Greetings and welcome to the Chefs' Warehouse Third Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman, and CEO; and Jim Leddy, our CFO. By now, you should have access to our third quarter 2020 earnings press release, which can also be found at www.chefswarehouse.com, under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures including, among others, historical and estimated EBITDA and adjusted EBITDA, as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our Annual Report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our third quarter results in detail. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our third quarter 2020 earnings call. While early third quarter business trends showed slight improvement sequentially as compared to late second quarter, we experienced more measurable increases in active customer count and revenue during the second half of the quarter. Despite continued significant restrictions on indoor dining capacity in our largest markets, the September sales averaged approximately 69% of the same period in fiscal 2019. We saw multiple days of greater than 80% of prior year sales during the month. Customer openings across markets continued during the quarter as restrictions eased, and we continue to add new customers across segments, including independent restaurants, cafes, country clubs, retail, and hospitality. In this section of the earnings announcement, I usually compare the sales and gross margin results of the current quarter to the prior year quarter. But based upon the current situation we are in, I felt that it would be more appropriate to provide commentary on how we compared versus our sequential quarter. Jim will provide the comparisons to prior year in his comments later on. During the quarter, net sales were 26.7% higher versus the second quarter of 2020. Specialty sales were up 63.5% organically over the second quarter, driven by an increase in unique customers of approximately 52.6%, higher placements of approximately 67.4%, and an increase in specialty cases of 58.1%. Organic pounds in center-of-the-plate were approximately 9.7% higher than in the second quarter of 2020. Gross profit margins increased approximately 210 basis points compared to the second quarter. Gross margin in the specialty category increased 420 basis points as compared to the second quarter of 2020, while gross margin in the center-of-the-plate category decreased 52 basis points. Now, I'll move on to an update on recent business activity. Sales in October are trending at approximately 71% of prior year. Pent-up demand for dining out restaurants was evident in certain Midwest and Southern markets where capacity percentages were gradually increased. This trend gives us confidence that business will continue to improve over time as indoor dining availability grows in our larger urban markets such as the Northeast, Mid-Atlantic, and California. Throughout the last six months, in addition to supporting customer openings, transitions, and reinvention, our teams have opened thousands of new customer accounts, targeted growth in suburban markets, grown our Allen Brothers' direct-to-consumer business, and have quickly and adeptly adjusted our product lines to meet the changing needs of our Chef partners. Menus are adapting to evolving cost structures and guest experiences in restaurants and other segments of the hospitality industry. One example is evident in the move towards grab-and-go for breakfast and lunch, while maintaining the highest quality ingredients and service, thus allowing our sales team to bring the full force of their culinary expertise and creativity to help drive the evolving trends in food service. I would also like to welcome Harris Seafood to the Chefs' Warehouse family of companies. This acquisition supports our growth in fresh seafood in the Southeast and complements our continuing category expansion across Florida. In terms of technology and operation, we completed the consolidation of our Texas operation into our Dallas hub, and we have continued to invest in new technology applications and in upgrading and deploying our existing platforms throughout this period of volatility and uncertainty. During the quarter, we completed the integration of our Philadelphia operation onto our ERP platform and operational scanning system and have commenced our West Coast implementation projects with an expectation to go live in the first half of 2021. In addition, we executed several enhancements to our digital platforms, including a redesign of our Chefs' Warehouse website, with new customer-focused content, as well as internally focused improvements to drive both sales growth and operational efficiency. Before I turn it over to Jim, I would like to pay tribute to Peter Pappas, my and John's dear father, who passed in early October at the age of 92. Peter founded the Veterans Butter & Egg Company in 1956, the food service business that would form the foundation of the Chefs' Warehouse. Peter's combination of integrity, compassion, and dedication to quality and service are the underlying themes that define the culture of our company as it has grown and evolved over 35 years. We will miss him, but we will look to honor him as our team members continue to provide the highest quality food products and service to our customers that embody the Chefs' Warehouse unique specialty food service model. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?

Thank you, Chris, and good morning everyone. In this quarter's results, you'll find some reclassifications within our income statement, better in response to an SEC comment letter. These reclassifications have been included in all periods presented in our current press release and 10-Q and will be reflected prospectively in our future filings. We have reclassified our food processing costs previously included in operating expenses to cost of sales and have split our historical presentation of operating expenses between selling, general and administrative expenses and other operating expenses. These reclassifications have no impact on the company's net income, cash flows, or EBITDA. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended September 25th, 2020, decreased approximately 36% to $254 million from $396.8 million in the third quarter of 2019. The decrease in net sales was a result of a decline in organic sales of approximately 44.9%, as well as the contribution of sales from acquisitions, which added approximately 8.9% to sales growth for the quarter. Net inflation was 2.1% in the third quarter, consisting of 1.6% inflation in our specialty category and inflation of 2.7% in our center-of-the-plate category versus the prior year quarter. Gross profit decreased 37.6% to $60.6 million for the third quarter of 2020 versus $97.2 million for the third quarter of 2019. Gross profit margins decreased approximately 63 basis points to 23.9%. Changes in product mix due to both customer mix and menu adjustments during the COVID period were the primary driver of slightly lower gross profit margin versus the prior year quarter. The primary driver of net specialty inflation was above-average price increases in the chocolate and cheese categories, partially offset by deflation in the dairy and specialty pastry categories. Inflation in the center-of-the-plate category was driven by higher pricing across most beef categories, as well as product mix changes that contributed to growth in our direct-to-consumer business, as well as other premium cut sales in our Allen Brothers division. Total operating expense decreased approximately 16.2% to $72.6 million for the third quarter of 2020 from $86.6 million for the third quarter of 2019. Lower costs associated with compensation and benefits, as well as general administration-related costs, were the primary driver of the decrease in operating expense in the quarter. On an adjusted basis, operating expenses decreased 13.4% year-over-year. Excluding the impact of acquisitions, adjusted operating expenses decreased approximately 27.5% versus the prior year quarter. As a percentage of net sales, adjusted operating expenses were 25.8% for the third quarter of 2020 compared to 19.1% for the third quarter of 2019. As mentioned earlier, sales volumes increased sequentially from August into September. As such, September's operating expense, on an adjusted basis, represented approximately 24.6% of net sales for the month. The operating loss for the third quarter of 2020 was $11.9 million compared to operating income of $10.6 million for the third quarter of 2019. The decrease in operating income was primarily driven by lower gross profit, offset in part by lower operating expense. Income tax benefit was $5.2 million for the third quarter of 2020 compared to an expense of $1.7 million for the third quarter of 2019. Our GAAP net loss was $11.4 million or $0.31 loss per diluted share for the third quarter of 2020 compared to net income of $4.4 million or $0.15 profit per diluted share for the third quarter of 2019. On a non-GAAP basis, we had negative adjusted EBITDA of $4.9 million for the third quarter of 2020 compared to positive adjusted EBITDA of $21.6 million for the prior year third quarter. Adjusted net loss was $13.7 million or $0.38 loss per diluted share for the third quarter of 2020 compared to adjusted net income of $6.8 million or $0.23 profit per diluted share for the prior year third quarter. Turning to the balance sheet and an update on our liquidity. As of October 23rd, 2020, we had total liquidity of $237.3 million comprised of $193 million in cash and $44.3 million of availability under our asset-based lending facility. As of October 23rd, net debt inclusive of all cash and cash equivalents, was approximately $209.1 million. At this time, due to the continued uncertainty regarding both the pace of broader economic recovery and the lifting of in-room dining restrictions across our key markets, we will not be providing guidance for 2020. We hope to provide more color as we gain more clarity on the length of the economic downturn and the pace of re-openings. Thank you. And at this point, we will open it up to questions, operator.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Peter Saleh of BTIG. Please proceed with your questions.

All right, thank you. First, Chris, I just want to say, I'm sorry to hear about your loss. I just wanted to ask about the sales trajectory. It was encouraging to see that the September sales numbers were approaching, call it 70%, and in October, a little bit above that. Can you give us a sense of what level you need to get to profitability? Are you profitable in October or just shy of that level?

Yes, I'll let Jim take the first part of that and then I'll weigh in on the rest.

Yes, so in terms of where we're operating right now, it's really month by month very close to breakeven. The cadence through the month was similar to Q2, with September being very close to breakeven, maybe a little bit of profitability, on an adjusted EBITDA basis. So we're at a level now where, based on accruals, we're on either side of breakeven. From a medium to longer-term perspective, we've said that our stated goal is to get to 75% to 80% of either 2019 pro forma for the acquisitions or the midpoint of our implied guidance, which are similar levels, our implied guidance for 2020. And the way that we view the world right now, we believe that while the near term, with the colder weather and the activity around COVID, may provide a more conservative view for the next three to six months, we believe that as we approach the second half of 2021 and into 2022, we'll be able to build towards those levels and get back to profitability.

Yes. And really to add to Jim's comments, given that we have a strong balance sheet, it's how much do you want to double down on '22 and '23? I mean we see as soon as things - as soon as the weather gets better and things open, the pent-up demand is unbelievable. We're observing the demand in parts like Florida and Texas, where things are a little more normalized in terms of restaurants. We see tremendous growth. So my decision really was to start to invest, keep investing in IT and digital, keep investing in talent. We have been adding talent that normally is not available to us in the marketplace and really starting to get businesses primed to benefit when the uptick starts to happen. So as painful as it is for us now, we think there's tremendous opportunity through smart M&A. Not everybody is going to get through this unfortunate time, so we believe using our balance sheet and our breadth and depth size and ability to do fold-ins intelligently is the right strategy going into '21 and into '22.

Great, very helpful. Would you just mind giving us a little color or some commentary around what you're seeing in New York City and maybe even San Francisco, as some parts of New York are reopened for indoor dining? I guess at the end of September. Have you seen trends improve in that market as indoor dining reopened?

Yes, we definitely saw upticks as New York opened. We're looking forward to New York going to 50%. We think that 50% is a huge number; it allows a lot of restaurants to reopen, although many customers still are waiting. But we did see a nice uptick. We really see an uptick in California. Unfortunately, the fires dampened things down in some of our best performing areas. Despite that, we're witnessing a real uptick that we were seeing until the fires set back. Again, I think the warmer climates are definitely going to do better. Our customers have pivoted, it's unbelievable. As you walk through New York right now, a lot of it looks more like a European city, given what they've created outside. I think they can push it with outdoor heaters and keep people comfortable. That's really going to help, and hopefully, we get some luck with the weather. I've been pleasantly surprised in cities that have opened up indoors. I understand there are spikes currently, which we expected, but we did notice that a portion of the population was very comfortable and restaurants were filling up, and that was really encouraging indoors. I think it's going to be an up and down next few months, but I'm encouraged by what I've seen.

All right. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.

Thank you. And Chris, my condolences. I had a question maybe on the holidays coming up and if you can provide us some context on how to think about these high-volume weeks later in the fourth quarter and maybe how significant the large party and banquet holiday business is for your customers? And how to think about managing inventory in that kind of environment?

Yes. Well inventory, I think, the worst is over. I think we went through the difficulty of when everything closed down in March, and we've been getting through a lot of that inventory, especially the perishable stuff, obviously, which we went through in the first few months. But what we are hearing and what we are seeing is - the encouraging part is that there are lots of parties booking; they are not the big ones. I think it's going to be more of a season of small gatherings. I'm excited to hear that even as we hear about spikes on the news, people are still wanting to get together. Right now they're trying to get together safely. Many of our larger units are able to accommodate them with their party rooms, spreading people out. So I think it's going to be a longer holiday season. I don't think it'll be the typical holiday season. I just - I think it's going to be an ongoing season of gatherings, with parties of 10 or 20 or 30 depending on what city it is.

That makes sense. And then if there are any silver linings of this crisis. I mean, you mentioned you're picking up some strong talent on the sales side; is there anything else you'd highlight or maybe breakthrough discussions with new customers that you previously couldn't get to?

Sure. I think just like restaurants had - the trend was starting for more pickup, take out, off-premise catering. I think COVID has kind of compressed what might have taken five years into a few months. So obviously take out will be tremendous this winter. And I think the trend that the industry was consolidating, I think that will really be consolidated over the next, let's say, two to three years versus seven to 10. We did a small acquisition in Florida, and we think that trend will continue. We believe there will be many opportunities to get talent, and our specialty is really supplying to wealthy suburban areas that have lots of restaurants and caterings, obviously in the cities. I think the cities will take longer to come back. At the same time, I think we'll be able to fill a lot of the vacuum of less volume with these tuck-in acquisitions. So I think that will be accelerated throughout 2021 and 2022.

Hey, Alex. I would just add that I think we've been really pleased with the level of new account openings that we've seen over the last six months. As we mentioned in our prepared remarks, thousands of new account openings. Obviously, the level of demand is not there, but as we build the business back, especially in the second half of '21, we feel that that sets us up for good growth.

Yes. And the driving force behind the new account openings is our ability to continue to service customers the way they need. I think a lot of our competitors, especially smaller ones, did not have the ability to keep the trucks on the road and service their customers the way they needed it - not just once a week, but multiple times a week. Our ability to put enough product on the truck combining all the categories we've been adding has really given us a tailwind to penetrate and grab market share with all these new customers coming on board.

That's great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Nicole Miller with Piper Jaffray. Please proceed with your questions.

Thank you and good morning, Chris. Very, very, very sorry for your loss. Thank you for sharing that.

Thank you.

Just two questions for me this morning. When you think about the improvement sequentially from this quarter to last quarter, I'd like that comparison by the way, or even in October to September, could you just rank where the improvement or the delta is coming from. And I'm tempted to say, hey, more capacity in the accounts that are open, but there is probably more behind the momentum. I'm thinking about accounts, just in general coming back online. Maybe there are new accounts, obviously capacity, and maybe other items. Could you just rank where the improvement is coming from?

Sure. Again, we saw unbelievable demand in the outskirts of a lot of our major cities. So that demand continued even after summer, as many people hunkered down and did not return to their city apartments. But they continued to go out in their neighborhoods, they continued to take out. I think there wasn't a golf course that didn’t have a record year this year. They were - golf courses have big catering facilities, and they were able to space people out and create outdoor dining, which I think continues. So that really assisted our growth. As the cities started to open, I think everybody forgets how decimated our major cities were, where even going to 25% is significant. We see cities going to 50%, and that gives many hundreds, maybe thousands of customers who are still waiting to reopen. That's the uptick that we are looking for. We did get part of that going into September and October.

Okay, excellent. And then, it's been fascinating in the last few months, I've received a lot of inbound commentary from a lot of our peers and partners in New York saying, 'Hey, I found Chefs' Warehouse, very pleased to find you and a good experience.' So how big is DTC and can this be a real opportunity?

Yes, I mean, we are investing in it right now. Obviously, it's a completely different model. The big upticks come when the weather gets cold, and people would rather get delivery. So I think, it's a wait and see. We have a digital team right now that is focused on trying to accelerate that business again in the winter months. But the big uptick we saw was with our online premium protein. So Allen Brothers continues to accelerate and is having a phenomenal year with their online ability to send products—usually via FedEx and UPS. We expect that to continue throughout the rest of the year as people fill up their freezers again. I think the discovery is that you can buy such great high-quality steakhouse steaks and seafood. I think that trend will continue, and we are looking to add on to that.

Great. Thanks again.

Thank you.

Thank you. Our next question comes from the line of Kelly Bania of BMO Capital Markets. Please proceed with your questions.

Hi, good morning. And I also just want to express my condolences for you and your family, Chris.

Thank you, Kelly. Yes, he had a great life.

Yes. So I guess, I was wondering if you could just talk a little bit more about the talent investments you're making. I assume it's in the sales force, but would just love to hear more about where you're making those. Is that part of the comment about the acquisition? Is there other investments? And just generally talk about the size of the sales force now and how you're working to kind of motivate them in this environment; just any color on those topics would be helpful?

Sure. Well, this is a very important topic. Obviously, keeping everybody motivated in an environment like this is of the utmost importance. We continue to add talent to support our new businesses. We're in unprecedented times, but looking at the pent-up demand, looking at where the business was going to change anyway, becoming a complete Chefs' Warehouse, I call it like the four legs of the stool. We have just started to invest in produce, we are accelerating into seafood and more into the specialty proteins with our state cutting operations, and we see a tremendous opportunity over the next few years to dominate more in those categories. So adding more talent, doing small acquisitions like we did in Florida, adding talent, and sales especially as Florida recovers is really going to accelerate our growth into 2022 and 2023. We continue to see opportunities throughout the country; we're not bashful. If we think there's talent, we will acquire it, and if we can get the right acquisitions using our balance sheet, it's very intelligent. The opportunity has never been greater to really have other companies that we always wanted to join Chefs join us. I think we are stronger together.

Thank you. Our last question of the conference comes from Todd Brooks with CL King & Associates. Please proceed with your questions.

Hey, good morning, guys. And Chris, I just want to pass my condolences along as well for your dad passing.

Thank you, Todd. Thank you.

A few questions this morning. One, I was wondering if you could talk about the specialty distribution industry in general, and I know you made a great comment about everybody has excess capacity, and there are a lot of instances where companies will be stronger together. But as you look at the industry and kind of some of the players that can deliver service levels, what are you thinking of as far as survivor bias that will benefit Chefs in '22 and '23? Do you expect to see a decent number of competitive closures? Do you expect it to be more competitive impairments that turn some of the competitors into more zombie type distributors going forward?

Yes, I think the reality of what has happened is unprecedented. I don't think there was a business class that covered, let's say, you wake up one day and all 40,000 or 50,000 of your customers are closed. I can’t imagine being a small business right now without the ability to access capital and how to get through this. Even if you do get through it, you're severely wounded. I think the reality is that they have to merge. The pain is not over. Even if you're doing okay coming out of this, the demands of the customer have changed just like takeout. I don't think takeout is going to go away. It will subside, but the trend was already there. Just like gluten-free options were growing; I think the trend to consolidate was already there. Labor costs were increasing. The cost of operating, insurance was already a burden for small businesses. What was going to happen, maybe over seven to 10 years, is going to be condensed. It makes more sense for people to combine and go after their overhead and their fixed overhead. I think we're going to deliver more expensive boxes, and I think that's why you see us going into more specialty produce and specialty seafood and proteins.

That's great. And then my final question. You talked about the unprecedented nature of what the industry is going through. And I know early on in the pandemic, you took a first cut at what store closures might be within the customer base for Chefs. You kind of talked about maybe a mid-teens level, which was normal closures plus maybe an incremental 500 basis points to 700 basis points. But now that the delays have occurred in reopening dining rooms, just do you have updated thoughts you can share with us on what you're expecting for door closures within your customer base, maybe what you've seen and what you're anticipating?

Yes, I think we said that normal attrition was anywhere from 7% to 14%, and we expected that to at least be doubled. Unfortunately, cash flow projections were pretty accurate. So that's probably what we're going to see. On the flip side, we're already starting to see the green shoots. It's interesting to see people who invested so much of their life and money get the keys back. But restaurant owners are not going to become investment bankers tomorrow or leave for New Zealand; they are going to come back into the industry. We're starting to hear of customers signing new leases. We're starting to hear old friends, big operators calling me to ask what I think. Should they take the lead now and sign the lease for the build-out? They could be opening by mid-2021 or at the end of 2021 going into 2022. Capital is key. We are going to get another stimulus—unfortunately it didn't happen, but I’m almost positive there will be one—it's just a question of timing. When that happens, you will see a lot of new restaurants come back after this is done. They might change, but I'm hearing from operators who are feeling encouraged about the business.

That's great. Thanks, Chris.

Thank you. Our last question comes from the line of Ben Klieve from National Securities Corporation. Please proceed with your questions.

All right. Thanks for taking my questions, and first I'll reiterate everybody's condolences here. It's never easy, so wish you, your brother, and the rest of your family well during this time.

Thank you.

I've got a two-part question regarding restaurant capacity. So first, to what degree do you see your customers taking advantage of being able to reopen with low capacity restrictions, let's say, 25%? And then for those customers that are open, to what degree do you believe that they are getting filled at whatever that capacity is?

Again, I think it's not a one-size-fits-all answer. It varies by territory; 25% really is more of a warm-up. The worst thing is having a dark restaurant. You need to get your staff back. That's why the restaurant organization is talking to the White House; people are trying to get them to understand that it’s not just flipping the switch on and reopening. It’s more like pre-season for a professional sports team; you need practice coming back to the court. So going to 25% was a major step in the right direction for our operators to begin operating again; it allowed them to get back to the game, so to speak. We noticed that as capacity went to 50%, they were able to start scheduling multiple seating times. With 25%, we saw our customers do some serious business; customers are very forgiving. I find myself going out sometimes and thinking, 'What a crowd, I can't get a seat.' You have to have multiple seating at 6 o'clock, 8 o'clock, and 10 o'clock in many cities. So when they reach 50%, that is when we should see a significant uptick in volume. I anticipate it will be a little inconsistent over the next few months, but hopefully municipalities will understand that maintaining capacity is beneficial to operators.

Got it. Perfect. And you actually answered my next question. So, thanks for taking my questions, and I'll get back in queue here.

Thank you.

Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.