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

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO and Jim Leddy, our CFO. By now, you should have access to our second quarter 2022 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA, 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 SCC website. Today, we are going to provide a business update and go over our second quarter results in detail. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our second quarter 2022 earnings call. Late, first quarter business strength continued into the second quarter as a combination of strong consumer demand, new customer openings and increased dining capacity led to consistent growth in revenue trends as we enter the late spring and summer season. Despite sequential deflation in certain center of the plate categories, overall pricing remained firm and incremental gains in volume contributed to sales growth during the quarter. Although not back to pre-pandemic levels, moderate improvement in hospitality and event related business was evident as the quarter progressed. A few highlights from the second quarter, as compared to the second quarter of 2021 include a 36% organic growth in net sales. Specialty sales were up 52.2% organically over the prior year, which was driven by unique customer growth of approximately 35.9%. Placement growth of 54.6% and specialty case growth of 34.8%, organic pounds in the center of the plate business was approximately 14.2% higher than the prior year second quarter. Gross profit margins increased approximately 140 basis points. Gross profit in the specialty category decreased 70 basis points, as compared to the second quarter of '21, while gross margin in the center of the plate category increased 230 basis points year-over-year. Jim will provide more detail on the gross profit margin in a few moments. We are excited to announce the addition of two acquisitions completed during the second quarter and one completed just recently in July. University Foods is the specialty broad line distribution company located in Southern California. We welcome Dean Schauer and his team into the CW family and we expect to fold their operation into our new Los Angeles distribution center in the coming weeks. We are also excited to add Alexa specialty Foods to our Northwest region, located in Portland, Oregon, we will combine Alexa with our CW Specialty Business serving Portland and Seattle and look forward to driving significant growth in these key markets going forward. In Florida, we added Master Purveyors, a center of the plate distribution company operating out of the Tampa area to our portfolio of categories and brands in the region. Masters was eventually combined with our seafood processing operation to bolster our growth in the Central to Northern regions of the state, complementing or expanding in high growth specialty and protein business in South Florida. Each of these acquisitions are important additions to the CW portfolio and facilitate growth in key regions and create operating leverage as we grow into our expanding distribution capacity across our footprint. I would like to express sincere thanks to the entire Chefs' Warehouse team for delivering on a great second quarter performance and continuing to provide our customers with the premium products and service they have become accustomed to over our 37-years of operations. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended June 24 2022, increased approximately 53.2% to $648.1 million from $423 million in the second quarter of 2021. The growth in net sales was the result of increase in organic sales of approximately 36%, as well as the contribution of sales from acquisitions, which added approximately 17.2% to sales growth for the quarter. Net inflation was 13.6% in the second quarter, consisting of 16.4% inflation in our specialty category and inflation of 10.9% in our center of the plate category versus the prior year quarter. Gross profit increased 62.7% to $156 million for the second quarter of 2022 versus $95.9 million for the second quarter of 2021. Gross profit margins increased approximately 140 basis points to 24.1%. Year-over-year inflation was broad-based across most specialty and center of the plate categories. Selling, general and administrative expenses increased approximately 37.8% to $124.5 million for the second quarter of 2022 from $90.4 million for the second quarter of 2021. The primary drivers of higher expenses were higher compensation and distribution costs associated with higher year-over-year volume growth, route expansion and increased fuel costs. Adjusted operating expenses increased 40.7% versus the prior year second quarter. And as a percentage of net sales, adjusted operating expenses were 17.1% for the second quarter of 2022, compared to 18.7% for the second quarter of 2021. Operating income for the second quarter of 2022 was $27.6 million, compared to $4.7 million for the second quarter of 2021. The increase in operating income was driven by -- primarily by higher gross profit, partially offset by higher operating costs. Income…

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

Thank you. Good morning. Congrats.

Hey, Alex.

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

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

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

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

All right. Thank you.

Thank you.

The next question comes from Peter Saleh of BTIG.

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

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

Great. And then just -- and you mentioned for pricing holding at the same time, you discussed that you're trying to see at least some sequential deflation and some items. How long do you think that pricing can hold? And what's the magnitude of the deflation that you guys are seeing, do you think that continues into the back end of the year?

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

Yes. And we might have been a little bit ahead of ourselves on these deflation. I mean, we got a little bit of it, but what we're seeing now with obviously all the news about drought and crops, and the cost of keeping these cattle fed, the cost the fuel, you could see an uptick again depending on demand. It really goes back to if the demand remains strong it could keep prices up. So it's just amazing watching the news every day and you're looking at the overall economy and spend. And I think people really do forget that we are still coming out of the pandemic. There's still a lot of demand for travel and we're starting to see that a lot of the industry -- a lot of our customers last year who probably did better in the summer, because nobody was traveling and this year I think is more normalized. People are traveling, the tremendous amount of people who have the means are going to Europe or going on trips that we're postponed for the year. So like Jim said, I think we're starting to see more normalization and then at the same time, we're starting to see events being planned, we're starting to see a lot of meetings, put back on the board. And I think we should continue to benefit from the reopening of the world and people getting back into the meeting mode and business travel and weddings happening left and right. So we obviously have been waiting for this for two years and I think we're finally starting to see it.

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

Thank you.

Thanks, Peter.

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

Good morning. Follow-up on the deflation, could you just say which categories I assume it's in beef, but and not in poultry, which I think, because of avian flu still going up. And just how do you view that? I mean, I think, Chris, you had been saying or other, maybe others too much beef inflation just at some point isn't good for the menu prices. So I mean is it -- I think a lot of people hear deflation and they think it's negative, but how do you view it? Let me just put [Technical Difficulty] that one.

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

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

Yes. Well, I mean, I think you've been hearing me now for years saying that we're -- especially during the pandemic we made the decision to keep investing in people. So we went out and got the best talent possible, so we can continue to be able to do acquisitions, right? You always got to remember, you need some -- you need talent to run these businesses, right? So we built the new building finally, we moved in mostly in Southern California. So that gave us the ability to acquire somebody like University Foods, who will be folding in hopefully shortly. And you know, there's nothing I like better than a good fold-ins, because they're the most accretive, because we're able to eliminate a lot of the overhead and hopefully keep the sales and synergize the trucks and the sales teams. And usually that's a great return for us. So, University is one, Alexa is another one, it’s a competitor up in the Portland, Seattle area. It's a company that is a great business and competes with us. So besides eliminating a competitor, that one, we're going to eventually move into one building and we’ll get all the synergies there, okay? And the latest one, Masters in -- I call it Northern Florida, really gives us a great business to leverage our plan. We already have a -- an Allen Brothers Seafood in Orlando, so we're already starting to look precise to put a facility up that we can combine the two and create a powerhouse Allen Brothers Meat & Seafood in that whole Tampa, Orlando area going all the way down to eventually probably that cut off is Naples where we split off with our other facility coming out of Opa-locka in Miami. So these are all great, I'm hoping to do many, many more of these strategic fold-ins besides doing new categories and new markets, but these are really important for us.

Terrific. Thank you for that answer and I'll yield to the next time -- person.

Thank you.

Thanks, Andrew.

The next question comes from Kelly Bania of BMO Capital.

Hi, good morning and congrats on a great quarter.

Thanks, Kelly.

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

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

Okay. That's very helpful. And then obviously this year is just coming so strong and maybe there is some uncertainty on the macro front. But as you think about growth drivers next year, you mentioned the cape volumes over -- back over 2019 levels, but maybe hospitality still has some room to recover. Can you just help us understand the magnitude of what that might look like if and when it fully recovers?

Yes. Well, again, in a perfect world, we'd stay at the pace that we're seeing of people coming back to dining out, and we would start to get really the piece that's missing, right? More city business, more business lunch, more events, more especially in the fourth quarter, right, where it's usually our busiest quarter and you get a combination of everything, you're going to get tourist in, you're going to get a lot of business meetings and holiday parties. So when I look at where the business is coming from, that piece is still missing. We still don't have that great tourism in, say, in Midtown Manhattan or Chicago, all of Asia really, if you go, I just came back from a big swing around the country and visiting a lot of our businesses and you see casinos really busy, but you still don't see a lot of the Asian tourists that I normally see in my travel. So I think there's a -- the airlines are limited, they don't have, I guess the seats, so the planes to bring more people. So, optimistic that eventually they'll figure that out. The cruise line business is coming back. So I think it's -- we're still at least a year away from any sorts of normality for travel and figuring out really if you catch COVID, is it five days away? Is it two days in the future staying away from work. So the crystal ball says that there's a lot of upside still to come. So when I look at the crystal ball, I'm like, well, there's a lot of upside to come and maybe you get a little slowdown in spending and you still could be a net positive. And you've heard me say Kelly for, I don't know, how many years that I think our strength is our laser focus on the customer sector that we sell to. We really stay on our mat, we focus on the top restaurants, the top upscale casual restaurants and hotels. And I have found for almost the past 40-years that, that customer -- our customers' customer always seems to go out to dinner or to have meetings or parties. It's been a great customer base for us and I think that's why we said we wanted to dominate that customer base nationally. We did start to grow out of Metro New York. So always see a slowdown in a catastrophe like the financial collapse or obviously COVID, but other than something of that magnitude, our sector seems to always do better than the rest of the hospitality sector. So we remain cautiously optimistic and bullish. And with these kind of opportunities to have tuck-ins, into our facilities, especially our new facilities, it really gives us a very optimistic roadmap.

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

Yes, sure. Well, again, there's always a -- you need a good reason to write a check. So we look for company that either has a customer base that we don't have that gives us access now. We see that the great thing about Chef is there's nobody like us. The bad thing is there's no one exactly like us to go buy would make my job much easier. So buying the same Masters right now in Northern Florida gives us a company with a history of lots of loyal customers up and down, the Gulf Coast that's not one of our strengths, so the plan as usual is to keep those customers happy and expand leverage that sales force and continue to add to it and that gives us 100s of customers now that we can go sell or 1,000s of items that they don't carry. So the other acquisitions, one is synergistic up in Portland, they also give us many, many customers that we could sell our giant portfolio of products too. And I think that's what you're seeing the many years that we've been putting, I call it, more of a national chef warehouse together is -- I think we've been able to get that hybrid growth that even before the pandemic where the industry might have been growing 1%, we were able to grow 5%, 6%, 7%, I think because we've been putting together such great businesses that their portfolios coincide together and we're getting that uptick in the hybrid sale. And that's really what we -- our plan is to continue doing that is now we're adding more produce and we're adding more seafood. And as long as we continue, we have 600-plus in our sales department and highly trained, that we continue to train and add to giving them the knowledge to be able to talk to customers' as consultants, I know every distributor says that, but it's extremely hard to do. And I think that our many, many years of investing in our test kitchens and our training kitchens and our trainers and our expertise, I think you're starting to see the payback for all those investments.

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

Yes. What I am seeing talking to many, many customers, I think you have obviously different types of clientele. So I think on the high-end, I see them just passing along carefully, a lot of the cost in the menu and then I see a huge amount of customers that are changing the way they do business and changing their menus. So they're not as courageous to continue to raise a lot of their menu costs. So again, there maybe cutting portions, there maybe changing the accoutrements, on their entrees or different types of specials. So they're really smart restaurant tours, they're going to try to lead the customer right, like any other business. So they're going to mix it up. So I’d say on a seafood platter, you might see if lobster is really expensive, you might see a smaller portion and you'll see maybe more shrimp or scallops or whatever is more affordable right this way they can make their GP on a dish. You're seeing much more creative drinks. I'm seeing all different types I always see more potato as prices go up. Potatoes fill you up and no matter what it's a lot less expensive than a prime stake. So again, our customer base is extremely entrepreneurial and they know their customer base. And I think if you would add as much as me, you start to really see a $38 entree where they think that's the spot that is high as they can go and then you have a $75 stake on a menu, on other places I've been eating and you can't get a reservation on Thursday, Friday, Saturday. So it’s -- I think they're very creative and they're figuring out how to keep their establishments busy.

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

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

Hey, Todd.

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

Yes. So you're saying -- I mean, the question is the pace of us being able to close deals increase?

Yes, correct, correct.

Yes, I think absolutely, I mean, these deals take time. Very few are one month and then you close. So a summer in the -- some have been in talks for years, some are in talks for six months. So like, I think you just mentioned, Todd, the pipeline is extremely frothy and we're really diligent in choosing, who joined Chef, I would say that to close one, we look at 20 these days, but the industry again was consolidating before COVID. So the lack of being able to do deals, very few deals got done during COVID. So you're seeing a backup, you're seeing a lot of the PE backed roll-ups starting to come to market. But we kind of -- I mean, there's always a surprise, there's always somebody new, but one of the advantages of being in the industry for so long as you kind of know where all the pieces are that really make sense. And I think we are focused on the companies that really -- again, giving you a roadmap from the crystal ball, I continue to see us doing fold-ins, which are unbelievably synergistic. I continue to see us finding companies in territories that we're still not strong in to continue to grow CW as a national platform. And I continue to see new categories and some surprises coming up for sale that fit into what we do. So after two years of the COVID closures and openings and starting to finally see that we have light at the end of the tunnel and you could start to forecast. And I think that's why a lot of these companies are coming to market now, because I think they have enough of a run rate to show that what their real business looks like even though you have a lot of inflation in and that's where the tricky part comes out, figuring out what it looks like in a more normalized world. But Jim reminds me every day, I don't think labor is coming down, so that cost is there. I don't know if gas will ever be $2 a gallon again, so that input is there. Real estate cost for facilities, that's way up, so I think you do have a built in uptick in the cost of business. And so products will always be more expensive than they were. I think pre-COVID overall. I mean, now you got a crazy war, so that's not helping. So that's really the tricky part trying to take a look at a business that's coming up for sale and say what does it look like in a more normalized time, and what is the new norm?

Right, exactly.

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

Okay, great. Thanks, Chris, my follow-up. And Chris, you talked about this earlier that Chef’s continued to invest during the pandemic and made the operations stronger. I know you brought a lot of sales talent onboard during the pandemic from competitors and kind of ramp them into the operation? Are we starting to see the fruit of it? I mean, you talked as one of the big drivers in the quarter, new customer wins. Are we -- that investment, how is it manifesting itself? The organic growth was really strong in the quarter? Is this kind of your return on spending that money during the pandemic starting to bear real fruit for the model both in revenues and margins? Thanks.

Yes. I think so. I mean, besides sales, I mean, it's really operations that has really stepped up in a brutally difficult environment for labor, and is really carrying us through and allowing us now to get the -- that profit that falls to the bottom line by figuring out how to operate better and get the efficiencies of the crew doing more with less. So the investments in operations and people and leadership combined with that sales talent that we've been able to acquire. And I still think we're really in the maybe third inning of really seeing the benefits of all the investments that we're making in talent. And now the investments in facilities will start to bear fruit over the next four years. So as we're able to grow in Florida, where we're going to have two new facilities and obviously Southern California, that building we can quadruple our business or more. We have a new one coming up in San Francisco that we're going to consolidate, make San Francisco, I can keep going on and on around the country. I think our knowledge of the business, the expertise of the team and the continuing recruiting, we created the office of Talent Officer, I think just at the right time, because we obviously as a growing company, we continue to need that talent. So that focus of really looking for the best of the best, I think, is going to pay lots of dividends over the next four, five years.

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

Six months ago.

We expect to move in the back half the year.

Okay, great. Thanks guys.

Thank you.

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

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

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