Greetings and welcome to The Chefs' Warehouse Third Quarter 2021 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 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. 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 2021 earnings call. Revenue trends remained strong as momentum from second quarter customer and consumer demand continued into the third quarter. In September, limited growth in return to offices and hospitality related activity contributed to a moderate increase in sales trends sequentially over August and July, and we exited the quarter at approximately 103% of 2019 sales. Similar to our previous reporting, I will compare sales and gross margin results of the current quarter sequentially to the second quarter of 2021. Jim will provide the comparison to prior year in his comments later in the call. During the quarter, net sales increased approximately 14.5% versus the second quarter of 2021. Specialty sales increased approximately 18.1% sequentially versus the second quarter of 2021 with average unique customers increasing 7.1% and we saw higher placements of approximately 8%. Specialty cases increased 12.8% versus the second quarter of 2021, while center-of-the-plate pounds sold were approximately 2.8% higher sequentially versus the second quarter of 2021, excluding the impact of acquisitions. While gross profit margins were relatively unchanged compared to the second quarter of 2021, total gross profit dollars increased 14.7% versus the second quarter. Gross margin in the specialty category increased 70 basis points as compared to the second quarter of 2021, while gross margin in the center-of-the-plate category decreased 97 basis points. Jim will provide more detail on gross margin and inflation in a few minutes. During October, we completed two acquisitions that will contribute to our continued growth as a provider of choice for high-end center-of-the-plate product lines to our customers nationally. On the West Coast, we added Silver State Meats, the premier provider of specialty proteins in the greater Las Vegas metro area. We are excited to partner with the Silver State team as their high-touch, high-quality service model will serve as a great complement to our existing specialty business in Las Vegas. This acquisition will also provide us with a bridge to growing our Southern California specialty protein sales until we implement center-of-the-plate processing in our new LA facility, which we currently expect to be opening in 2022. In Texas, we acquired certain assets of Martin Preferred Foods. This will facilitate accelerated growth of our premium Allen Brothers brands to our growing customer base in the Lone Star State. Regarding recent business activity, recent sales trends have continued in excess of 2019 sales consistent with the final weeks of the third quarter. Continued modest growth in travel, office building and college related markets combined with favorable fall weather led to moderate week-over-week sales progress during October. Despite the ongoing challenges in the labor and supply chain environment, our team at Chef's Warehouse continues to focus on sourcing, marketing and delivering our high-quality product and high-touch service model to our customers. If anything, the last few months have strengthened our confidence in both the future growth of the culinary industry at large and the investments we at Chef's are making in market and category expansion and adding key talent and partners as we look forward to returning to above-average industry growth. I would like to thank all of our CW team members for their dedication and resilience as we move forward towards achieving our medium-term and long-term goals. With that, I'll turn it over to Jim, to discuss more detailed financial information for the quarter and 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 September 24, 2021 increased approximately 90.7% to $484.3 million from $254 million in the third quarter of 2020. The increase in net sales was the result of an increase in organic sales of approximately 84.2% as well as the contribution of sales from acquisitions, which added approximately 6.5% to sales growth for the quarter. Net inflation was 18.7% in the third quarter consisting of 10.9% inflation in our specialty category and inflation of 28% in our center-of-the-plate category versus the prior year quarter. Please note that center-of-the-plate prices were only 4.2% higher sequentially versus the second quarter of 2021. Gross profit increased 82.2% to $110 million for the third quarter of 2021 versus $60.4 million for the third quarter of 2020. Gross profit margins decreased approximately 105 basis points to 22.7%. Although gross profit margins declined year-over-year, strong gross profit dollar growth was driven by increased sales while maintaining a strong gross profit margin profile in an extreme inflationary 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 prices across most beef categories, especially in the higher-end prime categories. Total operating expense increased approximately 37.7% to $99.5 million for the third quarter of 2021 from $72.3 million for the third quarter of 2020. The primary drivers of higher operating expense were higher compensation and transportation costs associated with year-over-year volume growth and route expansion. Adjusted operating expenses increased 33.3% versus the prior year third quarter. And as a percentage of net sales, adjusted operating expense was 17.9% for the third quarter of 2021 compared to 25.7% for the third quarter of 2020. Operating income for the third quarter of 2021 was $10.4 million compared to operating loss of $11.9 million for the third quarter of 2020. The increase in operating income was driven primarily by higher gross profit partially offset by higher operating costs. Income tax expense was $2.8 million for the third quarter of 2021 compared to income tax benefit of $5.2 million for the third quarter of 2020. Our GAAP net income was $3.5 million or $0.09 income per diluted share for the third quarter of 2021 compared to a net loss of $11.4 million or $0.31 loss per diluted share for the third quarter of 2020. On a non-GAAP basis, we had positive adjusted EBITDA of $23.4 million for the third quarter of 2021 compared to negative adjusted EBITDA of $4.9 million for the prior year third quarter. Adjusted net income was $4.5 million or $0.12 per diluted share for the third quarter of 2021 compared to adjusted net loss of $13.7 million or $0.38 loss per diluted share for the prior year third quarter. Turning to the balance sheet and an update on our liquidity. At the end of the third quarter, we had total liquidity of $243.7 million comprised of $134.2 million in cash and $109.5 million of availability under our ABL facility and net debt as of September 24, 2021 was approximately $266.4 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 event and travel-related business activity, we will not be providing guidance for 2021. Thank you. And at this point we will open it up to questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Fred Wightman with Wolfe Research. Please proceed with your question.

Hey, guys. Good morning. Thanks for taking the question. Really helpful color on sort of the September exit rate and how that continued into October. But I'm wondering if you could just give a little bit more color as far as when you saw the delta impact, how that sort of progressed throughout the quarter and then the comments that you made about business and travel returning a little bit — how you see those progressing going forward?

Yes. Sure. Thanks for the question, Fred. The cadence through the quarter — the headline is we didn't really see much impact from the delta variant at all. July is seasonally generally a little weaker than June, but we had very consistent revenue trends throughout July. August is seasonally a little bit better than July and that played out as we had incrementally higher week-over-week revenue trends in August. As we mentioned in the prepared remarks in September, we started to see the impact of some of the college markets opening up. We saw very limited incremental business in the segments of our markets that do better when offices are full — theater districts, things like that. So not a leap, but more of a very gradual incremental build. From a delta variant perspective, we didn't really see much at all. In terms of looking forward, since this thing began we have internally modeled a very gradual build back in hospitality, travel, business travel and that type of business activity, whether it's cruise lines or international travel coming back to the big cities. So we still model internally a very gradual build back through the end of this year and into 2022. The United States is opening up travel to vaccinated people internationally in mid-November, so we'll see how that plays out.

Great. And then just broadly, a little bit more detail on the staffing outlook. Are you still super constrained to the extent that you're having to turn away new customers in your business? And did you see any change as some of the federal programs rolled off in the late summer, early fall?

Yes. Staffing has been a challenge. The positive side is it's made us have to operate much more strategically and efficiently. Staffing was a problem before COVID, so it was always an issue trying to find enough CDL drivers and especially night crews. For us it imposed a huge discipline on what customers we would take on. Servicing our existing good customers was the number one priority. It did limit us from, I would say, path behavior of maybe taking on too many customers in different regions that weren't as profitable. I think we learned a lot. It was a forced discipline. As staffing comes back, we are seeing more and more people coming back into the workforce, which is a positive sign. We're still looking at the business differently than we did pre-pandemic and I think we've learned a few things. If anything positive came from the pandemic, it's we understand our business even better than before and are operating more efficiently.

Yes. Go ahead, Chris. Sorry.

Okay. Thank you.

Thanks.

Our next question comes from Alex Slagle with Jefferies. Please proceed with your question.

Hi. Thanks. Good morning. I just wanted to follow-up on that previous question. If you could just provide some more color on the magnitude of overtime and incremental training and incentive payments — just to get some color where you are maybe in terms of the slope of these cost headwinds, if you see them continuing to increase through the fourth quarter and then maybe moderate at some point as hiring improves?

Alex, thanks for the question. Just adding to Chris's comments, the biggest impact we saw during COVID on labor has been in the larger markets, where there was a lot more competition for that labor pool. In September and early October, we started to see more applicants — a better flow of labor. It's still challenging; there's no doubt about that. We think the world has changed as it relates to the labor market, and so that's why we're investing in technology where we can to offset that impact. So that's basically what played out. As we move forward, it's leveled off a little bit. There's always going to be challenges around labor given our business model. We hire drivers and night crews, as Chris mentioned. Our teams have done a great job of adjusting operations to the current labor market, and we're pleased with what they've been delivering.

Thanks for that. And one question on the inflationary cost pressures — could you provide a little extra perspective on how effectively you've been able to pass along those higher costs relative to your expectations and maybe thoughts on pricing flexibility in the current environment? I wonder if you're seeing any changes there more recently.

Of course...

I'll take this first and Jim can add. I don't think anyone in my generation has seen inflation due to a lot of logistics pressures — a lot of it is freight. Proteins have seen the greatest inflation, especially prime categories. There's so much demand as well. I didn't expect demand to come back as fiercely as it has. We've always run the business with a limited amount of contracts. Our primary customers are independent restaurants, big shops, or caterers, and the price really floats with the market. We try not to get locked into a situation where you can't pass it on. There are some larger customers with agreements, but even those contracts today are negotiable. The most important factor is being able to execute and deliver. In our industry everyone is cooperating and understands this is probably a once-in-a-lifetime environment and flexibility is required. That has allowed us to move price as you can see from our results. We were able to pass on — if not exactly the total margin increase, we were able to keep our gross profit dollars, which is how we run the business. The spread between our operating expense and gross profit dollars on more expensive boxes gives us leverage on OpEx because they don't cost more to move. I've often said I'd rather sell expensive boxes than inexpensive boxes because they don't cost more to move. That's our model with higher-end restaurants. We don't sell many customers 300–400 boxes of French fries at one time; we might sell 40 different line items, one of each. That allows us to get the margin to deliver high-touch, frequent delivery service and provide value for both the customer and us. That model played out in the last quarter.

It’s helpful. Thank you.

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

Hi. Good morning. Thanks for taking our questions. I wanted to ask about the comment on sales tracking at 103% of pro forma 2019 levels — that's very helpful and ahead of expectations. But on the expense side, could you put some color around operating expenses on a pro forma basis? How do you think this quarter came in relative to what you think pro forma expenses would be?

Thanks, Kelly. I think it's coming in as we expected. Over Q2 and Q3, as business came back, we've started to leverage our fixed cost base. That was escaping us during the depths of COVID, so that's gradually improved. I'll echo Chris's comments about growing gross profit dollars above adjusted OpEx. Our gross profit margins are lower than 2020 and 2019, but adjusted OpEx as a percent of revenue is better. You're seeing a shift because of the abnormal inflationary environment and we're managing price such that we're partnering with customers and passing on market-related costs, while growing gross profit dollars and creating operating leverage as we did prior to COVID. The comps to 2020 create extreme numbers, but our adjusted EBITDA margins in Q3 are very close to Q3 of 2019. If you normalize for the addition of Sid Wainer, which is a lower EBITDA margin business, and we have a multiyear plan to grow that margin, we're actually very close. Even with wage increases, investments in technology, process improvement, and prioritizing commercial business, all those things have come together and given us an OpEx profile in line with expectations.

That's very helpful. And in terms of hiring, can you update the extent to which you still need to hire drivers or warehouse employees or any labor across the board?

We discuss this daily in ops calls. Hiring warehouse workers and CDL drivers was a challenge before the pandemic, so it's not new. We work hard to recruit and have restructured HR responsibilities to focus on hiring and retention. It's not only hiring, it's keeping people in these jobs. People are quitting more often and it's harder to get them to stay; these are tough jobs involving heavy lifting and driving large trucks. We want to make sure we have great packages to compensate for the hard work. I don't think that will change much. It was tough before the pandemic. We're actively recruiting; it seems to be getting better in recent weeks with more people showing up at job fairs. We have full-time recruiters. The industry forces you to be resourceful and find ways to do more with less. I don't think it will change drastically. There are more candidates, but we're being careful as we add trucks back. We're running the business with fewer trucks and have found efficiencies. We know travel will resume and cities will return to a more normal state with hotels and business travelers, and we're planning routes and recruiting under close scrutiny to operate more efficiently than in the past.

Thank you. One more: on the two transactions announced this month, what stood out about those acquisition opportunities and why those locations? Also, general update on how some of the smaller competitors are faring in this environment?

Many deals were in the works before the pandemic. We're constantly talking to people in different markets. We like holdings — these are creative because we're mainly acquiring sales and customer bases. The Las Vegas deal was strategic: we have a great specialty facility there but lacked a protein solution to launch our Allen Brothers steak and seafood business. Silver State Meats provided that. We like the people who ran the business and it complements our existing specialty operations. It also gives us the opportunity to start building Southern California protein sales until our new LA cut shop opens, which should be late 2021 or early 2022. The Texas acquisition was a processing asset to accelerate Allen Brothers growth in that region. Many deals were delayed by the pandemic, but the pipeline is active. I expect more M&A now that forecasts are somewhat more visible. Six months ago the Delta variant made forecasting hard, but now we're more comfortable pulling the trigger.

Thank you. Our next question comes from the line of Peter Saleh with BTIG. Please proceed with your question.

Great. Thank you. I think most of my questions were asked, but I wanted to ask about the overall industry for independents. There's been a lot of talk about a labor shortage and high labor turnover. Are you seeing independents being more cautious about opening new concepts, or is there still a surge in development coming out of the pandemic?

A mixed picture. Sadly, some customers closed, though not as many as predicted. I thought perhaps there were too many restaurants before the pandemic, and the pandemic provided an opportunity to exit unprofitable locations. Many small businesses didn't have the wherewithal to survive, though PPP helped the industry tremendously and was a lifeline for many. We're seeing many customers coming out as volumes return; they're looking for new locations and signing leases. It's a once-in-a-lifetime opportunity to find fully built-out locations ready to go with minor cosmetic work. We're seeing customer accounts increase and many planning new restaurant openings over the next six to 12 months. Restaurateurs are creative and like to open new concepts; I expect an acceleration of new openings.

Great. Very helpful. And lastly on the recent acquisitions — any impact we should expect on margins in 2022 from these two acquisitions, or are they too small to move the needle?

Nothing significant. They're more growth investments. The Las Vegas addition will contribute to West Coast P&L and operations but it's relatively small and we plan to grow it over the next several years. The acquisition in Texas is a processing plant that will accelerate Allen Brothers product growth in that region. It's an investment that will pay off over the next couple of years, so nothing immediate to model in.

Our next question comes from the line of Todd Brooks with CL King. Please proceed with your question.

Hey. Good morning, guys. Can we talk looking forward about the inflation outlook — maybe Q4 going into fiscal 2022 for specialty and center-of-the-plate? Some labor pressures that are driving inflation from producers — might those ease? Thoughts on inflation looking forward?

Thanks, Todd. Prices remain firm going into the fourth quarter. Public data and our experience show pricing sequentially hasn't significantly changed. Some center-of-the-plate categories have come off a little, but others remain dear. Our view is wages are unlikely to reset lower; we think wages will reset higher. Year-over-year changes will most likely moderate and be slightly deflationary versus the extreme pricing we've seen in 2021 compared to 2020. The comparisons should be easier because you're comping to 2021 rather than 2020.

It's a unique environment for a long time. We may be getting used to a new normal where products are more expensive. The good part is consumers haven't pushed back significantly. When you break down ingredient costs, even if a case of pasta goes up $10, the cost per plate might only increase $0.50 or $1. Our customers are generally higher-end and more resilient. Hopefully travel and business travel return. I'm optimistic: restaurants are busy even without world travelers and business travelers and events. Prices may moderate; much of the increase is driven by logistics and shipping constraints. Shipping costs will likely come down from extreme levels and that will help margins. Our clientele is finding ways to pass costs on and be creative with menus, which is why restaurants remain full and more are opening. We live in interesting times.

Thanks, Chris. And a follow-up on private label as a percent of sales — how has that changed in the inflationary environment and what might that mean for margins when things normalize?

I don't think our strategy changed much. For proteins and private labels, we probably sell over 50% of what we sell in some sort of Chef's Warehouse box or Allen Brothers or Michael's box or an exclusive label. Customers are more understanding today when you have to substitute products. If one SKU is out, we often have a close quality substitute customers accept. That's one of the things that helped us — what we thought was costly to carry (a very wide assortment) proved beneficial during supply chain disruptions. Having breadth allowed us to substitute without losing customer trust, and that helped over the past year.

Great. Final one: on October trends and holiday outlook — what are customers saying about early reads on the holiday season and bookings?

Overall, we're hearing optimism. Parties are being booked, often smaller, and people are anxious to get back together. We're hosting an event for our leaders who haven't seen each other in almost two years, and that's representative of the industry. Events are returning but are often smaller. Operators are excited to put events on the books. We're hearing about Vegas bookings increasing. Watching sports and stadiums being full shows people want to go out, and we're starting to see that effect.

Our next question comes from Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Hi. Thanks for taking my question. On the direct-to-consumer business model — there are only a couple of markets included on your website at this point. How are you thinking about this model going forward? Has it served its purpose or is it still something you plan to focus on as the world settles down?

Sure. The question was about our direct-to-consumer business, Shop Like a Chef?

We've always had a solid direct-to-consumer business with Allen Brothers via online and catalog channels. It was a relatively small part of the overall business but it quadrupled during the pandemic and has since leveled out at a higher level than pre-pandemic. The dream was to do direct-to-consumer on our own trucks, which we did during the heart of the pandemic, but that's too expensive and would require a different operating model than servicing our existing warehouses. As business normalizes, the warehousing and pickup model doesn't align with serving consumers at scale. We plan to grow Shop Like a Chef more with the Allen Brothers model using third-party fulfillment and expand seafood and gourmet divisions. Demand data show customers are searching for truffle products, olive oils, imported cheeses and extensive gourmet offerings and proteins — that's a real business we're working on.

Great. That's very helpful. That's it for me. Thanks for taking my question. I'll get back in queue.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.