Chefs' Warehouse, Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to the Chefs' Warehouse Second Quarter 2025 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 second quarter 2025 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 historical adjusted net income, adjusted earnings per share, adjusted operating expenses, adjusted operating expenses as a percentage of net sales and as a percentage of gross profit, net debt leverage and free cash flow. These measures 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 and second quarter 2025 earnings presentation. 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. For a portion of our discussion this morning, we will refer to a few slides posted on the Chefs' Warehouse website under the Investor Relations section titled Second Quarter 2025 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. 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 2025 earnings call. Second quarter business activity displayed typical seasonality as revenue and profitability improved across our network. Our operating divisions, domestic and international, delivered strong unit volume and unique item placement growth and managed pricing effectively while providing our customers with high-quality products and high-value service during the quarter. I'd like to thank all the Chefs' Warehouse teams from sales, procurement, operations to all the supporting functions for their dedication and contribution to a strong second quarter and first half of 2025. During the second quarter, Chefs' Warehouse achieved the Great Place to Work certification for the fourth consecutive year. We view this certification as recognition of our unique culture and our focus on people as our greatest asset in the dynamic and competitive food-away-from-home industry. All of us at Chefs' Warehouse recognize and give thanks to our customers and supplier partners. Their support and confidence in our people, quality and diversity of products, and our high-touch flexible distribution platforms continue to drive our company forward. As discussed on our first quarter call, as part of the process of integrating our Hardie's operation in Texas with our legacy CW specialty and protein operations, we have taken a number of actions to merge our culture, streamline operations and drive both top-line and bottom-line improvements as we make progress creating the Chefs' Warehouse model in Texas. This has included the attrition of a non-core commodity protein program during the first quarter and the subsequent elimination of a non-core specialty produce processing and packaging program early in the second quarter. These actions are aimed at creating distribution capacity for specialty category and customer growth, operational cost efficiency and improved profitability as we continue to scale in the Lone Star State. As such, given these non-core programs were high in case and pounds volumes, we will present price and volume metrics as reported and also excluding the impact of these changes to present more representative year-over-year price inflation and volume change for our business overall. With that, please refer to Slide 3 of the presentation. A few highlights from the second quarter include: 8.4% growth in net sales, specialty sales were up 8.7% over the prior year, which was driven by unique customer growth of approximately 3.6%, placement growth of 8.7%, and reported specialty case growth of 3.5%. Excluding the elimination of the Texas produce processing and packaging program, specialty case growth was 5.8% versus the prior year quarter. Pounds in center-of-the-plate were approximately 4.0% lower than the prior year second quarter. Excluding the attrition related to the Texas Commodity Protein program, center-of-the-plate pounds growth was 5.8% higher than the prior year second quarter. Gross profit margins increased approximately 59 basis points. Gross margin in the specialty category increased approximately 59 basis points as compared to the second quarter of 2024, while gross margin in the center-of-the-plate category increased approximately 56 basis points year-over-year. Jim will provide more details on gross profit and margins in a few moments. Now please refer to Slide 4 for an update on certain of our operating metric improvements. In summary, Chart 1 shows continued improvement in gross profit dollars per route. Second quarter 2025 trailing 12 months were 2.8% higher versus full year 2024 and 36.2% higher than 2019. Chart 2 shows second quarter 2025 trailing 12-month adjusted operating expense as a percentage of gross profit dollars improvement by 69 basis points versus full year 2024 and 160 basis points versus 2019. Second quarter 2025 trailing 12-month adjusted EBITDA per employee increased 7% versus full year of 2024 and 26% versus 2019. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity.

Thank you, Chris. 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. Please refer to Slide 5. Our net sales for the quarter ended June 27, 2025, increased approximately 8.4% to $1.035 billion from $954.7 million in the second quarter of 2024. Net inflation was 7.2% in the second quarter, consisting of 5% inflation in our specialty category and 10.8% inflation in our center-of-the-plate category versus the prior year quarter. Reported inflation was impacted by two primary factors in the second quarter versus the prior year quarter. Center-of-the-plate inflation was impacted by the commodity poultry program attrition in 2025. Excluding this attrition impact, net inflation in center-of-the-plate category was 4.1% versus the reported 10.8%. Continued growth in specialty cross-sell as we further integrate CW and Hardie's results in elevated reported specialty second quarter inflation. Excluding this impact, specialty inflation was approximately 2.3% and overall inflation for the company was approximately 3% versus the prior year quarter. Gross profit increased 11.1% to $254.3 million for the second quarter of 2025 versus $229 million for the second quarter of 2024. Gross profit margins increased approximately 59 basis points to 24.6%. Selling, general and administrative expenses increased approximately 9.7% to $213.8 million for the second quarter of 2025 from $194.8 million for the second quarter of 2024. The increase was primarily due to higher costs associated with compensation and benefits to support sales growth, higher depreciation driven by facility and fleet investments, and higher self-insurance-related costs. Adjusted operating expenses increased 9.3% versus the prior year second quarter. And as a percentage of net sales, adjusted operating expenses were 18.25% for the second quarter of 2025. Operating income for the second quarter of 2025 was $40.2 million compared to $33.9 million for the second quarter of 2024. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general and administrative expenses versus the prior year quarter. Our GAAP net income was $21.2 million or $0.49 per diluted share for the second quarter of 2025 compared to net income of $15.5 million or $0.37 per diluted share for the second quarter of 2024. On a non-GAAP basis, we had adjusted EBITDA of $65.4 million for the second quarter of 2025 compared to $56.2 million for the prior year second quarter. Adjusted net income was $22.5 million or $0.52 per diluted share for the second quarter of 2025 compared to $17 million or $0.40 per diluted share for the prior year second quarter. Turning to the balance sheet and an update on our liquidity. Please refer to Slide number 6. At the end of the second quarter, we had total liquidity of $260.3 million, comprised of $96.9 million in cash and $163.4 million of availability under our ABL facility. During the second quarter, we repriced our $253.5 million term loan maturing in 2029, reducing the coupon from term SOFR plus a fixed spread of 3.5% to term SOFR plus a fixed spread of 3%. In addition, during the quarter, we repurchased approximately 160,000 shares under our $100 million authorized buyback program. To date, repurchases totaled approximately $27 million of equivalent shares, inclusive of shares repurchased in 2024 and 2025. As of June 27, 2025, total net debt was approximately $544.1 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 2.3x. Turning to our full-year guidance for 2025. Based on the current trends in the business, we are raising our full-year guidance as follows: We estimate the net sales for full year 2025 will be in the range of $4 billion to $4.06 billion. Gross profit to be between $964 million and $979 million and adjusted EBITDA to be between $240 million and $250 million. Please note, for the full year 2025, we expect the convertible notes maturing in 2028 to be dilutive, and therefore, we expect the fully diluted share count to be approximately 46 million to 47 million shares. Thank you.

The first question that we have is from Mark Carden of UBS.

So I want to start on the underlying health at the restaurant level. You continue to see solid growth despite some of the traffic challenges the broader industry continues to face. Your end market demographic, of course, it's a little bit different from the industry. But are you seeing any pockets of weakness or elevated restaurant closures within really any of the channels in which you operate? Or has it been pretty resilient across the board?

Yes, there may be some fluctuations here and there, but overall, we're very happy with our progress. Our team's ability to gain more market share in the areas we've focused on over the last decade in infrastructure, sales, and technology is impressive. It feels like the ideal scenario for us. Our customers seem to be performing well, and we're consistently attracting new clients who generate significant volume. Many of our customers are engaging with all aspects of Chefs' Warehouse, which aligns with our current mission to be the preferred choice for chefs. We're expanding our offerings, and I believe our customer base is showing resilience. It truly feels like a perfect situation, where customers are doing well, we're growing our market share, and we're reaping the benefits of our investments.

Makes sense. And then we continue to see a greater push for return to the office policies really across the country. Have you guys seen much of a corresponding uplift yet on business dining at this stage?

I believe it's a net positive, but I often say you can't have the same meal twice. When you're going into the office, you're not sourcing food locally from where you used to work or live. I think returning to the office is benefiting our lunch business in major cities and encouraging more people to go out for Friday dinners, which we have noticed. However, it's still balanced. For us, if you're commuting to the city, you’re drawing spending away from local markets. Therefore, I don’t think it's a major focus for us.

The next question we have is from Alex Slagle of Jefferies.

How are the summer travel changes impacting demand? I understand that foreign travel to New York and possibly tourism to other major cities is reportedly down, but I'm interested in your observations regarding this situation.

Yes, thanks for the question, Alex. Over the last couple of years, especially in July and early August, we were somewhat surprised by a decline due to what seemed like excessive tourism in Europe. Many people chose to spend their dining dollars in Lisbon, Paris, and Madrid rather than in New York City and San Francisco. However, this July was quite good, aligning closely with our expectations, perhaps even exceeding them slightly. I’m not certain if we are witnessing a shift, but typically, July and August are slower seasons, especially in major cities, as people tend to head to the shore, which we are seeing. I'm unsure if this signals a change or if the over-tourism is simply wearing off.

Yes, I believe we are returning to what I consider normality. After coming out of COVID, I mentioned that it might take us 4 or 5 years to understand the new normal. The intense travel patterns we saw with destinations like the Amalfi Coast and Barcelona have settled down. Now, things seem to be more balanced. We are cautiously optimistic as we head into summer, and overall, I am quite satisfied with our performance. I was initially more concerned about June and July, but the results are looking strong. We remain cautiously optimistic that our higher-tier customer price points are somewhat protected. While tourism is definitely down in places like Las Vegas and other areas, there are regions experiencing increases of 120%. It seems to be a period of rebalancing.

Got it. And I had a follow-up on the Hardie's planned attrition. Just trying to get an idea of what magnitude we should think about in terms of the headwind on reported case growth in pounds as we look ahead to the third quarter, just should it be similar to what we saw in the second quarter? And I know you said the specialty attrition, the produce piece had started during the 2Q. So I didn't know if that was early on in the 2Q or midway or just trying to get a feel for that.

Yes. I would expect the large commodity poultry program, which began midway through the first quarter, had a smaller impact initially. We noted this when we reported our first quarter results, but the effect was less significant than in the second quarter. Our reported center-of-the-plate pounds were down 4%, but excluding that program, they were up almost 6%. This program accounted for nearly 10% of our total pounds for both the quarter and the year. We will keep highlighting it until we fully lap it, which won't happen until the second half of next year for both programs. These are high-volume, low-dollar, and low-margin programs, and eliminating them will enhance our profitability. We're already observing some benefits from cost reductions as well as distribution and operational improvements. However, these will continue to affect our reported volume and price figures, and we will need to adjust both accordingly.

Yes, Alex, the way we assess the strength of the business is by breaking it down into segments, which we've been doing for over 40 years. We've made numerous acquisitions during this time because we believe these companies are strong, have great people, and fit into our desired markets or categories. However, there are parts of the business that don't align with what Chefs' Warehouse typically does, and it's a matter of time before we phase those out. A prime example is New England, where we significantly reduced Sid Wainer's operations by almost 50%, but then we revitalized it, and it now performs at profit levels typical of Chefs' Warehouse. The situation in Texas is similar; it's just a small part of our overall business, so I prefer not to dwell on it too much. However, to provide some insight, the team there is performing well and is following our long-term business strategy. They are meeting our expectations and becoming increasingly profitable. We are naturally shedding parts of the business that don't align with Chefs' Warehouse. As we continue to develop that market and integrate more of Chefs' Warehouse's approach into Hardie's, it will increasingly resemble New England. Currently, I would say we are in the second inning of this progress, moving past the initial phase, and expect significant growth ahead.

That's great. The specialty cases had a significant impact that we observed throughout the full quarter in the second quarter. We might expect to see a similar effect going forward.

Yes. We exited that program in April. So it covered almost the entire quarter.

The next question we have is from Todd Brooks of Benchmark Company.

Congrats on really strong results even accounting for the Hardie's exits. And I have a question on Hardie's kind of following up on what Alex was asking about. Is the right way to think about this? It looks like with the pricing benefits from an inflation standpoint, one being just the kind of Hardie's cross-sell that you sized, it seems like from a profitability standpoint, or a pricing net volume standpoint, it's flattish to slightly positive in specialty and probably a 300-basis point drag from a sales standpoint for center-of-the-plate. Part of that obviously requires the inflation outlook to kind of hold with what you've seen in the first half. So Jim, I was wondering about the second half inflation outlook in general. And are these the type of drags if we're modeling both case impacts and pricing impacts for the Hardie's exit for the next couple of quarters to frame it up with?

I think the best way to answer that is really just to point to the aggregate inflation environment, excluding these product mix changes that are happening because of the transition that Chris just very nicely articulated. Our reported aggregate inflation was 7.2%. But if you exclude the two programs that we're trading out of, it's 3%. And it's 2.3% on the specialty side and 4% on the center-of-the-plate side year-over-year. And so that's the environment that we're seeing for 95% of our business when you're excluding these two programs that are just highly transactional and not part of what we really do. So I would just say that that's what we expect really for the remainder of the year. I don't think there's anything we see other than potential unforeseen impacts from tariffs that nobody really knows what the impact will be yet. I mean, we've modeled what we think, and we think it's going to be at most low single-digit impact on aggregate year-over-year inflation. But I would just mention that sequential inflation has been very moderate. Actually, specialty and produce have been slightly deflationary sequentially versus the first quarter; and center-of-the-plate has been slightly inflationary versus the first quarter. So I think that's the best way to frame how we're thinking about price and inflation for the remainder of the year.

The next question we have is from Peter Saleh of BTIG.

Congrats on a good quarter. I wanted to ask about the gross margin. I know there's a lot of moving parts here, but I think gross margin was 50 basis points stronger than what we anticipated, and I think the best number that you guys have posted in about 6 years. So just trying to understand, is this the new level of gross margin? Or is there a lot of moving parts here with some of this inflation noise and the Hardie's business? If you could just help us parse that out, that would be helpful.

Thank you for your question, Pete. I believe you're pointing out that there are many factors at play, which is an accurate description. The transformation at Hardie's, which involves low-margin businesses, is creating some year-over-year fluctuations. However, the primary driver can be found in the initiatives outlined in our 2028 goals, particularly in areas like pricing, procurement, and the growth of our digital platform. We are seeing contributions from our operating units implementing Select Prime technology to minimize inventory damages and returns. While we are still in the early stages and observing initial benefits, these elements are starting to contribute to growth in gross profit dollars and margin improvement. It's important to remember that gross profit margins are a result of various factors. In different inflationary or deflationary contexts, as long as we emphasize gross profit dollars per unit, per pound, per drop, or per truck, we can achieve the necessary gross profit dollar growth to drive EBITDA growth, even as margins may fluctuate within a typical range.

Got it. Okay. I know you mentioned tariffs. Is it correct to say that you haven't observed any impact from tariffs yet, but you anticipate some effect later in the year?

No, we've seen an impact. A significant portion of our imports comes from the EU, and they were hit with a 10% tariff months ago. Now it's increased to 15%, and we still don't know what products will be excluded. We anticipate there will be exclusions for items that are not produced here, which might not be subject to tariffs. We have definitely observed an increase in certain categories. Additionally, as Jim mentioned, we are not facing tariffs on freight or many other input costs affecting the overall price. We have experienced a few points of inflation, and while we absorbed that hit, we have also seen significant deflation in some product lines. For example, chocolate prices soared but have since decreased, and olive oil prices have also come down. Produce has shown deflation as well, and as the bird flu situation resolves, we expect further deflation. Overall, we are modeling in moderate inflation sequentially in our current reporting, and we don't foresee any major issues on the horizon.

I would just add, Pete, that we have a bit of a natural advantage given our business model. We have 130-plus different types of olive oils in our distribution centers. So our diversity of product and the amount of SKUs that we carry for each category give us a little bit of an advantage from a substitution and alternative perspective. So I just wanted to add that.

The next question we have is from Kelly Bania of BMO Capital Markets.

I wanted to just ask about your outlook here for the second half. And the first half has been quite strong. It seems like the momentum, the seasonality all continues. But I guess the guidance kind of assumes a slowdown in the top-line and the EBITDA growth. So I was just wondering if you can help us understand if that's just conservatism? Or is there anything to call out specifically that we should be thinking about modeling for the second half?

Thank you, Kelly. Much of our outlook is based on the strong performance we had in the latter half of last year. As we moved into September and the fourth quarter, our results were impressive. When we developed our guidance and strategy for this year, we recognized there would be some imbalance between the first and second halves. However, this doesn't reflect any negativity about our expectations for the second half or the overall guidance for the year. If you look at the mid to upper range of our expectations, it aligns with a typical percentage of revenue or EBITDA that we experience in a normal year at Chefs' Warehouse, particularly regarding seasonality. This suggests a 6% revenue growth in the second half, and nearly 14% EBITDA growth. Overall, this positions us for a full-year growth of 6.5% to 7%, which falls within the upper end of our medium- to long-term growth projections. It also indicates strong operational leverage, which we saw was about 200 basis points in the first half and is expected to be similar for the full year. Therefore, it's more about comparing to last year's performance than any concerns regarding this year's expectations.

Okay. That's helpful. Fair enough. Also, I wanted to ask, I know there's been a lot of questions about the Hardie's and the planned attrition. But I guess the placement growth is one item that I don't think would be negatively impacted by that, it would seem that's indicative of kind of some really strong cross-selling and some success with that. Can you elaborate on that and just what you're learning as you do that cross-selling with the Hardie's business in the Texas region?

We acquired Hardie's, which has a strong team and a solid operation, but it isn't the same as Chefs' Warehouse. Our goal was to use it as a foundation to significantly grow our business in Texas, aiming for over $500 million. This expansion hinges on cross-selling. We integrated a produce supplier with numerous routes and added some specialty businesses. Our team successfully launched operations in Allen Brothers in Texas, which was a major accomplishment. This growth is contributing to CW Specialty. If I outline our five-year vision, we actually have a ten-year plan to develop Hardie's to be similar to Chefs' Warehouse. We have made the tough decision to let go of certain clients that brought in high volume but didn't align with the Chefs' Warehouse model. We are now refocusing those routes with more accounts that match our brand, including independents and high-quality restaurants throughout Texas. The growth will come in waves, involving protein boxes, produce boxes, and a mix of specialty and broadline products. While the overall situation might appear complex, I believe we are only in the early stages of this transition. We have made the business more profitable, and this trend is ongoing. Even though the transition may seem unclear at times, we have already made significant progress in moving away from non-CW business. Our focus now is on ramping up sales. We are hiring more salespeople and increasing our sales of Chefs' Warehouse products, but the exact figures may still be somewhat uncertain.

Okay. No, that's helpful. Also, just starting to get the question from more investors just about M&A. Obviously, you've been kind of on pause here for, I believe, about maybe 2 years. But are you thinking of restarting that? Is there anything in the pipeline? Maybe just help us understand where the thought process is on future M&A at this point?

Yes, we've always been opportunistic. Aside from CME in the Middle East, there hasn't been a company like Chefs' Warehouse available for acquisition. We generally look for targets that we can integrate and that help us expand into new categories or territories; for example, Hardie's allowed us to enter Texas. We are continuously evaluating potential deals; I currently have 20 options on my desk. The key challenge has been the valuations, which we felt were too high for certain businesses coming out of COVID. There could also be exceptional opportunities that we haven't encountered yet, and we would certainly be interested in those. At the moment, we see potential for smaller tuck-in acquisitions to complement the facilities we have, which have ample capacity. We don't want to exhaust that capacity after investing significant resources to grow organically. Our outlook suggests we may pursue a few acquisitions each year to support our growth. Right now, we are experiencing strong organic growth from our investments. Over the next few years, expect to see a mix of growth strategies. As Jim mentioned, we are confident in our plan through 2028, which we anticipate will yield an EBITDA percentage exceeding 6%. This will involve maximizing our existing capacity and finishing development in some of the markets we've entered, while we also explore additional markets to complete our national footprint.

The last question that we have is from Elle Niebuhr of Lake Street Capital Markets.

Congrats on the quarter. I was wondering if you could touch base on your 2028 goals and relate them to the strong results you've seen in the first half of the year. Are any of the catalysts that you've laid out in your 2028 goals contributing to the positive results today? Or do you still kind of view them as ambitions?

Thank you for your question. I previously mentioned the improvements in gross profit margin and gross profit dollars. If you look at the initiatives we've outlined, which are available in the appendix of our presentation on our website, you'll see the efforts of our procurement and pricing teams along with category management in predictive demand forecasting. They are working with suppliers to address issues such as tariffs and route consolidation. I also discussed Select Prime and how our operators are using that technology to enhance inventory management. Additionally, our digital growth is noteworthy; approximately 60% of our specialty orders and sales now come through our digital platform, with roughly 40% growth in orders compared to last year. All these factors, along with the ongoing progress in acquisition integration and growth, are contributing to our success. Our Chefs' Middle East business is performing exceptionally well, and we've made significant strides in Texas. While we are still in the early stages of many initiatives, they have made a clear impact on our success in the first half of the year.

At this time, there are no further questions. And I would like to turn the call back over to Chris Pappas, CEO, for closing comments.

Thank you all for being with us today, and congratulations to our team for an excellent quarter and their hard work. I want to express our heartfelt condolences for the tragic loss of life that New Yorkers have experienced this week due to the attack in the office building. Our thoughts are with the affected families. We look forward to your participation in our next earnings call. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.