Greetings, and welcome to The Chefs' Warehouse Second Quarter of 2022 Earnings Conference Call. At this time, all attendees are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to hand over to your host, Mr. Alex Aldous, General Counsel and Corporate Secretary of The Chefs' Warehouse.

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 2022 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, 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 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 2022 earnings call. Late first quarter business strength continued into the second quarter as a combination of strong consumer demand, new customer openings, and increased dining capacity led to consistent growth in revenue trends as we enter the late spring and summer season. Despite sequential deflation in certain center of the plate categories, overall pricing remained firm and incremental gains in volume contributed to sales growth during the quarter. Although not back to pre-pandemic levels, moderate improvement in hospitality and event-related business was evident as the quarter progressed. A few highlights from the second quarter, as compared to the second quarter of 2021 include a 36% organic growth in net sales. Specialty sales were up 52.2% organically over the prior year, which was driven by unique customer growth of approximately 35.9%. Placement growth of 54.6% and specialty case growth of 34.8%. Organic pounds in the center of the plate business were approximately 14.2% higher than the prior year second quarter. Gross profit margins increased approximately 140 basis points. Gross profit in the specialty category decreased 70 basis points compared to the second quarter of '21, while gross margin in the center of the plate category increased 230 basis points year-over-year. Jim will provide more detail on the gross profit margin in a few moments. We are excited to announce the addition of two acquisitions completed during the second quarter and one completed just recently in July. University Foods is the specialty broad-line distribution company located in Southern California. We welcome Dean Schauer and his team into the CW family and we expect to fold their operation into our new Los Angeles distribution center in the coming weeks. We are also excited to add Alexa Specialty Foods to our Northwest region, located in Portland, Oregon; we will combine Alexa with our CW Specialty Business serving Portland and Seattle and look forward to driving significant growth in these key markets going forward. In Florida, we added Master Purveyors, a center of the plate distribution company operating out of the Tampa area to our portfolio of categories and brands in the region. Masters was eventually combined with our seafood processing operation to bolster our growth in the Central to Northern regions of the state, complementing or expanding in high growth specialty and protein business in South Florida. Each of these acquisitions are important additions to the CW portfolio and facilitate growth in key regions and create operating leverage as we grow into our expanding distribution capacity across our footprint. I would like to express sincere thanks to the entire Chefs' Warehouse team for delivering on a great second quarter performance and continuing to provide our customers with the premium products and service they have become accustomed to over our 37 years of operations. 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 24, 2022, increased approximately 53.2% to $648.1 million from $423 million in the second quarter of 2021. The growth in net sales was the result of an increase in organic sales of approximately 36%, as well as the contribution of sales from acquisitions, which added approximately 17.2% to sales growth for the quarter. Net inflation was 13.6% in the second quarter, consisting of 16.4% inflation in our specialty category and inflation of 10.9% in our center of the plate category versus the prior year quarter. Gross profit increased 62.7% to $156 million for the second quarter of 2022 versus $95.9 million for the second quarter of 2021. Gross profit margins increased approximately 140 basis points to 24.1%. Year-over-year inflation was broad-based across most specialty and center of the plate categories. Selling, general and administrative expenses increased approximately 37.8% to $124.5 million for the second quarter of 2022 from $90.4 million for the second quarter of 2021. The primary drivers of higher expenses were higher compensation and distribution costs associated with higher year-over-year volume growth, route expansion, and increased fuel costs. Adjusted operating expenses increased 40.7% versus the prior year second quarter. And as a percentage of net sales, adjusted operating expenses were 17.1% for the second quarter of 2022, compared to 18.7% for the second quarter of 2021. Operating income for the second quarter of 2022 was $27.6 million, compared to $4.7 million for the second quarter of 2021. The increase in operating income was driven primarily by higher gross profit, partially offset by higher operating costs. Income tax expense was $6.3 million for the second quarter of 2022, compared to an income tax benefit of $0.8 million for the second quarter of 2021. Our GAAP net income was $16.9 million or $0.42 income per diluted share for the second quarter of 2022, compared to net income of $1.1 million or $0.03 income per diluted share for the second quarter of 2021. On a non-GAAP basis, we had adjusted EBITDA of $45.3 million for the second quarter of 2022, compared to $17.2 million for the prior year second quarter. Adjusted net income was $20.9 million or $0.51 income per diluted share for the second quarter of 2022, compared to $1.5 million or $0.04 income per diluted share for the prior year's second quarter. Turning to the balance sheet and an update on our liquidity. At the end of the second quarter, we had total liquidity of $210.8 million, comprised of $51.8 million in cash and $159 million of availability under our ABL facility. As of June 24, 2022, net debt was approximately $341.2 million, inclusive of all cash and cash equivalents. Turning to our guidance for 2022, based on the current trends in the business, we are updating and raising our full-year financial guidance as follows: we estimate that net sales for the full year of 2022 will be in the range of $2.375 billion to $2.475 billion. Gross profit to be between $553 million and $576 million and adjusted EBITDA to be between $135 million and $145 million. Our full-year estimated diluted share count is approximately 42.5 million shares. We currently expect our senior unsecured convertible notes to be dilutive for the full year, and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you. And at this point, we will open it up to questions.

Thank you very much, sir. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. The first question comes from Alex Slagle of Jefferies.

Thank you. Good morning. Congrats.

Hey, Alex.

Question on the guidance, I guess, typically you earn 40% to 42% of your full-year EBITDA in the first half of the year. But I guess if we look at the full-year guide, the midpoint of $140 million it's closer to 48% this year. So just trying to understand some reflection of some conservatism in the back half just given the unknowns, the macroeconomy or the facts moderating food costs or something you're seeing out there just a reflection of an unusually strong first half perhaps with some tailwinds that you think will be hard to replicate going forward?

Thanks for the question, Alex. Now the guidance really reflects the three acquisitions that we just announced, at least about five months of those as we completed two of them in late second quarter and we completed one just the other day in July. So the $50 million bump in revenue and the $5 million bump in EBITDA, since we last guided in June reflects about a little more than half the addition – the pro rata addition of the acquisitions, and the rest was just really additional trending that we've seen. I think we're starting to return to kind of more normal seasonality than we have in the past two years. So July and August are generally slower business months than May and June. And if you look at us historically, the third quarter is generally a little bit slower than the second quarter. The second quarter is usually our second strongest quarter of the year, next to the fourth quarter. So it's a little bit turning back to normal seasonality and then just adjusting for the acquisitions.

Got it. And just following up on your leverage target, so I think you had last said 3.6 times is the target for the end of ’22 and if EBITDA moving higher. Does this change or any thoughts on leverage targets?

Net debt leverage, we don't have a specific target, I think right now, we sit a little bit below – on a trailing 12-months basis, we sit a little bit below 3 times, probably 2.8 times or so. I think we're very comfortable operating the company with a three or four handle on net debt leverage. So we feel pretty good about the balance sheet right now, and we expect to continue to strengthen it as we grow.

All right. Thank you.

Thank you.

The next question comes from Peter Saleh of BTIG.

Great. Thanks and congrats on the quarter. I wanted to ask if you could just give us a little more color on trends throughout the quarter. I mean, I think, you guys have raised guidance, this is the third time so far this year. And just trying to understand if there's any way to tease out how maybe the – how seasonality has come back, and maybe I guess third quarter might be a little bit lighter than second quarter? Is there a way to tease out that its seasonality and not some broader based slowdown in the economy?

Yes. Well, the cadence during the quarter, thanks for the question, Peter. The cadence during the quarter was really driven by pricing remaining firm, we saw a little bit of sequential deflation in center of the plate, but we saw a little bit of sequential versus Q1 inflation in specialty. So they kind of evened out meaning that pricing remained firm. And it was really the first quarter that we're back to over 100% of volume from 2019. So incremental volume build as Chris mentioned in our prepared remarks, continued firm pricing, good margin management by our teams. And then if you look back at us historically, Q3 is always seasonally a little weaker than Q2, that’s just the normal cadence of the industry and of the business. So that's not to be unexpected.

Great. You mentioned that pricing has remained stable while also trying to achieve some sequential deflation in certain areas. How long do you expect this pricing stability to last? What do you estimate regarding the extent of the deflation you're observing, and do you think it will persist into the latter part of the year?

We anticipated center of the plate pricing, having some moderate deflation coming into the year, it’s kind of played out that way. It's just being offset by specialty and produce and other prices, kind of, being a little more firm. I wouldn't say that we have a general expectation that there's going to be considerable significant deflation given I think the dynamics that we're seeing in the markets. But I mean, as you're aware, the environment is a little more volatile than it has been in the past, so it's a little more difficult to forecast.

We may have been a bit premature in anticipating significant deflation. While we have observed some, the current news about droughts affecting crops and the rising costs associated with feeding cattle and fuel suggests that we could see prices rise again, depending on demand. It really highlights that if demand stays strong, prices could remain elevated. It's fascinating to monitor the news daily as we consider the overall economy and spending habits. Many seem to overlook that we are still emerging from the pandemic, with ongoing high demand for travel. We're noticing that many of our customers who performed well last summer—when travel was less common—are now experiencing more typical patterns. People with the means are traveling to Europe or taking trips that were postponed. As Jim mentioned, we're witnessing more normalization along with an increase in planned events and meetings. This shift means we are well-positioned to benefit from the global reopening, with business travel and weddings happening frequently. We've been anticipating this return for two years, and it seems we are finally beginning to experience it.

Thank you very much and congrats. I'll pass it along.

Thank you.

Thanks, Peter.

The next question comes from Andrew Wolf of C.L. King.

Good morning. Regarding the deflation, could you clarify which categories this pertains to? I assume it's in beef, but not in poultry, which I think is still experiencing increases due to avian flu. How do you perceive this situation? I believe Chris mentioned that excessive beef inflation isn't favorable for menu prices. Many people associate deflation with negativity, but what is your perspective on it?

Look, I mean, you know, continuing to go much higher from here, I think we all start to rethink what the crystal ball is going to say, how do restaurants deal with it. Again, Andy, we've been talking about this for over 11 years. Restaurant owners are entrepreneurial, right? To survive, it’s a very tough business, labor and rents and everything else coming at them. And they're going to figure out how to, you know, except for maybe steakhouses and even they they'll figure out more 6 ounce versus 8-ounce filets, instead of a 16 ounce or 22 ounce steak, you'll start to see more 14 ounce. Obviously, you're seeing tons of skirt steak. Chicken for our clientele, obviously are lower casual it hurts, because there's only a certain price point I guess. They think that their customers will pay before they see a slowdown. But when you go to a regular CW restaurant that chicken is $22 to $37 on the menu, $1 a plate cost, they'll figure out a way how to earn that back, whether it's on sides or drinks or that’s their business. They're out to make a profit, right, every day. So what I'm seeing is that they're getting more creative, they're figuring out how to recreate menus with less people and our good customers are thriving. So after almost two years of what we saw and closed down, so this is really exciting to see business back.

Chris, thanks for that color. And I wanted to just follow on also on the three acquisitions you talked about. How would they, kind of, fit in the strategically between standalone versus, kind of, fold them?

Yes. I believe I have consistently emphasized that, especially during the pandemic, we made a conscious choice to keep investing in our workforce. We sought out top talent to ensure we could pursue acquisitions effectively. It is crucial to have skilled professionals to manage these businesses. We recently completed a new building in Southern California, which allowed us to acquire University Foods, a process we hope to finalize soon. I truly appreciate a good fold-in, as they tend to be highly beneficial; we can cut down on overhead while maintaining sales and combining our trucks and sales teams, often resulting in excellent returns. University Foods is one acquisition, and Alexa, a competitor in the Portland and Seattle area, is another. By integrating Alexa, we not only eliminate competition but also plan to consolidate operations in one facility, maximizing synergies. Lastly, Masters in northern Florida presents an exciting opportunity to enhance our business strategy. We already have an Allen Brothers Seafood in Orlando, and we are exploring the establishment of a facility that merges the two, creating a strong presence for Allen Brothers Meat & Seafood in the Tampa and Orlando regions, extending down to Naples, where we have another facility in Miami. These acquisitions are significant for us, and I look forward to pursuing many more strategic fold-ins in addition to exploring new categories and markets.

Terrific. Thank you for that answer and I'll pass it on to the next person.

Thank you.

Thanks, Andrew.

The next question comes from Kelly Bania of BMO Capital.

Hi, good morning and congrats on a great quarter.

Thanks, Kelly.

Just wanted to follow-up on a little bit of the seasonality topic, your Q4 EBITDA margin is typically the highest and this quarter obviously at 7%, I mean is there any reason to think that Q4 shouldn't be 7%-plus or just maybe help us understand some of the puts and takes of the margin dynamics in the back half?

I think with the normal seasonality coming back and if trends continue that the way they are that we're seeing them right now, I don't think there is any reason that we should expect anything different than we've seen in the past. The only thing I would say is that given some of the uncertainty around the macroeconomic environment, it's a little harder to have the visibility into the fourth quarter that we would normally have at this time of the year. But other than that, assuming that trends continue that the way they are right now, and I wouldn't expect that it would be much different.

Okay, that's very helpful. This year has been strong, but there may be some uncertainty in the macro environment. As you consider growth drivers for next year, you mentioned that CAPE volumes are returning to pre-2019 levels, but hospitality still has some room for recovery. Can you explain the potential scale of that recovery when it occurs?

In an ideal situation, we would continue to see an increase in people dining out, and we'd be able to tap into the aspects that are still lacking, such as more city business, business lunches, and events, particularly in the fourth quarter, which is typically our busiest time. This period usually brings in tourists, numerous business meetings, and holiday parties. Currently, we still lack strong tourism in areas like Midtown Manhattan, Chicago, and across Asia. I’ve recently traveled extensively and noticed busy casinos, but I haven't seen the usual influx of Asian tourists. This might be partly due to airlines being limited in capacity, which is hindering their ability to bring in more travelers. I remain hopeful that they will address this issue. The cruise industry is recovering, but I believe we are still about a year away from returning to any normal travel patterns. There remains uncertainty about COVID-19's impact on work absences, but I foresee significant potential for growth ahead. While there may be a slight decrease in spending, it could still lead to a net positive outcome. For years, I've emphasized that our strength lies in our concentrated focus on the customer segments we serve, specifically targeting top restaurants and upscale casual dining, along with hotels.Over nearly 40 years, I've observed that our customers consistently seek dining and event experiences, making this a robust customer base for us. This focus has driven our ambition to dominate this market nationally, and as we've expanded beyond Metro New York, we generally perform better than the wider hospitality sector, despite any downturns or crises like the financial crisis or COVID-19. Therefore, we maintain a cautiously optimistic outlook and see exciting opportunities for growth through strategic integrations into our operations, particularly within our new facilities.

Okay, very helpful. And just another follow-up on the acquisitions, just curious as you look at those how many of those acquisitions really bring net new customers that you weren't serving? Or are you serving some of those customers and now you just are able to expand your line items with those customers? Or just help us understand a little bit more about what you're seeing there?

Yes, absolutely. We always need a strong justification to make an investment. We seek out companies that offer us access to customer bases we currently lack. The unique aspect of Chef is that there aren't any competitors exactly like us. This makes acquisitions a bit challenging. For example, acquiring a company in Northern Florida will provide us with a history of loyal customers along the Gulf Coast, which is not a particular strength of ours. Our plan remains to keep these customers satisfied, leverage our sales force, and continue to grow it, which will give us access to hundreds of new customers and thousands of products that they don’t currently carry. Another acquisition in Portland is complementary and will also open up many new customer opportunities for our extensive range of products. Over the years, we have effectively built a national chef warehouse which has allowed us to achieve hybrid growth. Even before the pandemic, while the industry was growing at around 1%, we were able to grow at rates of 5%, 6%, or even 7%, thanks to the strategic alignments of our business portfolios. Our ongoing plan is to keep this momentum going by adding more produce and seafood to our offerings. We have more than 600 trained sales team members who are continually educated to engage customers as consultants. While it’s common for distributors to say this, it’s quite challenging to execute. Our long-term investments in test kitchens, training facilities, and skilled trainers are beginning to yield returns, and I believe you’re starting to see the benefits of those investments.

Super helpful. And then maybe I can just ask one more on inflation/deflation and obviously a big topic. But I guess if you think about what's ideal for Chefs' Warehouse going forward on the inflation/deflation front? What would that be? And do you think investors should at all worry about some more deflation? Or could that be a positive for Chefs' just help us think through, kind of the puts and takes given how much inflation we've had over the last few years?

What I'm hearing from many customers is that there are clearly different types of clientele. On the high end, some are carefully adjusting their menu prices to pass along costs, while a significant number of customers are altering their business operations and menus. They're hesitant to increase their menu prices significantly. For instance, they may reduce portion sizes or change the accompaniments to their entrees or specials. These restaurant owners are very savvy and are trying to cater to their customers wisely, much like in any other business. For example, on a seafood platter, if lobster is highly priced, you might find a smaller portion of it, accompanied by more shrimp or scallops, which are more affordable, allowing them to maintain their gross profit on a dish. We've also seen an increase in more creative drink options and various types of side dishes. Potatoes, for instance, are often used more because they are filling and much cheaper than a prime steak. Our customer base is incredibly entrepreneurial and understands their audience well. If you observe the pricing, you'll notice a $38 entree where they believe is the maximum they can charge, alongside higher-priced options like a $75 steak in busy restaurants that often have no availability on weekends. Overall, these businesses are being very innovative and finding ways to keep their establishments thriving.

Thank you. The next question comes from Todd Brooks of The Benchmark Company.

Hey, good morning, guys. Congrats on the results on the quarter here.

Hey, Todd.

Two questions. Chris, three acquisitions closing in relatively short order here, I know you've talked about the environment for M&A being frothy for a long time here, and maybe even frothy or coming out of the pandemic. Pace of closures do you see that picking up either A, due to getting to more of a normalization in the recovery here? Or maybe because of the opening of the new facility in the West Coast, there have been some things in the hope or now that fold-ins particularly that now that, that facility is up and running, it's getting these deals across the finish line?

Yes. So are you saying the question is whether our ability to close deals is increasing?

Yes, correct, correct.

Yes, I absolutely think that these deals take time. Rarely do you close a deal in just one month. Some discussions have been ongoing for years, while others last around six months. As you mentioned, Todd, the pipeline is quite active, and we are very careful in selecting those who join Chef. Currently, to finalize one deal, we are considering about twenty. The industry was already consolidating before COVID, and very few deals were completed during that period, which has led to some backlog. Many private equity-backed mergers are starting to come to market now. There are often surprises and new participants, but having been in the industry for so long allows us to understand where the valuable opportunities lie. We are concentrating on companies that truly align with our vision. Looking ahead, I foresee us continuing to pursue synergistic fold-ins, expanding into regions where we currently lack strength, and exploring new categories that align with our business. After two years of navigating the challenges posed by COVID, we are beginning to see the light at the end of the tunnel, allowing for clearer forecasting. This influx of companies entering the market now is likely because they have stabilized enough to demonstrate their actual business performance despite the ongoing inflation. The real challenge is figuring out what the landscape looks like in a more normalized environment.

Right, exactly.

But the pipeline I think is going to remain extremely frothy and you just have to be careful and diligent, you know, do the deals that make the most sense.

Okay, great. Thanks, Chris, for my follow-up. You mentioned earlier that Chef continued to invest during the pandemic, which strengthened operations. I know you brought in a lot of sales talent from competitors during that time and integrated them into the operations. Are we starting to see the results of that? You identified new customer wins as a major driver this quarter. How is that investment showing its effects? The organic growth was really strong this quarter. Is this a sign that the money spent during the pandemic is starting to pay off in terms of both revenue and margins? Thanks.

Yes, I believe so. Besides sales, operations have truly stepped up in a challenging labor environment and are helping us achieve profit by improving our operations and enhancing crew efficiency. The investments we’ve made in operations, people, and leadership, combined with the sales talent we've acquired, are crucial. I think we are only beginning to see the benefits of these investments in talent. The investments in facilities will also start to yield results over the next four years as we expand in Florida with two new facilities and Southern California, where we can significantly increase our business. We also have a new project in San Francisco that we are consolidating. Our knowledge of the business, the team's expertise, and ongoing recruitment efforts, including the establishment of a Talent Officer position, come at a crucial time as our company continues to grow. Focusing on attracting top talent will yield significant returns over the next four to five years.

And then just one final quick follow-up. What's the timing on the New Florida facility coming on later this year?

Six months ago.

We expect to move in the back half the year.

Okay, great. Thanks guys.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the conference over to Chris Pappas for closing remarks.

Yes. Well, we thank everybody for joining our call today. Couldn't be prouder of the CW team, they had a great quarter. All their hard work is showing up in the numbers. And we look forward to sharing our next quarter and for you joining us again. So thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.