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 2020 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 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 is 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 -- of the current quarter sequentially to the first quarter of 2021. Jim will provide the comparison to 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 acquisition. 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…

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% a $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% the sales growth for the quarter. Net inflation was 11.5% in the second quarter insisting 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 in 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…

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 provide even more flow through margins if you could touch on that dynamic also?

Yes, sure. So the cadence in the quarter was a little surprising. I mean, the big cities that had been a lag for us earlier in the year and then all through COVID San Francisco, Chicago, New York, they all started to open really in kind of mid to late May. And so we really started to see -- as we reported coming out of April, we were just shy of 80% of 2019. We really saw the ramp really 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 in -- earlier in the quarter through the states that were pretty much already open. So that was a big driver. And 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 I mean, how much of it do you think was due to sort of the spur of openings and pantry loading and sort of unusually strong period of celebrations and everything going on in May and June, just, I guess just trying to get a sense for what the underlying run rate trend would be as we sort of look out the 3Q and 4Q, I know there's a lot of moving parts but any color there would be helpful?

Sure. So I mean, as we mentioned, recent business activity is very similar to what we saw coming out of June. We haven't, obviously, the second part of Q2 is, is always a little less busy just seasonally than May and June. So it's -- I'm sorry, the early part of Q3, I should say. So, we haven't seen a significant change in our numbers, as we've come into the more 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 got to keep reminding ourselves, we still, I mean -- we're back to these numbers where -- I think it's a little better than we expected. I mean, we knew that 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. So if I had to look in a crystal ball, I would say that any of that comes back, okay you 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 just the money. The money is changing where it's being spent. So we're still I mean, obviously, Midtown Manhattan is still not back. Downtown San Francisco is not back. Chicago isn't bursting at the seam. So the spending at our customers is really just continuing to be in a lot of the suburbs, a lot of the downtowns of, say like New York City downtown and uptown. People want to go out and people are getting together, I think they're being careful. 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, the demand and we can only be optimistic as we get through this could be a little bumpy in the next month or two, but we think again, going into ‘22 all that built up convention business and conferences and business travel starts to come back, you can't help but get really optimistic.

to you:

Thanks, Alex.

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 kind of unpack the sales force a little bit just really curious. What's maybe sales per customer looks compared to 2019? How much of contribution is coming from new customers just trying to get a gauge of kind of market share gains here or just how you're thinking about that, I guess outside of the M&A activity?

Sure. Again, Kelly, it's coming from new customers, okay. It's coming from market share. I think that our extra efforts to supply service. Obviously, we don't have full employment amongst the ranks, we're not running all our trucks. And I'm sure we are disappointing some customers, but I think that our decision that -- we need to keep the company together rather than just too tons and tons of more layoffs and try to crank up the numbers, even though the numbers are good. I think the extra effort and offering service that customers are used to as much as possible obviously we're still short-handed allowed us to take market share. We have 1,000s of new customers during the pandemic, which I was so pleasantly surprised. We continue to see tons of new leases being signed. So I would say, restaurant tours, open restaurants, right. So, they're not going to let a, -- an opportunity like this to grab prime locations pass by and we're starting to see more and more credit applications for key real estate. And there's just a lot of demand, people, as I kind of predicted, we're going to get tired of cooking, I did, my wife stole my pans and my knives and said, we're going out after so many months of cooking. So I think it just continues to build, America loves to go out and dine. And I think that's what we're seeing. And we're nowhere near out of this and well we have vibrant midtowns of all our cities. But as you can see the, restaurants, restaurants are starting to really thrive. They're short-handed. I mean nothing is easy right now, but the demand is there.

Hey, Kelly. I would just add that while we don't disclose that level of detail, we are approaching, the -- we measure the average weekly customers that are actively buying, we are very close to approaching our 2019 levels and so that's encouraging.

Okay, that's very helpful. And then also just thinking about gross margin here. It looks like it's about 300 basis points below 2019 levels in this quarter that year. Just curious if you can talk about the factors that need to happen to get that back to normal. If you think that's possible, it maybe looks like it's largely just some more pressure in the center-of-plate area is just curious if that's accurate, how much of that is just inflation or other factors that could get us back to kind of 2019 gross margin levels?

Well, I think what you're comparing are not apples-to-apples. So as you recall, we adjusted our processing costs and we moved them from OpEx into gross profit for the SEC. And we did that earlier in the year. So actually, when you look on an apples-to-apples basis, because that's about 150 to 170 basis points adjustment of our prior gross profit margins were kind of between 25% and 25.5%, you really have to rebase line that to 23.5% to 24%. When you're comparing gross profit now to then. So we're really maybe 50 to 70 basis points below when you compare on an apples-to-apples basis. And really the difference there is just coming back to our normal volumes some of the revenue performance right now is price. And so we're not back to 100% of volume, we're getting close. And some of it is the efficiencies that come with buying on volume. Some of it is managing the inflation volatility right now. I think we're extremely happy with our team's ability to improve sequential gross profit margin, as inflation exploded from Q1 into Q2. I mean, we went from mid-single-digits to double-digit inflation. And we drove significant gross profit margin improvement. I mean really, that was not only managing price that was better buying that was better inventory management really across all of our teams in the company. So as we continue to build volume back, that'll move back towards normal.

Great. And it may be early to ask this question, but just curious, anything you're seeing in the business, whether it be wages or other factors that make you think about eventually at some point returning to kind of those pre-COVID margins and even maybe your longer term kind of margin goals closer to 7%?

Yes. I mean, it's just so hard to predict the total feature, Kelly. But, I think the pivot has been -- how do you do more with less and our team has done an unbelievable job of doing that. I mean, it's not easy. There's too many people working six and seven days and 20 hours a day and we don't want that and we don't think it’s working six and seven days and 20 hours a day. And we don't want that. And we don't think it's healthy, it's burnout. But we have learned a lot. And we've learned that we can do more with less. I wish nature finds a way. And it's the necessity is the mother of invention couldn't be truer of what we've had to do and continue to do. So by being more efficient, and asking our customers to cooperate, I don't mind this model going forward actually prefer it. But the market will dictate if they -- if we're going to have to add more service and we're going to see where it goes, we're a high touch service model with a long-tail and items, but we've kind of shortened it all up for COVID for many, many reasons, and it's 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. And this is Ben Klieve now with Lake Street Capital Markets. Thanks for taking my question. Got a couple questions here first round inflation. Curious what if anything you can provide about kind of how inflation was really absorbed throughout the supply chain? I mean, were you guys -- did you guys see the ability to kind of pass cost on were -- your customers able to pass those on to the to the diners? And really how kind of quickly was the pricing model able to adapt to inflation as it came throughout the quarter?

Yes, thanks for the question, Ben. Yes, I think just like a lot of industries, we've observed pricing power throughout the value chain from the manufacturers to distributors to our customers to the -- through to the end consumers that are accepting it right now. I think, when you look at inflation, it looks so pronounced versus Q2 of 2020. But the baseline effect is a big part of that, when you compare food inflation at least in our categories to 2019, it is -- it's less pronounced. It's still double what is a normal for our market which is somewhere between 1% and 3% in normal times, But it is less pronounced. So some of that is the baseline effect that will fall away, as you move further away from comping to 2020. We are still seeing volatility especially in center-of-the-plate although we're starting to see some easing in a number of the center-of-the-plate categories and that's some encouraging signs freight remains elevated and that's a big part of product cost. So, while freight remains elevated, we expect pricing to remain elevated, especially in imported products. But once again, I'd go back to -- there's a lot of pricing power in the market right now really throughout the value chain. And until the end consumer stops accepting it. We expect it will continue for a little bit here.

Got it. That's helpful. Thanks, Jim. Jim, another question probably directed to you regarding cashflow and inventory build with -- how dramatic the ramp was in the quarter, the obvious need to refill your pantry. Where do you guys stand at the end of the quarter regarding inventory levels? How -- I know it's difficult to forecast out the next couple of quarters, but do you think you guys are in kind of a normalized run rate now for inventory levels? Or do you think you're going to need to ramp that spend up still here in the second half of the year?

Well, I mean, we have a really strong cash position. Our cash flow during the quarter was really some CapEx on our building build-outs in Florida in LA. We spend some money on acquisitions, and then we invested in working capital. Our team has done an amazing job of managing working capital everything from bringing our DSOs down. And really effectively managing inventory. So we have a significant cash position. We can easily fund additional working capital investment. I think the bulk of it happen pretty quickly, but there'll be some additional investment lots of additional CapEx. But as we reported, we have [$220] million of accessible liquidity between cash and availability on our revolver. So we're not really concerned about that. We're looking forward to putting that capital to work to generate ongoing returns for the business going forward.

Yes, duly noted. The certainly liquidity is not an issue right now. But that was helpful color. I got one more quick one for me, and then I'll get back in queue. Didn't hear much about the Texas ramp up. Can you elaborate kind of on where you stand there both in terms of investments and converting those investments to business?

Was the question about Texas is ramp up? Yes. I mean, look, all that, Chris can comment as well. We made the Texas investment pre-COVID obviously COVID has laid that. But actually, we're very pleased our Texas business has moved towards breakeven faster than we expected. Some of that is the team there really starting to build the business. Some of it is Texas being a COVID state that opened very early. So we're pleased with our progress there. I mean, we'd obviously like to do some acquisitions eventually. We haven't gotten there yet. But Chris I don't know if you have anything you want to add about Texas?

Well, yes, again, Texas is -- it's an investment in the future where we're continuing to hire salespeople. We've -- we're looking at multiple opportunities in Houston and Dallas, San Antonio and Austin. So it's pretty spread out, I actually just came back spending a little bit of time on the Westcoast and in Texas to see what are up and coming opportunities. I still think Texas will be a top three market for shops. So we're basically in the first inning at this point, but extremely excited to what we're seeing, and what the team is doing and the new people that are joining us.

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

Thanks, Ben.

Our next question comes from one 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.

Couple of quick questions for you. You talked about the natural kind of July, August slowdown where you're still with the acquisition still running at kind of 100% of fiscal ‘19. But if we think about this seasonal slowdown before, what could be a fall spike with back to work back to travel again? What's this digestion period look like? Chris, you had a couple of interviews during the quarter just outlining the extreme measures that you guys were having to undertake to maintain service levels? Are we digesting this spike in demand that we've seen now, if you could just kind of qualitatively talk about the organization and what you've been able to do so that maybe we're a little bit better matched to demand trends going into the fall?

Yes, well, it's still a big headwinds, labor in the warehouse and qualified drivers. So there was more demand then we could meet. So, always hate to turndown some business. But, we had to have the discipline to say we're going to service our best customers like any other business, right. We're going to say, these are the people that we have the best relationships that are loyal before COVID and after COVID and customers that maybe just want an interim supplier, they're going to go back to where they were buying from before, because we can -- we could service them, but their regular suppliers can’t, those people kind of fall to the back of the line, pure capitalism, right. You're going to try to service the people that are going to be your customers of the future. So, the demand is there. And now, it's, -- every day we're hiring, every day it's -- I sent out a memo this morning, it's like train, but make sure you retain because it costs money to train. And it's not an easy market, and we want the best people in the industry to work for us because our customers expect the service levels and we go down basements in the big cities and we go upstairs and they're difficult deliveries in our major cities. So it's hard work, it was a hard job, it was hard to find these kinds of people with the work ethic and ability to do those jobs before the pandemic. So the pandemic actually -- obviously made it harder. But, we got great leaders that continue to recruit. And as you could see the numbers, they're executing, obviously we want to get better. And I think we do get better every day. But I just think the opportunity right now for our growth and take advantage of M&A and take market share has never been greater.

Hey, Todd, I'll just add that, as we talk to our operators on a weekly or even daily basis, while it's still challenging. There are initial green shoots around some easing in certain markets around finding frontline workers. So there is a little bit of positivity out there. And I would just add that, we're doing everything that we had started before the pandemic in terms of consolidating routes. We're building new buildings where we're making investments in consolidating our operations, and providing a lot of technology-based tools to our operators and our salesforce and our customers to drive efficiency through the entire value chain that Chefs’ works. And so it's not like we're not doing anything against it to offset it. It's an ongoing process.

Yes, very helpful things Jim. Second question, you talked about some early evidence of menus broadening out again. Can you just talk about how early we are in that process? I know, at the restaurant level, a lot of the operators labor constrained to especially in backup house which may make it harder to do, but where do you see -- where are we in that process of kind of the benefit of broader menus and what that does to case counts?

Yes, I mean, we're getting really close to normal, which is amazing. I mean, we're not there yet because obviously, all the other banquets are not back. And that's a tremendous amount of SKUs. We still don't have the labor obviously in the restaurant industries, but so there's still so much upside for us some of -- are most profitable categories, like pastry and all that are still way below category sales in a normal time. But I can't complain Todd, it's amazing to see the creativity at the restaurant. I always say restaurant tours, they multitask, they have to have a bit of expertise in finance and people management as well as being really creative at putting out food. And it's a competitive field as more and more restaurants open, people like myself that dine-out every day, you want variety. And I'm starting to see it. I'm starting to see more and more things on the menu, because many people eat in the same restaurants weekly. So you got to keep it interesting. And I think that's why we're seeing it. And that's why we're almost back to lines per customer of 2019. I think that's really, the only reason it's not back to where it is because, our very large customers are not back yet.

Okay, great. And a final question you along this whole process, I've kind of shared a goal for what you were hoping the exit rate for fiscal ‘21 would be entering fiscal ‘22. And, obviously, we're all surprised by the -- how robust the revenue recovery was in this quarter. Just wondering if it's changed your thoughts, I think previously you’ve talked about an 85% to 90% of 2019 pro forma for the acquisitions as a targeted exit rate, but where's the thinking now for what we should look like coming out of the back end of the year?

Todd, I hesitate to change our kind of conservatism that in this environment, you want to under promise and over deliver, certainly versus the reverse. I think we're quite pleased. But once again, we're not back to 100% in terms of volume, we are getting there. We believe we're on the path. But look I think we are -- we still feel that we'll come out of this as a more efficient company operator and continue to get back to the path that we had communicated that we will come out of the year at a run rate very similar adjusted EBITDA margin range as we were prior to the pandemic. We've done a couple acquisitions since then. So we'll have to model that in. But we don't want to go out and make a bold declarative statement at this point given that there's a couple of variables out there that could still impact business going forward.

That's fair enough continued success across 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. And it's just been amazing to watch them perform and execute. And 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.