery. The more money that's on a truck and the same amount of hours, you'll make more money, right? The more boxes they can pick on a shift, you'll make more money. So I think all the tools are to make every department more efficient, and we are seeing that. It just gets -- it's getting better and better. How many less people will you have, say, per dollar spent is the question. Maybe I thought it would be more rapid, but what we're still seeing is quality people produce. And so we're not slowing down on hiring, but I think we're able to get more with less. And I think that's the goal.

So Hardie's, obviously, gave you guys scale in Texas. You've been making a lot of changes within that organization. Can you walk through essentially where you stand with Hardie's today?

Well, with Hardie's, we're in the process of integrating our kind of legacy CW specialty business. We built an Allen Brothers protein cut shop in Dallas, located very closely to our Hardie's business there as well as CW. We're in the process of securing a new facility to consolidate similar to what we've done in New England. We also have presence in Houston, San Antonio and Austin. But the focus right now is to consolidate in Dallas. And it's going incredibly well. It's process of combining the sales force, gradually integrating the cultures. And then we'll really get the aha once we get the facility in place where you have everything going on the same truck. Our produce business, which is Hardie's; our specialty legacy specialty business, which we've already integrated from a commercial perspective, we are getting a lot of those boxes cross-selling on the trucks. We bought Hardie's not because they were making a lot of money or they were a specialty company. They just had a really good customer base for a portion of their business. There was a smaller portion that I think you're aware, we've been trading out of over time. And those are kind of some big, what we call big chunky corporate business that didn't make a lot of money, didn't make sense to point our resources at. And so we've traded out of most of that. And now it's a process of kind of doing what we did in New England, taking -- combining our companies and over time, turning it into a true Chefs' Warehouse. And we're in the second inning of doing that. And we've already started to get their EBITDA margin up on a combined basis. And it's really -- the goal is just to get it to higher than our average as a company.

Yes. Beginning to look a lot like Christmas in ways. So yes, we're really proud. The team there is starting to really find their legs and not easy, multiple warehouse, multiple computer systems, different customer base. So we knew it would take 5 years when we bought it. We bought it, we thought for the right price. It wasn't a company that was exponentially growing. Like Jim said, they had a great base. great. They were great at what they did in deliveries and logistics, handling produce. So our experience from before, having done this is once we get people trained, which is the hardest part, I forget what year we're on now, but you could start to see it happening. You're starting to see all the new items going to customers. You're seeing -- starting to see the EBITDA margins rising. You're starting to see people get confidence and to sell more and more products that they never sold before. So I think Hardie's over the next 5, 6, 7 years could be top 3 markets for Chefs'. Top 3. Yes, I...

What are the other 2 for you?

I don't want to upset anyone listening, but because we love all our children. But we really love Florida right now. I mean, Texas and Florida, obviously, have population growth. It's no secret. A lot of companies moving there. Money is growing. Everyone likes to make fun of California. We do unbelievable in California. Every time I go out there, I expect to see like a line of people leaving. And like there's a lot of people here. And they're eating really well. A lot of money. The same in New York. The -- you're seeing in news like everyone is leaving New York. Jim look at our numbers every day. I'm like New York is doing really well.

Jim, you pointed out just in terms of some of the attrition you guys have done with Hardie's. Just can you talk about the capacity that maybe has freed up, how quickly you can essentially use that to help [ cheopsized ] the business?

Yes. Yes. It's created some capacity in the near term. I think like I mentioned, the real aha will be when we secure a new building and then really consolidate. That's where you get the operating leverage, and that's where you get all the categories in one building. It's a place where you bring customers to see how it works. They see a cut shop, they see us cutting fresh fish, proteins, they see produce, they see specialty. And we have state-of-the-art test kitchens where they'll test their products, and that's a great networking tool and a marketing tool. So yes, it's similar to what we've done on the West Coast, we've created some capacity on the West Coast with some attrition out of some noncore business there. We've done that in Texas, and that allows us to grow the -- what Chris talked about in the whole sales discussion and how that works. So yes, it's...

Just the fact that we're growing and the EBITDA margins are going up is just a testament to the team. I mean, we couldn't make it more difficult for them right now. Multiple facilities, they're touching things 3, 4x, multiple computer systems. So it's just a testament to that the market is there. The market loves our product, and we're able to do business and grow it. So we started in Florida. We had 1, 2, 3, I think, 4 outside storage facilities, 2 other cut shop facilities. Once we consolidated in Florida, it just exploded. And it just continues to grow exponentially because it's -- I always believe as a salesperson, selling it has to be easy, right? Easy is going to win. You have to make it easy for the customer, easy for the salesperson. And once these facilities are retrofitted in Texas, it's going to be so much easier. And it's going to be like lifting a weight off their back that all they have to do now is focus on selling. And we know the market is there. We just see the sales coming in, the inquiries, the amount of new customers and they're growing even in this environment. So we're really excited about Texas.

And then you guys point to a lot as a parallel with the Texas conversion, just the operation you guys bought and really [ cheopsized ] it over time. How long did that process take, I guess, when you got in there at [ Sid Wainer ] from when you bought them to like when you were happy with them? And is Texas...

More I really want to go back in history. So we bought [ Sid Wainer ]. We got hacked. So after surviving the hack, somebody lit explosives in the parking lot and blew up trucks and part of the building. And then COVID hit.

A month later...

So it was -- I'm like, I don't know if this was a good idea. But yes, so then we put humpty dumpty back together again and -- as we started letting go of nonprofitable business. So [ Sid Wainer ] was a great brand. Historically, it's been around, I think, three generations, was not really making any money for many reasons. So we knew that we were going to have to go backwards before we went forward. And today, even without the right facility, we're still touching products in multiple buildings. They're making really good money. But -- and it's again, a testament to the team. We have great leadership, the product mix, the customer base, you're going through Vermont, New Hampshire, all the way up to Maine, all the islands. Boston is actually -- it's a small town overall compared to some of the other big cities. So it's logistically challenging. We're great at that. And the leadership there now has figured out the balance. I mean the best is yet to come there. We're building them a new facility. So we think it's going to be exactly like Florida. They're doing great. But once they're in that new facility, they're just going to explode.

Let's pivot over to M&A, area that you guys took a little bit of a breather from after doing the spate of M&A post-COVID.

We're getting a lot of good deals right now on the border of Iran. There's going to be a lot of opportunity. I couldn't help that one. We've been really patient. We did a lot of M&A for a lot of reasons. We had to just to get the footprint. And then coming out of COVID, it was all the deals that were in the hopper were so backed up. So it just -- we did one after the other, and it was extremely challenging. Kind of took a break to get everything more organized, and I think the numbers are showing the efficiencies gave the team time to catch up. And we're open for business. Like I tell all the brokers that want to sell us something, you just got to bring us something that's priced correctly or something that we really need and except for a few little deals. We look at it and like we're growing organically at such a high rate. It has to be something compelling because I think we have a lot of our pieces. We still have that white space in the South to connect Virginia to Florida. But other than that, we want to do tuck-ins because they're very low risk as we build facilities that have a lot of excess space, tuck-ins are extremely accretive. And we'd love to buy something great. We're a growth company, that's something that we think is going to grow. But it just has to be compelling at the right price. And right now, we're just focused on growing the business and being disciplined. And usually opportunity will show up.

Fair enough. And when you think about that area and the white space opportunity you guys have in the Southeast, how do you think about the balance between -- do you have to acquire to get scale there? Can you see yourselves growing organically and reaching into those regions?

Organic is hard. We're starting -- what we do normally is we start to send trucks to a depot and then we start to grow an area. We are doing that already. And we know they want chef down there. So we're starting to hire people. And at a certain point, we'll find somebody that we can acquire that gives us routes and then we could fold out from there. Yes. So just like Texas, there was nobody to buy really, I mean there was no -- which told us the market was open for us. There was -- I would say the good thing about Chefs' is nobody like us. The bad thing is there's no one exactly like us to buy. So we have to buy somebody to get us into the market, and then we start to bring the teams in and the inventory and the experts, and we start all over. It's a rebirth all over again. So we'll get there. We're patient. We've been talking to a lot of people. We're seeing ways that we can get into that market. But again, what's going to drive a lot of to the bottom line right now is our big core markets, right? Growing New York, growing California, growing Florida, growing Texas, continuing to grow the Midwest. Obviously, all our small markets. The Pacific Northwest is doing great. They're moving into a new facility up in Portland. We have a new facility in Seattle. L.A. has got a beautiful big new facility. They can triple their business. So we have a new facility up in Richmond, California for Allen Brothers. So it's not like we have nothing to do. So we have lots of ways to really drive growth. And it's where the people are, right? So we get really excited. We go into Nashville. Nashville is doing great, still a small market. It will grow, but we really need to continue to grow our big markets. We can grow 7%, 8%, 9%, 10% in a big market. Those are numbers that move our needle.

And building on that point, you guys have added obviously a lot of capacity in some of these growth regions over the course of the past few years and you still have some that's underway. Just how has the ramp on in these regions relative to your original expectations?

I think they've gone better than our expectations in a number of them. I mean, Chris already talked about Florida. Texas is still early innings. Dubai has been amazing. We've expanded 3 of our facilities in Dubai, Qatar and Oman, all over the last couple of years. So we've made that investment. They're investing in people. Obviously, you've got the short-term issue with the war, but that's still a big growth market for us. And Chris mentioned some of the smaller markets, even like the Northwest is growing really high single digits, sometimes double digits. So I would say that they've gone as expected or even better.

Great. [indiscernible] gave you scale in the Rocky Mountain region. How has that gone so far?

I don't know if we'd say scale.

Maybe not scale.

We're excited building.

Eventually, it will start snowing as well. We're retrofitting. We got lucky We found a building that doesn't require a huge amount of CapEx that will allow us to move them into that and quadruple and more of the business. So we think it will scale pretty fast. Again, it's small. It's a great market. Our team loves seeing our trucks in Aspen and getting stuck in the snow -- when the snow up in Breckenridge or Vail. So it's a great customer -- it's our customers' customer base that gets excited. There's a lot of money, a lot of upscale tourism. A lot of people with second homes there now. Denver is growing. It's sunny 300 days a year, okay? People forget that. We're excited about it, but it's still -- it's a small market, but it will scale.

Got you. Drop ship model, something you guys talked about briefly at the Analyst Day. Just curious how initial uptake has gone on that front in terms of customers starting to utilize that service.

We've always had some sort of drop ship. I think we called it something else. I think it complements the business well. But the driver of our business is build the demand, have it, have it for next day. I like it when it's on our truck. It makes me feel much more in control. But it definitely complements and gives our customer base, we call it, the magical sale. We look at what comes in from not in the warehouse and not on our trucks a lot of times, and it just goes to the bottom line. So it's a good addition.

Maybe pivoting to some broader topics, just obviously, artificial intelligence is a big source of discussion really across the consumer industry. Talk a bit about how you guys are able to use it with your sales force. How do you think about artificial intelligence and your ability to deploy it to the broader organization? And then related, just conceptually, how do you think about that balance in that there's all sorts of opportunities to save money. But if we do see unemployment go up, potential demand implications, I think it's something that a lot of people are really grappling with trying to figure that out.

Yes. I mean I think for our industry, whenever we have a lot of our corporate meetings discuss our challenges, when I hear that it's hard to find drivers, I wish I would have saved like recordings of our first meeting 41 years ago; it's impossible to find drivers. So really, it's a challenging job. It's a hard job because it's not just driving, you're going downstairs, heavy boxes. So we take care of our people, we try to pay as much as possible. So any technology to make their job easier is welcome, but I don't see the robust that can replace people that can deliver products and go downstairs in New York yet. So I think that's still a bit away. Back office, I mean, we've been using AI for a while now. I mean we must have systemized so many of the back-office functions.

Yes. I mean, in corporate, a lot of our -- we use a lot of third-party providers, software providers, and they're all integrating AI. I would say where it's been most impactful for us is with our digital team and also our operations team. We're starting to use drones to improve inventory management. On the digital side, we put in a really dynamic team over the last couple of years, and they've really exponentially grown our digital platform. And so Elements of AI help our sales reps have more real-time information on our customers' behavior, and it gives our customers, our chefs and their buyers a better buying experience. It gives them a window into inventory. Chris talked about how a sales rep could never know 90,000 products, right? But our search engine is so much more improved through AI that they'll buy things and see things that they never knew we had. And that's been a real differentiator on the sales side, the gross -- I would say that's the most impactful. In operations, I think we're still in the second inning of integrating AI and robotics. I think it will be bigger 5 or 6 years down the road, but where we've started the process.

Fantastic. Well, I think that just about brings us up on time. Please thank you, everyone, and please join me in thanking both Chris and Jim today. This is awesome. Thank you.

Thank you. Thank you for having us. Thank you.