Greetings, and welcome to The Chefs' Warehouse Second Quarter 2021 Earnings Conference Call. As a reminder this conference is being recorded. I would now like to turn this conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir. You may begin.

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 second quarter 2021 earnings press release. It can also be found at www.chefswarehouse.com, under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA, as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP, and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance. 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 second 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 second quarter 2021 earnings call. Business activity and revenue grew steadily throughout the second quarter as existing and new customer openings increased and COVID-related restrictions eased across many key markets. As the quarter progressed, our customers benefited from the growth in both indoor and outdoor dining capacity, strengthening consumer demand, and the early stages of menu expansion. Thanks to our teams working tirelessly and delivering The Chefs’ Warehouse premium products and service model to our customers in a very challenging environment. We exited June trending in line with 2019 revenue inclusive of acquisitions added in 2020 and 2021. Similar to our previous reporting, I will compare sales and gross margin results of the quarter sequentially to the first quarter of 2021. Jim will provide the comparison to the prior year in his comments later in this call. During the quarter, net sales increased approximately 51% versus the first quarter of 2021. Specialty sales increased approximately 48.1% sequentially versus the first quarter of 2021 with average unique customers increasing 22% and we saw higher placements of approximately 36%. Specialty cases increased 41% versus the first quarter of 2021, while center-of-the-plate pounds sold were approximately 29.4% higher sequentially versus the first quarter of 2021 excluding the impact of acquisitions. Gross profit margins increased approximately 163 basis points compared to the first quarter of 2021. Gross margin on the specialty category increased 316 basis points as compared to the first quarter of 2021, while gross margin in the center-of-the-plate category increased 31 basis points. Jim will provide more detail on gross margin and inflation in a few minutes. In mid-June, we completed the acquisition of Nicola Imports based in Phoenix, Arizona. The addition of Nicola contributes to our continued expansion out west by growing our presence in Arizona, and giving us an entry point into Denver, Colorado, a key restaurant and hospitality market that we feel will be well-served by Chefs’ unique culture and service model going forward. On the technology and operations front, during the second quarter, we implemented several system and process improvements targeting improved efficiency in routing and warehouse management. We now have close to 100% of our specialty locations utilizing mobile truck scanning. In addition, we completed a key enhancement to our cybersecurity platform during the quarter. Now I’ll move on to an update on recent business activity. Recent sales have been trending generally in line with 2019 sales, inclusive of the acquisitions completed in 2020 and 2021 to date. As July and August are typically quieter months for revenue, trends remained at similar levels coming out of June and July. While difficult to predict at this point, there are observed expectations that the return to office buildings in certain large urban markets and continued growth in travel and hospitality could lead to additional industry growth as we move into the fall months. I would like to take this moment to express my sincere thanks to all of Chefs’ Warehouse team members across our amazing company. The extreme nature of this comeback and customer demand as markets reopened in May and June presented an unprecedented set of challenges. Their ability to execute in these unique dynamics—labor supply constraints, price inflation, and logistics created by the pandemic—has been a significant achievement. We are grateful for their dedication, hard work and expertise. Our teams not only delivered our high-quality products and service, but also worked with customers to find solutions to the issues created by this unique environment. Whether it was finding the right substitute ingredients among our 55,000-plus products, making a last minute delivery, or consulting on menu changes amid multiple supply chain disruptions and food inflation, our teams were there. I would also like to thank our customers and suppliers for their cooperation and partnership during this challenging but exciting time. 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. 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 June 25, 2021 increased approximately 111% to $423 million from $200.5 million in the second quarter of 2020. The increase in net sales was the result of an increase in organic sales of approximately 106.1% as well as the contribution of sales from acquisitions, which added approximately 4.9% to sales growth for the quarter. Net inflation was 11.5% in the second quarter, consisting of 10.6% inflation in our specialty category and inflation of 12.1% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 120.8% to $95.9 million for the second quarter of 2021 versus $43.4 million for the second quarter of 2020. Gross profit margins increased approximately 101 basis points to 22.7%. Multiple factors combined to drive gross profit margin improvement during the quarter, including product mix changes, volume-driven efficiencies, and effective inventory management. We were extremely pleased with our sourcing, sales and operating teams’ execution within a challenging food inflation and logistics environment. Specialty inflation was driven by broad-based inflation across most specialty product lines. Inflation in the center-of-the-plate category was driven by higher pricing across most beef categories, partially offset by product mix changes associated with our Allen Brothers direct-to-consumer segment. Total operating expenses increased approximately 32.5% to $91.2 million for the second quarter of 2021 from $68.8 million for the second quarter of 2020. The primary drivers of higher operating expense were higher compensation and transportation costs associated with higher year-over-year volume growth and route expansion. Total operating expense is inclusive of a one-time benefit of approximately $1.4 million associated with the employee retention tax credit as part of the American CARES Act. This credit has been added back to our presentation of adjusted EBITDA for the quarter. As a percentage of net sales, adjusted operating expenses were 18.6% in the second quarter of 2021 compared to 28.5% for the second quarter of 2020. Operating income for the second quarter of 2021 was $4.7 million compared to an operating loss of $25.4 million for the second quarter of 2020. The increase in operating income was driven primarily by higher gross profit, partially offset by higher operating costs. Income tax benefit was $0.8 million for the second quarter of 2021 compared to $10.8 million for the second quarter of 2020. Our GAAP net income was $1.1 million, or $0.03 income per diluted share for the second quarter of 2021 compared to a net loss of $20.3 million, or $0.62 loss per diluted share for the second quarter of 2020. On a non-GAAP basis, we had positive adjusted EBITDA of $17.2 million for the second quarter of 2021 compared to negative adjusted EBITDA of $13.7 million for the prior year second quarter. Adjusted net income was $1.5 million, or $0.04 income per diluted share for the second quarter of 2021 compared to adjusted net loss of $18.7 million, or $0.57 loss per diluted share for the prior year second quarter. Turning to the balance sheet and an update on our liquidity. As of June 25, 2021, we had total liquidity of $247.7 million comprised of $146.9 million in cash and $100.8 million of availability under our ABL facility. Net debt as of June 25, 2021 was approximately $254.5 million, inclusive of all cash and cash equivalents. At this time, due to the continued uncertainty regarding the pace of broader economic recovery, and the timing of events and travel-related business activity, we will not be providing guidance for 2021. We hope to provide more color as we gain more clarity on the pace of recovery, outlook and the broader post-pandemic related environment. Thank you. And at this point, we will open it up for questions. Operator?

At this time, we will be conducting a question-and-answer session. Operator Instructions: One moment while we pull for questions. Our first question comes from the line of Alex Slagle with Jefferies. You may proceed with your question.

Great. Thank you. Good morning, everyone.

Good morning, Alex.

Congrats. Great quarter. Maybe you could just provide some more color on how this quick ramp in demand played out and how you were able to capture it so much. I know it's been a challenge hiring enough drivers and staff to raise the service levels, which I imagine possibly also provided even more flow-through to margins. Could you touch on that dynamic also?

Yes, sure. So the cadence in the quarter was a little surprising. The big cities that had been a lag for us earlier in the year—and all through COVID—San Francisco, Chicago, New York, they all started to open really in mid to late May. We really started to see—as we reported coming out of April—we were just shy of 80% of 2019. The ramp happened in late May and then June was kind of explosive as New York and the metro areas around the big cities really started to open. We had already seen good business activity earlier in the quarter through the states that were pretty much already open. So that was a big driver. Regarding labor, it continues to be a challenge. But, as we stated in our prepared comments, our teams really came together and executed, delivered our product and our service model to our customers and we were able to start to build the business back to 2019 levels.

Got it. So as we kind of think about the recent sales level and the uptick, how much of it do you think was due to the spur of openings and pantry loading and sort of unusually strong periods of celebrations in May and June? I'm just trying to get a sense for what the underlying run-rate trend would be as we look out to 3Q and 4Q. I know there's a lot of moving parts, but any color there would be helpful.

Sure. As we mentioned, recent business activity is very similar to what we saw coming out of June. The second part of Q2 is always a little less busy seasonally than May and June, so the early part of Q3 is typically quieter. We haven't seen a significant change in our numbers as we've come into the quieter season. So, we're not providing guidance for the rest of the year, but right now we haven't seen a significant change.

Yes, and we have to keep reminding ourselves—we're back to numbers that are a little better than we expected. We knew pent-up demand was there, but we still don't have any major events. We still don't have tourists. We still don't have real business travel. If I had to look in a crystal ball, if those things come back, you'd have a tremendous fourth quarter. If it comes back partially, you still have a really good quarter. And if it just continues as is, it's still good. The money is changing where it's being spent. Midtown Manhattan is still not back. Downtown San Francisco is not back. Chicago isn't bursting at the seams. So spending at our customers is continuing to be in a lot of the suburbs and in other neighborhoods. We have all sorts of outdoor dining venues now that have been added to traditional restaurants that never had it. So we continue to see the spend and the demand, and we can only be optimistic as we get through this. It could be a little bumpy in the next month or two, but we think going into 2022, as convention business, conferences and business travel start to come back, you can't help but be really optimistic.

Thank you.

Our next question comes from the line of Kelly Bania with BMO Capital Markets. You may proceed with your question.

Hi, good morning. Thanks for taking our questions.

Hey, Kelly.

Good morning. I'm wondering if you could just unpack the sales force a little bit. What's sales per customer look like compared to 2019? How much of the contribution is coming from new customers—trying to get a gauge of market share gains here or how you're thinking about that, outside of the M&A activity?

Sure. Again, Kelly, it's coming from new customers and market share. I think that our extra efforts to provide service have helped. Obviously, we don't have full employment among the ranks—we're not running all our trucks—and I'm sure we are disappointing some customers. But I think our decision to keep the company together rather than do massive layoffs allowed us to maintain focus and offer service that customers are used to. We're still short-handed, but that allowed us to take market share. We added thousands of new customers during the pandemic, which was a pleasant surprise. We continue to see many new leases being signed. Restaurants are opening and they are not going to let opportunities for prime locations pass by. We're starting to see more credit applications for key real estate. People are getting tired of cooking at home, so demand to dine out is building. We're nowhere near fully back in the vibrant midtowns of all our cities, but restaurants are starting to really thrive. They're short-handed—nothing is easy right now—but the demand is there.

Kelly, while we don't disclose that level of detail, we do measure the average weekly customers that are actively buying, and we are very close to approaching our 2019 levels, which is encouraging.

Okay, that's very helpful. And then thinking about gross margin here: it looks about 300 basis points below 2019 levels this quarter. Can you talk about the factors that need to happen to get that back to normal? Do you think that's possible? It looks like much of the pressure is in the center-of-the-plate area—how much of that is inflation versus other factors that could get us back to 2019 gross margin levels?

Well, I think what you're comparing are not apples-to-apples. As you recall, we adjusted our processing costs and moved them from OpEx into gross profit earlier in the year for SEC presentation purposes. That adjustment is about 150 to 170 basis points. Our prior gross profit margins were in the 25% to 25.5% range; when you rebase that, you're looking in the 23.5% to 24% range. So we're really maybe 50 to 70 basis points below when you compare on an apples-to-apples basis. The difference there is coming from volumes not yet fully returning—some of the revenue performance right now is price rather than pure volume—and the efficiencies that come with buying on volume. There's also the need to manage inflation volatility. We were extremely happy with our team's ability to improve sequential gross profit margin as inflation rose from Q1 into Q2. We moved from mid-single-digit to double-digit inflation, and we drove significant gross profit margin improvement through better buying and better inventory management across our teams. As we continue to build volume back, margins should move back toward normal.

Great. It may be early to ask this, but are you seeing anything in the business—wages or other factors—that make you think about eventually returning to pre-COVID margins and even longer-term margin goals closer to 7%?

Yes. It's hard to predict the future. But the pivot has been: how do you do more with less? Our team has done an unbelievable job of doing that. It's not easy—people are working hard, and we don't want burnout—but we've learned a lot and become more efficient. By asking customers to cooperate and by improving efficiency, I don't mind this more efficient model going forward; I actually prefer it. The market will dictate whether we need to add more service. We're a high-touch service model with a long tail of items, but we've shortened that tail somewhat for COVID and it's been a very profitable model.

Thanks very much.

Thank you.

Our next question comes from the line of Ben Klieve with National Securities Corporation. You may proceed with your question.

Thank you. This is Ben Klieve now with Lake Street Capital Markets. Thanks for taking my question. A couple questions: first, on inflation—how was inflation absorbed throughout the supply chain? Were you able to pass costs on? Were customers able to pass those costs to diners? How quickly was your pricing model able to adapt to inflation during the quarter?

Thanks, Ben. Like many industries, we've observed pricing power throughout the value chain—from manufacturers to distributors to our customers—and that is passing through to consumers now. When you compare inflation to Q2 of 2020, it looks pronounced, but baseline effects are a big part of that. Compared to 2019, food inflation in our categories is less pronounced, though still above normal (normal is 1%–3% typically). So some of the figure will moderate as we move further away from 2020 comps. We're still seeing volatility especially in center-of-the-plate, although we are starting to see some easing in a number of center-of-the-plate categories, which is encouraging. Freight remains elevated and is a big part of product cost, so where freight remains elevated, pricing will likely remain elevated—especially for imported products. But there is pricing power in the market right now throughout the value chain, and until the end consumer stops accepting it, we expect it to continue for a while.

Got it. That's helpful. Jim, another question for you regarding cash flow and inventory build with how dramatic the ramp was in the quarter and the need to refill your pantry. Where do you stand at the end of the quarter regarding inventory levels? Do you think you're in a normalized run rate now for inventory levels, or will you need to ramp that spend up in the second half of the year?

We have a really strong cash position. Our cash flow during the quarter was impacted by CapEx on building build-outs in Florida and LA, acquisition spend, and investments in working capital. Our team has done an amazing job managing working capital—bringing DSOs down and effectively managing inventory. We have significant cash and can easily fund additional working capital investment. The bulk of the inventory investment happened quickly, but there may be some additional investment and CapEx. As we reported, we have $247.7 million of accessible liquidity between cash and availability on our revolver, so we're not concerned about funding. We're looking forward to putting that capital to work to generate ongoing returns for the business.

That is helpful color. One more quick one: I didn't hear much about the Texas ramp-up. Can you elaborate on where you stand there both in terms of investments and converting those investments to business?

Regarding Texas ramp-up, we made the Texas investment pre-COVID and COVID delayed some of that. We're very pleased our Texas business has moved toward breakeven faster than we expected. Some of that is the team there building the business and Texas being a state that opened earlier. We're pleased with our progress, and acquisitions may be something we pursue eventually. Chris can add color as well.

Yes. Texas is an investment in the future where we're continuing to hire salespeople. We're looking at multiple opportunities in Houston, Dallas, San Antonio and Austin. It's pretty spread out. I recently spent time on the West Coast and in Texas to evaluate opportunities. I still think Texas will be a top-three market for us. We're basically in the first inning at this point but extremely excited about what we're seeing and the new people joining us.

Perfect, very helpful. Thanks to you both for taking my questions. Congratulations on a good quarter. I will get back in queue.

Thanks, Ben.

Our next question comes from the line of Todd Brooks with C.L. King & Associates. You may proceed with your question.

Hey, good morning, gentlemen. What a difference a year makes.

Hey, Todd.

A couple of quick questions. You talked about the natural July/August slowdown where you're still, with acquisitions, running kind of at 2019 levels. But if we think about this seasonal slowdown before what could be a fall spike with back-to-work and back-to-travel again, what's this digestion period look like? Chris, you had a couple of interviews during the quarter outlining the extreme measures you guys had to undertake to maintain service levels. Are we digesting this spike in demand that we've seen now, and can you qualitatively talk about the organization and what you've been able to do so that maybe you're better matched to demand trends going into the fall?

Yes. Labor in the warehouse and qualified drivers remain big headwinds. There was more demand than we could meet, so we had to be disciplined and prioritize servicing our best customers—those with long-term relationships and loyalty. We didn't want to chase all transient demand. We're hiring every day and emphasizing training and retention because it costs money to train and burnout is a concern. It's not an easy market to find people with the right work ethic and ability, especially for difficult deliveries in big cities. We have great leaders recruiting, and the team continues to execute as you can see in the numbers. We want to get better and we do get better every day. The opportunity for growth through M&A and market share has never been greater.

Todd, just to add: while it's still challenging, we are seeing initial green shoots around some easing in certain markets for frontline workers. There is positivity out there. We're doing everything we started before the pandemic—consolidating routes, building new facilities, making investments in technology for operators, our salesforce and customers—to drive efficiency through the entire value chain. It's an ongoing process.

Very helpful. Second question: you talked about some early evidence of menus broadening out again. How early are we in that process? Many operators are labor constrained—where do you see the benefit of broader menus and what that does to case counts?

We're getting really close to normal, which is amazing. We're not there yet—banquets and large events are still not back and those drive many SKUs. Labor constraints in restaurants remain, but there's still upside in many of our most profitable categories like pastry, which are still well below normal levels. I'm seeing creativity at restaurants and more variety on menus, because restaurants need to keep customers interested. We're almost back to lines per customer of 2019; the primary reason we're not fully there is that very large customers are not back yet.

Okay, great. A final question: earlier you shared a target for an exit rate entering fiscal 2022—previously discussed around 85% to 90% of 2019 pro forma for acquisitions. Given the robust revenue recovery this quarter, has that thinking changed for the back end of the year?

Todd, I hesitate to change our conservative stance. In this environment it's better to under-promise and over-deliver. We're pleased with progress but not back to 100% in terms of volume; we are getting there. We believe we'll come out of this as a more efficient operator and return to adjusted EBITDA margin ranges similar to pre-pandemic levels. We've done a couple acquisitions since then and will model those in. We don't want to make bold declarative statements now given variables that could still impact business going forward.

That's fair. Continued success in the third quarter.

Thank you, Todd.

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

Sure. Well, we thank everybody for joining us this morning. We couldn't be prouder of the job our team has done in such a challenging time. It's been amazing to watch them perform and execute. We expect them to do even greater things in the future, and we look forward to everybody joining us on our next earnings call. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.