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…

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…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] 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, Greg. Yes, the cadence through the quarter, I guess 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. And then 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. And then 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 are -- do better when offices are full theater districts things like that. So not a leap, but more of a very gradual incremental build. So from a delta variant perspective, I guess, we didn't really see much at all. In terms of looking forward, we have since this thing began have internally modeled a very gradual build back in the hospitality travel, business travel and that type of business activity whether it's cruise lines or international travel coming back to the big cities. And so we still model internally a very gradual build back through the end of this year and into 2022. I think the United States obviously is opening up travel to vaccinated people internationally in mid-November. And 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. I think that…

Yes. We -- go ahead Chris. Sorry, yes.

Sure. Yes. So in staffing has been a challenge. The positive side it's made us have to operate much more strategically and efficiently. We kind of knew -- I mean staffing was a problem before COVID. So it was always a issue trying to find enough CDL drivers and especially night crews. So, really for us a huge discipline on what customers we would take on. Obviously servicing our existing good customers was the number one priority. So, 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. So I think we learned a lot. It was kind of like a forced discipline. And as staffing comes back, I mean we are seeing more and more people coming back into the workforce, which is really a great positive sign. We're still looking at the business differently than we did pre pandemic and I think we've learned a few things. So if anything positive from the pandemic is we understand our business even better than before and are operating more efficiently.

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 …

Good morning.

… 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 there, where you are maybe in terms of the slope of these cost headwinds, if you kind of see them continuing to increase through the fourth quarter and then, maybe moderate at some point as given where you are on hiring?

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

Thanks for that. And one question on the inflationary cost pressures, that you could provide a little bit extra perspective. 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? Obviously very strong, but I wonder if you're seeing any changes there more recently.

Yeah, of course…

Yeah. Well obviously…

I am sorry, Chris. Go ahead.

Yeah. Yeah. I'm going to take this crack at Jim first for certain and you could opine. But yeah, I don't think anyone has ever seen a market -- not my generation of inflation due to a lot of logistics, a lot of it is freight. Many, many -- obviously the proteins have seen the greatest inflation especially in our prime category. And a lot of it it's because there's so much demand as well. I don't think anybody -- I really thought that the demand would come back as fiercely as it has. So we've always ran the business with a limited amount of contracts. Our primary customers are independent restaurants or big shops or caterers, and the price really floats so the floats with the market. So we try pretty much never to get locked into a situation where you can't pass it on. There are some larger customers that we do have some agreements with. But even those contracts in today's environment, I think everything is negotiable. I think the most important factor in today's market is actually being able to execute and to deliver. And I think in our industry everyone is cooperating understanding that it's probably once in a lifetime kind of environment and everybody has to be flexible. So, it is allowing us to move price as you could see from our results. We were able to pass on a -- if not exactly the total margin increase, we're able to keep our gross profit dollars, which is the most important way we run the business. The spread between our OpEx and gross profit dollars and more expensive boxes, really give us a little leverage on our OpEx, because they don't really cost more to move. And I think you've heard me say many times over the past 10 years, I'd rather sell expensive boxes than inexpensive boxes, because they don't really cost more to move. And that's really our -- more of our business model with higher end restaurants. We don't sell many, many customers 300, 400 boxes of French fries at one time. We sell a customer maybe 40 different line items, but it's one of each. And that allows us to get the margin to be able to deliver to these high-touch, more frequent delivery type customers and provide the value for them and for us. And I think that we saw the model pretty much play out in the last quarter.

It’s helpful. Thank you.

Thank you. [Operator Instructions] 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 just ask the comment about sales, tracking at 103% of pro forma 2019 levels is very helpful. I think ahead of expectations. But I guess the question I think on a lot of investors' minds is just on the expense side, and just wondering if you could kind of put the same color around operating expenses on a pro forma basis. Just how do you think this quarter came in relative to what you think pro forma expenses would be?

Yes. Thanks for the question, Kelly. I think it's coming in as we expected. I mean obviously the last two quarters, Q2 and Q3 really when we started to -- as business came back and markets opened, we've started to leverage our fixed cost base our fixed asset base. That was obviously escaping us during the depths of COVID. So that's gradually improved. I mean, I think I'll go back to the Chris's comments about growing gross profit dollars above adjusted OpEx. Our gross profit margins are lower than 2020 and 2019, but our adjusted OpEx as a percent of revenue is better as well. And so you're seeing a shift because of the abnormal inflationary environment or on the commercial side our balance is managing price such that we're partnering with our customers and passing on market-related costs, but also just making sure that we're growing gross profit dollars and creating operating leverage as we did for a few consistent years prior to COVID hitting. Obviously the comps to 2020 are creating a lot of extreme numbers. But when you break it down our adjusted EBITDA margins in Q3, we’re very close to what we delivered in Q3 of 2019. And if you normalize for the addition of Sid Wainer, which we were very upfront that is a lower EBITDA margin business, but we have a multiyear plan to grow that EBITDA margin over time. We're actually very close. So, I think even with the wage increases, the things that our operating teams have done in terms of investing in technology, process improvement, the things Chris talked about prioritizing commercial business based on the environment. All those things have come together and given us an OpEx profile that's in line with what we would expect.

That's very helpful. And I guess just in terms of hiring, maybe can you just give us an update on the extent to which you still do need to hire either drivers or warehouse employees or any labor hiring that you still need to do across the board?

Sure. Yeah, again, Kelly I think we talk about this daily in our ops calls. Hiring people in warehouse jobs and drivers CDLs for the larger truck, it was a challenge before the pandemic. So it's not something that's new to us. So we work really hard to try to recruit. We've actually broken up a lot of our HR. The way we look at HR and responsibilities required a talent officer to work with all our leaders to basically – it's not only hiring, it's keeping people in these jobs. So I mean, you read about in the paper all the time. It's the quitting generation. And unfortunately, it is much harder to get people to stay. These are – some of them are really hard job, right? You're lifting heavy boxes, you're driving big trucks. It's a tough job, and we really appreciate that and that's why we want to make sure that we have great packages for these jobs. So they are compensated for the hard work. I don't think that's going to change much. Like I said, it was tough before the pandemic. So we work at it at night and day. I could – I'm almost afraid to say that, it is getting better. Over the last few weeks, our calls it seems like, we are starting to get more people showing up on our job fairs. And we constantly everybody – full time recruiters are recruiting. But this industry forces you to be resourceful. You have to find ways to do more with less. And I don't think that, it's going to change drastically. I think that – yeah, there are more candidates. And, but we're being really careful as we add trucks back. We are doing the business with less trucks. So yeah, we do have more efficiencies. We know now that the travel is going to start to resume, hopefully in a week or so. We're going to start to get international travel. We're going to start to get our cities back to a semi normal right more – obviously, the hotels have not had those travelers and they haven't had a lot of business travelers. We haven't had catered events. So we know that that volume will start to build, and we're way ahead of it. And way the way we're out recruiting, and planning the – putting routes back on, but I think we're doing it with under a microscope understanding that we want to do it much more efficiently than in the past.

Thank you. And just one more from me. Just on the two transactions announced this month. I'm just curious, if you could help us understand what stood out with those two acquisition opportunities? I imagine, there is quite a bit of opportunity across the landscape. And just strategically, why those two in those locations especially? And just a general update on how some of those smaller competitors are faring in this environment?

Sure. Well, again, I think that a lot of the deals you'll see announced probably were in the works before the pandemic hit. So we're constantly talking to people in different markets. And you hear me talking about holdings all the time. I would do one a day, if we could find them, because they're so creative because basically all we're taking really is sales and customer base. I think the one in Vegas was extremely strategic. We have a great business there in our regular specialty Chef's Warehouse facility. And we were lacking a protein solution to launch our Allen Brothers steak and seafood business. So service they provided that. We like the people that ran the business, and we thought it would complement well. And it also gives us the opportunity to start to go in and build our Southern California business. Its close enough and we have trucks running back and forth that, this allows us to start to build volume, because our new facility in the LA is opening hopefully fourth quarter, first quarter of next year. And this gives us the opportunity really to start supplying through our existing routes customers, with protein products that allows us to build a run rate so when that cut shop does open in Southern California. We have enough business really to get it going and to get to a profitable level much quicker than starting from scratch. I think if you – again, if you hear of another acquisition, it's something that we were planning before pandemic and it probably got delayed for many obvious reasons. And I think the pipeline is extremely frothy. I think you'll start to see a lot of M&A, now that people have somewhat of a foreseeable forecast coming out. Even six months ago with the Delta variant, it was really hard to forecast. It still is. But I think now – I think we know that we're not heading back to a close down and it's easier for us to pull 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 independence. I know there's been a lot of talk about a labor shortage and high labor turnover. And I know you guys mentioned that you are being more selective in terms of the customers and the restaurants that you take on. Are you seeing – I think what everybody was expecting was more of a surge in development coming out of the pandemic, or do you feel like the labor shortage and all the turnover has resulted in maybe independence being a little bit more cautious in terms of opening new concepts and new restaurants? Thank you.

The – I think if there's another positive thing that we've seen coming out of the pandemic is that – I mean, the sad thing is that we've seen a lot of customers close, not nearly as many as everybody predicted think but there has been many small businesses that that didn't make it. And I always thought maybe perhaps there was too many restaurants before the pandemic and maybe this was an opportunity to get out of leases and walk away from unprofitable locations. But I'm sure that there's many, many clients that just didn't have the wherewithal, but I think the PPP helped our industry tremendously. I think it was a lifeline for many, many customers. And what we're seeing is many coming out now as volumes are returning. They're looking for new locations and they're signing many leases. I think it's the once in a lifetime opportunity, where you can find a fully built out location ready to go. Maybe with some minor cosmetic adjustments you can open a new restaurant in a key location. And I think what we're seeing with the customer accounts starting to go up and many customers planning new restaurants opening over the next six to 12 months is an outcome of that. It's an outcome of – they found stability with PPP. Maybe they had many, many good years, before that. So it kind of is a tale of two cities, unfortunately. And my crystal ball says that you're going to see a tremendous amount of new openings. So this industry restaurateurs like to open new restaurants. And I think they've given an opportunity right now to accelerate that desire to open up new concepts. I mean our clientele is very creative. There's constantly new ideas, new concepts, a blending of new cuisines and everybody likes a new restaurant. And I think you're going to see acceleration of that.

Great. Very helpful. And then just lastly on the recent acquisitions this month. Any sort of impact that we should expect on margins in 2022 from these two acquisitions, or are they too small to really move the needle?

Yes. Nothing significant. They're more -- Peter they're more growth investments. Obviously, the one in Las Vegas will contribute to our West Coast, P&L and operations but it's a relatively smaller company that we're going to look to grow over the next two, three, four or five years. And then the acquisition in Texas, was a processing plant that's going to allow us to really accelerate our Allen Brothers product line growth in that region. And so that's an investment that is going to pay off over the next couple of years. So nothing immediate to model in.

Great. Thank you very much.

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

Hey. Good morning, guys. I hope you’re well. A few follow-ups. Good morning. Can we talk kind of looking forward just crystal ball around inflation outlook maybe Q4 going into fiscal 2022 for specialty and center-of-the-plate as some of these maybe labor pressures that are driving some of the inflation from producers maybe those are starting to ease as well? Just thoughts on inflation looking forward?

Sure. Thanks for the question, Todd. I'll just start and then Chris, can add any thoughts obviously. But prices obviously remain firm going into the fourth quarter. You can see from the public data that pricing sequentially versus what we're experiencing and what we experienced in Q3 and Q2 has not significantly changed. Some of the center-of-the-plate categories have come off a little bit but certain other categories have remained fairly dear in terms of pricing. In terms of going forward, I mean our own internal view is that labor wages are not going to be resetting lower. At least, we think that, that's going to be kind of resetting higher. I mean I think year over sequential and year-over-year changes will most likely moderate maybe slightly deflationary versus the extreme pricing, we've seen in 2021 compared to 2020. But overall the comparison should be easier, as you're comping to 2021 than you were to 2020 of course.

Yeah. Great. Thanks that’s right Chris.

Yes. No I think that again it's a very unique environment for us in this industry for many, many years. I don't know if it's the frog boiling in water at this point that we're just -- we're all getting used to the new normal. Products are more expensive. And I think the good part -- the good news is that there hasn't been a tremendous amount of pushback from the consumer. When you really break down, the cost of ingredients so even if a case of pasta goes up $10 a case 20 pounds. When you really look at the cost per plate, what is it adding $0.50 or $1. We don't sell to the mass mass market. We have 50,000-plus customers but they are catering we set to the top 10% of the world's earners. And hopefully those earners are starting to travel internationally again and that business travel comes back. So, you can't help but get optimistic, when you're seeing what we've been what we've come through and the kind of business that our restaurants are doing without world travelers and business travelers and events. So we're very, very optimistic, cautiously optimistic that eventually prices may moderate some. It's really being driven a lot is being driven by either too much demand or supports, which are on TV every day. You see the ships out there floating waiting to get them loaded. So the shipping costs have driven the cost tremendously. And I think my prediction is that's pretty -- that's going to eventually find supply demand type of pricing and it won't be $10,000 or $20,000 to ship a container. It will come back down to maybe not the $1,500, but $3,000 $4,000. And I think that will help everybody's margins. But I think our clientele is finding ways to pass the cost on and be very creative with their menus. And I think that's why you're seeing restaurants are full and more and more are opening. So, yes, we live in interesting times for sure.

That's really helpful. Thanks Chris. And just a follow-up on that. Can we talk about maybe private label as a percent of sales? And how has that changed in this inflationary environment? And maybe what that means for margins down the road when people -- when things do normalize now that people are discovering the quality of some of the private label offerings that are in that breadth of offering that you've always had?

Yes, I mean I don't think it's changed much with our strategy. I mean with all our protein private labels, I think we're probably over 50% of what we sell is in some sort of Chef's Warehouse box or Allen Brothers or Michael's box or exclusive label that we own. So, customers are much more understanding today when you have to substitute. So, there's not a lot of pushback. They'll -- they have no choice in a way. I mean when Heinz Ketchup is out they have to use something. But for the products that we sell, yes, I think the -- I think what we built over 35-plus years was a model that was different than your average food service supplier that -- we had 180 different olive oils. We had 10 different types of tomatoes from Italy and California and Spain. So, we already had a very robust product offering. Sometimes we thought maybe it was too wide. We were carrying too many of lifetime products because our clientele was very specific. Chefs are very specific on what they want to use. And I think that it really came to the rescue during the last year where there was product supply chain disruptions. So, what became -- what we thought was something that was costing us extra to carry, proved to be extremely beneficial because if we were out of Italian San Marzano tomatoes, we had another tomato that was very close in quality and the customer was happy to receive -- to have tomatoes and accepted the quality. And it was a win-win situation. So, I think that was one of the things that really helped us over the past year.

That's great. And a final one for me. And you spoke to the October trends. But Chris and Jim, I'm wondering when you're talking to your customers, what's the early outlook for holiday as far as kind of pent-up demand to get out and celebrate bookings? What are you hearing from customers about their early reads on the holiday and their potential excitement about the season? Thanks.

Sure. Yes, that's a great question. Overall, I think what we're hearing is optimism. We're hearing a lot of parties are being booked. They're smaller. So, I think people are really anxious to get back together. I know I am. We're hosting our first event in a very long time where we have a lot of our leaders coming together, haven't seen each other in almost two years. And I think that really goes throughout the whole industry. It's more events, they're just smaller. And I think our operators are very excited to start having and putting them on the books. We're hearing about Vegas. The bookings are starting to go up. I think, if you're watching the playoffs, or Sunday football you see the stadiums are packed again. So, it's obvious people want to go out and want to get back together, and we're really starting to see that effect.

Okay. Great. Thanks, Chris.

Thank you.

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

Hi. Thanks for taking my question. Just one quick one from me on the direct-to-consumer business model here. So, there's only a couple of markets that are included in that model on your website at this point. Wondering if you can update us on kind of how you're thinking about this model really going forward? Is this something that kind of serve its purpose, or is this something you're still kind of focused on especially as the world hopefully settles down here in coming quarters?

Jim, I didn't catch that whole question. Sorry.

Sure. Sure. The question was about our direct-to-consumer business. So, Ben you're asking about Shop Like a Chef?

Yes. And kind of how you're looking at that evolving over the next year, if it's run its course, or if you're still -- this is still something you'd like to focus on down the road?

Yes. Yes. Jim I'll take this one. I don't know why the question wasn't coming through. So we've always had a strong direct-to-consumer business with our Allen Brothers. Consumer business, it's online, it's catalog. It’s -- it was a solid, I'd say, small business compared to our overall business and that quadrupled over the pandemic and now it's kind of leveled out. It's at a -- obviously a much higher level than pre-pandemic. But the dream really is to take that and direct-to-the-consumer on our own trucks, which we did during the heart of the pandemic when everything was closed down. We don't think that's the model. We think it's just too expensive. Number one, it would have to be something different than operating throughout our existing warehouses. As our business comes back to normal, the warehousing system and the way we pick our trucks is a lot different than trying to service people's homes. So I think where we are pushing and where we're going to grow the Shop Like a Chef is more with the Allen Brothers' model using a third-party and start to build our seafood division and our gourmet division. That's really where the demand comes. When we see people searching and the information, we're getting back from our analysts is that people are looking to buy our truffle products, our olive oils, our imported cheeses are really extensive gourmet offerings and proteins, and we think that's a real business and that's something that we are 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.