The Chefs' Warehouse, Inc.

Greetings, and welcome to the Chef's Warehouse Fourth 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 Aldis, 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 Letty, our CFO. By now, you should have access to our fourth 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 and 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're going to provide a business update and go over our fourth 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 fourth quarter 2021 earnings call. Revenue trends were strong in the fourth quarter as we saw continued growth in consumer confidence and dining out across our markets. December sales and business activity grew steadily as holiday customer traffic drove sequential volume increases, commensurate with pre-COVID periods, even with the reduction in larger corporate parties and events. Similar to our previous reporting, I will compare sales and gross margin results of the current quarter sequentially to the third 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 15.3% versus the third quarter of 2021. Specialty sales increased approximately 12% sequentially versus the third quarter of 2021, with average unique customers increasing 4.5%, and we saw higher placements of approximately 7%. Specialty cases increased 9% versus the third quarter of 2021, while center of the plate pounds sold were approximately 5.6% higher sequentially versus the third quarter of 2021, excluding the impact of acquisitions. Gross profit margins were 22.5% in the fourth quarter, compared to 22.7% in the third quarter of 2021, and total gross profit dollars increased 14.3% versus the third quarter. Jim will provide more detail on gross margin inflation in a few minutes. On December 27, 2021, we closed the purchase of Capital Seaboard, a premier provider of produce and seafood to their growing customer base in the mid-Atlantic region. We are excited to have Larry Quinn and his entire team join the chef's family of companies and brands. Moving forward, we will look to leverage capital's high-touch and high-quality business model to both complement and enhance our specialty and protein presence in this key market. Regarding recent business activity, as is the case across most of the food industry, January is seasonally the weakest month of the year in terms of revenue generation and business activity. While we experienced little observed impact on sales in the fourth quarter due to the emergence of the Omicron variant, it did appear customer traffic was somewhat impacted the first few weeks of January. However, our performance to date has been in line with our expectations and is reflected in our full year 2022 guidance. 2021 was a year that reinforced the resiliency and importance of the food away from home industry. The reopening of our larger markets during the summer of 2021, followed by steady growth and profitability during the second half of the year, displayed the continued strength in consumer demand for dining out, catered events, and virtually all forms of social interaction associated with the culinary experience our customers provide. While the labor and supply chain dynamics coming out of the reopening were certainly a challenge, We are incredibly proud of the entire Chef's Warehouse team for coming together and developing commercial, operational, and delivery solutions that allowed us to provide the high touch, high quality, and premium product service levels our customers have come accustomed to. We look forward to continued growth while providing the finest ingredients to current and future customers and the coming generations of chefs in 2022 and beyond. 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 December 24th, 2021, increased approximately 98.2%. to $558.3 million from $281.7 million in the fourth quarter of 2020. The increase in net sales was the result of an increase in organic sales of approximately 89.5 percent, as well as the contribution of sales from acquisitions, which added approximately 8.7 percent to sales growth for the quarter. Net inflation was 20.7 percent in the fourth quarter, consisting of 12.5 percent inflation in our specialty category and inflation of 29.2% in our center of the plate category versus the prior year quarter. Please note that on average center of the plate prices were only 3.5% higher sequentially versus the third quarter of 2021. Gross profit increased 113.5% to 125.7 million for the fourth quarter of 2021 versus 58.9 million for the fourth quarter of 2020. Gross profit margins increased approximately 161 basis points to 22.5%. Year-over-year inflation was broad-based across all specialty and center of the plate categories. Selling, general, and administrative expenses increased approximately 31.7% to $109.2 million for the fourth quarter of 2021 from $82.9 million for the fourth quarter of 2020. The primary drivers of higher expenses were higher compensation and distribution costs associated with year-over-year volume growth and route expansion. Adjusted operating expenses increased 37.6 percent versus the prior year fourth quarter. And as a percentage of net sales, adjusted operating expenses were 17.2 percent for the fourth quarter of 2021 compared to 24.6 percent for the fourth quarter of 2020. Other operating expense decreased by approximately $23.7 million due to the impairment of the Del Monte and Basian trademarks in the prior year period. Operating income for the fourth quarter of 2021 was $15.8 million compared to an operating loss of $48.3 million for the fourth quarter of 2020. The increase in operating income was driven primarily by higher gross profit, partially offset by higher operating costs. Income tax expense was $3.2 million for the fourth quarter of 2021 compared to income tax benefit of $16.6 million for the fourth quarter of 2020. Our GAAP net income was $8.4 million or $0.22 income per diluted share for the fourth quarter of 2021 compared to a net loss of $37.1 million or $1.02 loss per diluted share for the fourth quarter of 2020. On a non-GAAP basis, We had positive adjusted EBITDA of $30.2 million for the fourth quarter of 2021 compared to negative adjusted EBITDA of $10.5 million for the prior year fourth quarter. Adjusted net income was $10.2 million or $0.26 income per diluted share for the fourth quarter of 2021 compared to adjusted net loss of $19 million or $0.52 loss per diluted share for the prior year fourth quarter. Turning to the balance sheet and an update on our liquidity. At the end of the fourth quarter, we had total liquidity of $224.6 million, comprised of $115.2 million in cash and $109.4 million of availability under our ABL facility. And net debt as of December 24, 2021, was approximately $279 million, inclusive of all cash and cash equivalents. Turning to our guidance for 2022. Based on the current trends in the business, we are providing financial guidance to be as follows. We estimate that net sales for the full year of 2022 will be in the range of 2.1 billion to 2.2 billion, gross profit to be between 494 million and 517 million, and adjusted EBITDA to be between 99 million and 111 million. Our full year estimated diluted share count is approximately 42.5 million shares. We currently expect our seniors unsecured convertible notes to be diluted for the full year, and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you, and at this point, we will open it up to questions.

Operator? At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Alex Legal with Jefferies. Please proceed with your question.

Thanks. Good morning.

Good morning. Good quarter. Just wanted to get kind of curious in terms of what you've seen in trends and staging of recovery in recent weeks and how your customers are looking at their staffing coming back. I mean, it sounds like the impact from Omicron was not that dramatic in early January and the trends generally in line with your expectations, but I guess any more color there on the most recent weeks and then in terms of the guidance, how to think about the cadence of you know, the sales and EBITDA ramp, what the slope should look like through the year?

Yeah, thanks for the question, Alex. Yeah, I mean, January, in general, Q1, we normally plan very conservatively anyway. If you look back in history, we make, you know, 80 to 90% of our full year adjusted EBITDA from between Q2 and Q4. So, you know, as Chris mentioned in his prepared remarks, the seasonality of Q1 for us is pretty dramatic. And you're coming off, you know, the busiest month of the year in December. And as we mentioned, we had a very strong Q4. We saw trends that were very similar to pre-COVID periods. And we expected January to be fairly weak as it normally is. and that's reflected in our full year guidance. As Chris mentioned, recent trends are progressing as we normally expect through the first quarter. We've obviously seen some weather in different parts of the country, but we usually factor that into our guidance.

Okay.

And what you've seen from customers in terms of acceptance of the higher menu prices, I mean, any pushback there? Is it sort of in line with how it's looked recently?

Really no changes. We haven't seen a lot of changes in customer dynamics or activity. I would just say that we saw the normal kind of seasonality impact that you see in January. And generally, trends start to improve as you get into February towards Valentine's Day. And then as the weather starts to improve going into March, you start to see trends getting better as well.

Great.

Thank you.

Yeah, I mean, you know, Just the customer feedback. I was just on the West Coast, obviously the weather's better, and a lot of optimism that we've seen the worst of it, and all that pent-up demand at some point has to be unleashed, right? So just the conversation that started of the bookings and the parties and all the events, The suburbs have been doing phenomenal. So it's really the cities getting back to normality. You know, the cruise ships and those are the last two pieces for a full comeback. But, you know, I was really excited to see the optimism.

That's great. Thank you. Thank you.

Our next question is from Fred Whiteman with Wolf Research. Please proceed with your question.

Hey guys, thanks for the question. Maybe just to follow up on the last line of questioning, I mean, are you guys back to that same sort of pre-Omicron run rate just in terms of, you know, versus 2019 levels, or are you still below that December trend?

Well, I'm not sure what you mean by below the December trend. As I mentioned, you know, the first quarter is affected seasonally. And so we're seeing very similar trends as we saw in 2019. And although we've stopped kind of officially reporting our percentages compared to 2019, we're still trending above 2019 as prices have remained firm and volume is starting to build back. We're still missing, obviously, the travel-related and hospitality-related volume. As we mentioned when we provided our guidance earlier in the year, We don't expect that to be fully back until the end of 22 and into 23, so there's a lot of upside in the future from that business coming back as we haven't even modeled that in to our guidance for 22.

Okay, but just for the restaurant and case recovery, I think you guys had talked about that happening in 4Q of this year. Is that still a realistic timeframe?

Yeah, we expect to get back to 2019 volume levels by 4Q, the end of 4Q of 22, correct?

Okay, perfect. And then can you just sort of walk us through the high end versus the low end of the gross margin outlook for the year? Is that just sort of inflation that gets you there? Is there something else that drives the high end versus low end?

Well, actually, with our guidance, we pretty much average out to an expectation of about 23.5% gross profit margin. When you compare that to our margins in 2019, adjusted for the processing costs, of course, the biggest factor there has been the extreme inflation, lowering gross profit margin, but also lowering our adjusted OPEX. And we're getting the gross profit dollar growth because we're managing gross profit margins in a way that we get the appropriate gross profit dollar growth to drive EBITDA growth. So that's the main impact in our guidance related to gross profit margins.

Great. Thank you.

Our next question is from Peter Sala with BTIG. Please proceed with your question.

Great. Thank you. And congrats on a great quarter. Jim, I want to ask on the inflation. It seems like inflation was a little hotter this quarter than it was even in the third quarter. Do you guys get a sense that we've peaked here on inflation or is there more to come on inflation? How do you guys modeling this as we go on to 1Q and into the balance of 2022?

Yeah, thanks for the question, Peter. Yeah, I mean, it was mainly in the center of the play products that we saw slightly higher inflation. I mean, we reported 18% inflation in Q3 and about 20% inflation on average between the two categories, specialty and center of the plate in Q4. You know, the way we've modeled it is, we've said this before, we think prices are going to remain firm, especially through the first half of the year. You know, obviously the labor situation, the supply chain situation, the logistics situations haven't really changed that much. And I think the outlook is that they don't really start to change until the back half of the year. Obviously, you know, we can't predict that with, you know, surgical accuracy, obviously. But that's how we've modeled it. And so in our guidance, as we said at ICR, we've modeled in on average very moderate deflation. But that would really be driven by, you know, the comps get much better from a year-over-year perspective in the second half of the year as, you know, we're still – In the first half of 22, we're still lapping the inflation dynamics caused by the pandemic, and it gets easier in the back half of the year.

Great. And then just on the acquisitions, Chris, maybe, and you guys have made several acquisitions over the past year. Can you just talk about how you're viewing the market now? Are you kind of digesting what you've, acquired or are you still looking for more? And then just lastly on that, can you just talk about the margin profile of some of these acquisitions and what it takes to get them up to the company level, average EBITDA margin level? Thank you.

Sure. Every market that we're in is kind of unique and we're at a different stage of maturity and depending on the facilities. You know, Capital Seaboard was kind of unique. You know, Coastal was also for sale during that period of time. You know, they were much bigger, but they had a much bigger retail presence, which really is not our focus. So we thought it was an interesting strategic acquisition to complement, you know, our Mid-Atlantic strategy. You know, it gave us a lot of expertise. in produce and seafood, you know, two categories that we're trying to build, you know, nationwide. So, you know, gave us a great building, a good team, good leadership. So we're going to leverage that. You know, their top line gross profit margins are pretty healthy. So, you know, more of the focus is adding in, you know, the thousands of specialty items into their distribution. and adding more of their proteins for them to make deliveries. So synergistically, it's not going to require more trucks and a lot more people. So that's really where we'll get the leverage. So taking that business, say, from $100 and something million to $200 and something million, hopefully over the next few years, we should be able to get the EBITDA uptick really through the synergies and the product mix. New England, we made a whole bunch of acquisitions the last few years. There it's getting the buildings right, synergizing, again, the transportation. Our big expense really are drivers and trucks, especially today with labor going so high and fuel going higher. So over the next four or five years as we really figure out leveraging the sales force and transportation, we should be able to get the EBITDA uptick synergizing all those businesses now that we have acquired and have such a giant footprint in New England. So it's really the same in every single market where you see us building a building, acquiring multiple businesses. It's that three-, four-, five-year plan really of synergizing the sales force and technology, and that's really where we get the EBITDA uptick.

Thank you very much. Thanks, Peter.

Our next question is from Todd Brooks with Benchmark. Please proceed with your question.

Hey, good morning, everybody. Congrats not only on a great quarter, but kind of powering through a challenging year and doing it so well here. So congrats on that. Thank you, Todd. You're welcome. If I could start with just looking at the business and the incremental revenues that we're putting through the income statement now, are there any additional claims on SG&A that we need to think about this year, or are we starting to see some of that leverage unlock where you get back to that kind of mid-20s range that you saw in the 2018 timeframe?

Yeah, thanks for the question, Todd. You know, I think As we talked about when we provided guidance, we are starting to get the leverage. We are modeling in getting back to kind of the mid-single-digit adjusted EBITDA margins, that range that we've talked about getting back to. We did mention a couple of the headwinds that we have in 22 that we've modeled into our guidance, and that is mainly the the moving into our expanded facilities in Southern California and in Florida, which are, you know, LA is actually underway now. We're moving in within the next month or two, and then we anticipate to move into Florida a few months after that. So the additional costs associated with those facilities are really the The major headwind that we have in 22, we'll lap that in 23 and combine that with lapping that and with the growth that we're going to drive through those facilities. Hopefully, we'll get a few fold-in acquisitions over the next couple of years into those facilities. We're going to drive that leverage that you're talking about in the rest of our business as well as... as we continue to grow and leverage our fixed asset base, I think you'll really see the uptick in 23 and 24 as some of the things that Chris talked about in terms of synergizing, integrating some of these recent acquisitions really start to impact the bottom line.

Okay, great. Thank you. And then secondly, I know from a demand side, it seems like Omicron is moderately impactful, if at all, during the holiday here. Coming out of these different spikes, we've seen real spikes in demand. I think some of this may be movement on the part of individuals to think of this as endemic versus pandemic. I guess, can you talk about Chef's readiness to service another spike in demand post-Omicron, if you're expecting to see it in the spring and how well positioned you are to service a spike if it does manifest?

Yeah. You know, great question. I feel like you might have been with me on my West Coast trip. I just got back, Todd, and a lot of optimism. I mean, you know, my feeling, unless we get really unlucky with some, you know, bad mutation that changes, what we're seeing is, you know, we're seeing a lot of optimism, you know, in the warmest states. The demand is just building, you know, We're trying to get ahead of it. My position is telling the troops start hiring, start interviewing. I think it's going to be an extremely busy spring, summer, and hopefully just going to continue to build because of all the pent-up demand. What we're seeing is people want to get out. We're seeing shows, booking. We're seeing a lot of bookings for... you know, events and hospitality. So I think today New York just announced that they're getting rid of their mask mandates. You know, they're looking at the requirement for vaccines, you know, to show them to get into restaurants. So we're really optimistic that, you know, a big sense of normality is coming back. And what we're seeing in the warmest states and people that are starting to travel again, we're seeing no hold back in spending. people are, you know, taking the increases that we've seen with inflation. And thank God we're seeing a lot of our customers doing extremely well. So we're cautiously optimistic.

That's great, Chris. Thanks. And then a final one for me, and then I'll pass it along. If you think of not just your readiness, but you look back through your supply chain, I know with the breadth of suppliers, it allows you to kind of power through shortages with substitution in a lot of cases. But just how's the supply chain kind of holding up coming through Omicron? Any areas of shortages that are even challenging for you guys with the breadth of assortment, or what are you seeing as far as your suppliers' ability to get your product in a timely fashion?

I would say, because I just spent a few days with a lot of our suppliers at a food show, and again, cautiously optimistic that everything is getting much, much better. You know, there's blips. There's always something that, you know, we don't see and, you know, something pops up and something goes up, you know, 5%, 10%, 15%, and we're all scrambling, you know, price-wise. But overall, there's a lot of optimism that, you know, they're going to be able to supply us and the supply chains are going to start to get better. You know, obviously, I think there will be some blips, but I think overall there is a lot of optimism.

okay great thanks to you both thank you our final question is from kelly banya with bmo capital please proceed with your question hi good morning thanks for for taking our questions um a lot has been covered here uh just wanted to see if you can help us understand as you think about 2021 um any costs that you would consider temporary, transitory, that maybe you can cycle, and how you're planning those kind of expenses in 2022 within your guidance.

So you're talking about 2021 transitory costs, not currently or in 22?

Really both, actually.

Okay. Well, I think the one thing that we've called out is obviously, I talked about earlier, is the expenses related to moving in to our new expanded facilities. Beyond that, we've already seen the increases in labor and wages. That's really kind of come across the entire industry, everybody resetting higher. That's obviously being passed on. As you can see in our adjusted EBITDA margins for Q4, we were able to get to adjusted EBITDA margins fairly commensurate with pre-COVID periods after for adjusting for the new acquisitions. So, you know, I think, you know, the major transitory costs that we had in 21 we've talked about earlier were in the summer of 21 when we, you know, brought in temporary labor and contract labor, which was, you know, a very good decision on our operators' behalf to do that. We were able to service our customers during the during the snapback ramp that we saw of demand in the summer and into the fall. Obviously, that's behind us. Our labor situation is at a much more close to normal type of pace. So we don't expect any really changes to the way we've modeled our guidance in terms of operating expenses.

That's helpful. And then just last one for me, any change or update to your outlook in terms of deflation? I think you called out last month a 3% to 5% deflation outlook is obviously a hard number to predict, but do you still feel comfortable in that range? And is that a good thing to bring some of those costs down for your customers?

Well, in terms of the way we've modeled it, obviously we can't predict it, but our thought process in the guidance was really that we saw some really very extreme inflation, especially in the center of the plate products. And so that's really based more on some of those categories in the center of the plate category coming back down, not towards 2019 prices, but, you know, coming off in terms of the average prices that we saw in 2021. And some of that deflation is also just driven by the year-over-year comps getting better in the back half of the year and potentially getting back more towards low single-digit year-over-year inflation or even possibly low single-digit deflation as you're comparing to the numbers that we saw from the second half of 21 from an inflation perspective. um no we really haven't changed our outlook um obviously we'll be able to manage uh pricing such in in whether it's an inflationary or deflationary environment i think we've proven that over the last two years um and i'll just uh pass it to chris if he has any additional thoughts i mean kelly i mean you know you know the restaurant industry um i don't know over the last almost 40 years if i've ever seen them take down prices right so obviously some deflation

would be a great uptick for their bottom line because I don't think anyone's going to drop prices. So I think there is a lot of belief from our operators that they will capture some of that bottom line as prices... I think certain... Labor is not going down, but I think the supply chains and where so much of the inflation is coming from us... you know, just the transportation and, you know, the increase, you know, per case, per pound. I think that at a certain point, you know, we'll get some relief. And I think, you know, we will pass some of that along. And I think that, I think the restaurateurs are counting on that. So, I mean, I think you do speak to a lot of the operator side. I think there is optimism that they will be able to capture that sort of deflation to the bottom line. You know, we're seeing a lot of products holding. You know, the demand is there. You know, I don't know what the crystal ball says overall, but, you know, what we're seeing is not a lot of pushback on price from our customer's customer, which is great news because there has been so much inflation, especially in the high-end proteins. But high-end seems to be, you know, really strong, the demand and price. I just said the cities, the states, that we have better weather and people aren't having trouble getting out of their driveways or slipping. The demand for the high-end, the high-end products seems extremely strong, so we're very optimistic.

Kelly?

it looks like kelly has disconnected 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 thank you Thank you for watching. Thank you. Thank you. Thank you. Thank you. Thank you. Greetings, and welcome to the Chef's Warehouse Fourth 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 Aldis, 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 Letty, our CFO. By now, you should have access to our fourth 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 and 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're going to provide a business update and go over our fourth 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 fourth quarter 2021 earnings call. Revenue trends were strong in the fourth quarter as we saw continued growth in consumer confidence and dining out across our markets. December sales and business activity grew steadily as holiday customer traffic drove sequential volume increases, commensurate with pre-COVID periods, even with the reduction in larger corporate parties and events. Similar to our previous reporting, I will compare sales and gross margin results of the current quarter sequentially to the third 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 15.3% versus the third quarter of 2021. Specialty sales increased approximately 12% sequentially versus the third quarter of 2021, with average unique customers increasing 4.5%, and we saw higher placements of approximately 7%. Specialty cases increased 9% versus the third quarter of 2021, while center of the plate pounds sold were approximately 5.6% higher sequentially versus the third quarter of 2021, excluding the impact of acquisitions. Gross profit margins were 22.5% in the fourth quarter compared to 22.7% in the third quarter of 2021, and total gross profit dollars increased 14.3% versus the third quarter. Jim will provide more detail on gross margin inflation in a few minutes. On December 27, 2021, we closed the purchase of Capital Seaboard, a premier provider of produce and seafood to their growing customer base in the mid-Atlantic region. We are excited to have Larry Quinn and his entire team join the chef's family of companies and brands. Moving forward, we will look to leverage capital's high-touch and high-quality business model to both complement and enhance our specialty and protein presence in this key market. Regarding recent business activity, as is the case across most of the food industry, January is seasonally the weakest month of the year in terms of revenue generation and business activity. While we experienced little observed impact on sales in the fourth quarter due to the emergence of the Omicron variant, it did appear customer traffic was somewhat impacted the first few weeks of January. However, our performance to date has been in line with our expectations and is reflected in our full year 2022 guidance. 2021 was a year that reinforced the resiliency and importance of the food away from home industry. The reopening of our larger markets during the summer of 2021, followed by steady growth and profitability during the second half of the year, displayed the continued strength in consumer demand for dining out, catered events, and virtually all forms of social interaction associated with the culinary experience our customers provide. While the labor and supply chain dynamics coming out of the reopening were certainly a challenge, We are incredibly proud of the entire Chef's Warehouse team for coming together and developing commercial, operational, and delivery solutions that allowed us to provide the high touch, high quality, and premium product service levels our customers have come accustomed to. We look forward to continued growth while providing the finest ingredients to current and future customers and the coming generations of chefs in 2022 and beyond. 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 December 24th, 2021, increased approximately 98.2%. to $558.3 million, from $281.7 million in the fourth quarter of 2020. The increase in net sales was the result of an increase in organic sales of approximately 89.5%, as well as the contribution of sales from acquisitions, which added approximately 8.7% to sales growth for the quarter. Net inflation was 20.7% in the fourth quarter, consisting of 12.5% inflation in our specialty category, and inflation of 29.2% in our center of the plate category versus the prior year quarter. Please note that on average center of the plate prices were only 3.5% higher sequentially versus the third quarter of 2021. Gross profit increased 113.5% to 125.7 million for the fourth quarter of 2021 versus 58.9 million for the fourth quarter of 2020. Gross profit margins increased approximately 161 basis points to 22.5 percent. Year-over-year inflation was broad-based across all specialty and center-of-the-plate categories. Selling, general, and administrative expenses increased approximately 31.7 percent to 109.2 million for the fourth quarter of 2021, from 82.9 million for the fourth quarter of 2020. The primary drivers of higher expenses were higher compensation and distribution costs associated with year-over-year volume growth and route expansion. Adjusted operating expenses increased 37.6 percent versus the prior year fourth quarter. And as a percentage of net sales, adjusted operating expenses were 17.2 percent for the fourth quarter of 2021 compared to 24.6 percent for the fourth quarter of 2020. Other operating expense decreased by approximately $23.7 million due to the impairment of the Del Monte and Bassian trademarks in the prior year period. Operating income for the fourth quarter of 2021 was $15.8 million compared to an operating loss of $48.3 million for the fourth quarter of 2020. The increase in operating income was driven primarily by higher gross profit, partially offset by higher operating costs. Income tax expense was $3.2 million for the fourth quarter of 2021 compared to income tax benefit of $16.6 million for the fourth quarter of 2020. Our GAAP net income was $8.4 million or $0.22 income per diluted share for the fourth quarter of 2021 compared to a net loss of $37.1 million or $1.02 loss per diluted share for the fourth quarter of 2020. On a non-GAAP basis, We had positive adjusted EBITDA of $30.2 million for the fourth quarter of 2021 compared to negative adjusted EBITDA of $10.5 million for the prior year fourth quarter. Adjusted net income was $10.2 million or $0.26 income per diluted share for the fourth quarter of 2021 compared to adjusted net loss of $19 million or $0.52 loss per diluted share for the prior year fourth quarter. Turning to the balance sheet and an update on our liquidity. At the end of the fourth quarter, we had total liquidity of $224.6 million, comprised of $115.2 million in cash and $109.4 million of availability under our ABL facility. And net debt as of December 24, 2021, was approximately $279 million, inclusive of all cash and cash equivalents. Turning to our guidance for 2022. Based on the current trends in the business, we are providing financial guidance to be as follows. We estimate that net sales for the full year of 2022 will be in the range of 2.1 billion to 2.2 billion, gross profit to be between 494 million and 517 million, and adjusted EBITDA to be between 99 million and 111 million. Our full year estimated diluted share count is approximately 42.5 million shares. We currently expect our seniors unsecured convertible notes to be diluted for the full year. And accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you. And at this point, we will open it up to questions.

Operator? At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Alex Legal with Jefferies. Please proceed with your question.

Thanks. Good morning.

Good morning. Good quarter. Just wanted to get kind of curious in terms of what you've seen in trends and staging at recovery in recent weeks and how your customers are looking at their staffing coming back. I mean, it sounds like the impact from Omicron was not that dramatic in early January and the trends generally in line with your expectations, but I guess any more color there on the most recent weeks and then in terms of the guidance, how to think about the cadence of, you know, the sales and EBITDA ramp, what the slope should look like through the year?

Yeah, thanks for the question, Alex. Yeah, I mean, January, in general, Q1, we normally plan very conservatively anyway. If you look back in history, we make, you know, 80% to 90% of our full year adjusted EBITDA from between Q2 and Q4. So, you know, as Chris mentioned in his prepared remarks, the seasonality of Q1 for us is pretty dramatic. And you're coming off, you know, the busiest month of the year in December. And as we mentioned, we had a very strong Q4. We saw trends that were very similar to pre-COVID periods. And we expected January to be fairly weak as it normally is, and that's reflected in our full-year guidance. As Chris mentioned, recent trends are progressing as we normally expect through the first quarter. We've obviously seen some weather in different parts of the country, but we usually factor that into our guidance.

Okay.

And what you've seen from customers in terms of acceptance of the higher menu prices, I mean, any pushback there? Is it sort of in line with how it's looked recently?

Really no changes. We haven't seen a lot of changes in customer dynamics or activity. I would just say that we saw the normal kind of seasonality impact that you see in January. And generally, trends start to improve as you get into February towards Valentine's Day. And then as the weather starts to improve going into March, you start to see trends getting better as well. Great.

Yeah, I mean, you know, Just the customer feedback, I was just on the West Coast, obviously the weather's better, and a lot of optimism that we've seen the worst of it, and all that pent-up demand at some point has to be unleashed, right? So just the conversation that started of the bookings and the parties and all the events, The suburbs have been doing phenomenal. So it's really the cities getting back to normality. You know, the cruise ships and those are the last two pieces for a full comeback. But, you know, I was really excited to see the optimism.

That's great. Thank you. Thank you.

Our next question is from Fred Whiteman with Wolf Research. Please proceed with your question.

Hey guys, thanks for the question. Maybe just to follow up on the last line of questioning, I mean, are you guys back to that same sort of pre-Omicron run rate just in terms of, you know, versus 2019 levels or are you still below that December trend?

Well, I'm not sure what you mean by below the December trend. As I mentioned, you know, the first quarter is affected seasonally. And so we're seeing very similar trends as we saw in 2019. And although we've stopped kind of officially reporting our percentages compared to 2019, we're still trending above 2019 as prices have remained firm and volume is starting to build back. We're still missing, obviously, the travel related and hospitality related volume. As we mentioned when we provided our guidance earlier in the year, We don't expect that to be fully back until the end of 22 and into 23, so there's a lot of upside in the future from that business coming back as we haven't even modeled that in to our guidance for 22.

Okay, but just for the restaurant and case recovery, I think you guys had talked about that happening in 4Q of this year. Is that still a realistic timeframe?

Yeah, we expect to get back to 2019 volume levels by 4Q, the end of 4Q of 22, correct?

Okay, perfect. And then can you just sort of walk us through the high end versus the low end of the gross margin outlook for the year? Is that just sort of inflation that gets you there? Is there something else that drives the high end versus low end?

Well, actually, with our guidance, we pretty much average out to an expectation of about 23.5% gross profit margin. When you compare that to our margins in 2019, adjusted for the processing costs, of course, the biggest factor there has been the extreme inflation, lowering gross profit margin, but also lowering our adjusted OPEX. And we're getting the gross profit dollar growth because we're managing gross profit margins in a way that we get the appropriate gross profit dollar growth to drive EBITDA growth. So that's the main impact in our guidance related to gross profit margins.

Great.

Thank you. Our next question is from Peter Sala with BTIG. Please proceed with your question.

Great. Thank you. And congrats on a great quarter. Jim, I want to ask on the inflation. It seems like inflation was a little hotter this quarter than it was even in the third quarter. Do you guys get a sense that we've peaked here on inflation or is there more to come on inflation? How do you guys modeling this as we go on to 1Q and into the balance of 2022?

Yeah, thanks for the question, Peter. Yeah, I mean, it was mainly in the center of the plate products that we saw slightly higher inflation. I mean, we reported 18% inflation in Q3 and about 20% inflation on average between the two categories, specialty and center of the plate in Q4. You know, the way we've modeled it is, we've said this before, we think prices are going to remain firm, especially through the first half of the year. You know, obviously the labor situation, the supply chain situation, the logistics situations haven't really changed that much. And I think the outlook is that they don't really start to change until the back half of the year. Obviously, you know, we can't predict that with, you know, surgical accuracy, obviously. But that's how we've modeled it. And so in our guidance, as we said at ICR, we've modeled in on average very moderate deflation. But that would really be driven by, you know, the comps get much better from a year-over-year perspective in the second half of the year as, you know, we're still – In the first half of 22, we're still lapping the inflation dynamics caused by the pandemic, and it gets easier in the back half of the year.

Great. And then just on the acquisitions, Chris, maybe, and you guys have made several acquisitions over the past year. Can you just talk about how you're viewing the market now? Are you kind of digesting what you've, acquired or are you still looking for more? And then just lastly on that, can you just talk about the margin profile of some of these acquisitions and what it takes to get them up to the company level average EBITDA margin level? Thank you.

Sure. Every market that we're in is kind of unique and we're at a different stage of maturity and depending on the facilities. Capital Seaboard was kind of unique. Coastal was also for sale during that period of time. They were much bigger, but they had a much bigger retail presence, which really is not our focus. We thought it was an interesting strategic acquisition to complement our Mid-Atlantic strategy. It gave us a lot of expertise. um in produce and uh seafood you know two categories that we're trying to build you know nationwide so uh you know gave us a great building a good team good leadership so we're going to leverage that you know their their their gross their top line gross profit margins are pretty healthy so um it's you know more of the focus is adding in you know the thousands of uh specialty items into their uh distribution and uh adding more of their proteins for them to make deliveries so you know synergistically you know it's not going to require more trucks and a lot more people so that's really where we'll get the leverage so you know taking that business say from 100 and something million to 200 million hopefully over the next uh few years uh we should be able to get the uh ebitda uptick really through the synergies and the product mix you know new england know we made a whole bunch of acquisitions the last few years you know there it's you know getting the buildings right um synergizing again the uh the transportation you know our big expense really our drivers and trucks especially today with labor going so high and fuel going higher so you know over the next four or five years as we really figure out you know leveraging the sales force and uh transportation we should be able to get the EBITDA uptick synergizing all those businesses now that we have acquired and have such a giant footprint in New England. So it's really the same in every single market where you see us building a building, acquiring multiple businesses. It's that three-, four-, five-year plan really of synergizing the sales force and technology, and that's really where we get the EBITDA uptick.

Thank you very much.

Thanks, Peter.

Our next question is from Todd Brooks with Benchmark. Please proceed with your question.

Hey, good morning, everybody. Congrats not only on a great quarter but kind of powering through a challenging year and doing it so well here. So congrats on that. Thank you, Todd. You're welcome. If I could start with just looking at the business and the incremental revenues that we're putting through the income statement now, are there any additional claims on SG&A that we need to think about this year, or are we starting to see some of that leverage unlock where you get back to that kind of mid-20s range that you saw in the 2018 timeframe?

Yeah, thanks for the question, Todd. You know, I think As we talked about when we provided guidance, you know, we are starting to get the leverage. We are modeling in, you know, getting back to, you know, kind of the mid-single-digit adjusted EBITDA margins that range that we've talked about getting back to. We did mention, you know, a couple of the headwinds that we have in 22 that we've modeled into our guidance, and that is mainly the moving into our expanded facilities in Southern California and in Florida, which are, you know, LA is actually underway now. We're moving in within the next month or two, and then we anticipate to move into Florida a few months after that. So the additional costs associated with those facilities are really the The major headwind that we have in 22, we'll lap that in 23 and combine that with lapping that and with the growth that we're going to drive through those facilities. Hopefully, we'll get a few fold-in acquisitions over the next couple of years into those facilities. We're going to drive that leverage that you're talking about in the rest of our business as well as... As we continue to grow and leverage our fixed asset base, I think you'll really see the uptick in 23 and 24 as some of the things that Chris talked about in terms of synergizing, integrating some of these recent acquisitions really start to impact the bottom line.

Okay, great. Thank you. And then secondly, I know from a demand side, it seems like Omicron – moderately impactful, if at all, during the holiday here. Coming out of these different spikes, we've seen real spikes in demand. I think some of this maybe movement on the part of individuals to think of this as endemic versus pandemic. I guess, can you talk about Chef's readiness to service another spike in demand post-Omicron? If you're expecting to see it in the spring and how well positioned you are to service a spike if it does manifest?

Yeah. You know, great question. I feel like you might have been with me on my West Coast trip. I just got back, Todd, and a lot of optimism. I mean, you know, my feeling, unless we get really unlucky with some, you know, bad mutation that changes, what we're seeing is, you know, we're seeing a lot of optimism, you know, in the warmest states. The demand is just building, you know, We're trying to get ahead of it. My position is telling the troops start hiring, start interviewing. I think it's going to be an extremely busy spring, summer, and hopefully just going to continue to build because of all the pent-up demand. What we're seeing is people want to get out. We're seeing shows, booking. We're seeing a lot of bookings for you know, events and hospitality. So I think today New York just announced that they're getting rid of their mask mandates. You know, they're looking at the requirement for vaccines, you know, to show them to get into restaurants. So we're really optimistic that, you know, a big sense of normality is coming back. And what we're seeing in the warmest states and people that are starting to travel again, we're seeing no hold back in spending. people are, you know, taking the increases that we've seen with inflation. And thank God we're seeing a lot of our customers doing extremely well. So we're cautiously optimistic.

That's great, Chris. Thanks. And then a final one for me, and then I'll pass it along. If you think of not just your readiness, but you look back through your supply chain, I know with the breadth of suppliers, it allows you to kind of power through shortages with substitution in a lot of cases. But just how's the supply chain kind of holding up coming through Omicron? Any areas of shortages that are even challenging for you guys with the breadth of assortment, or what are you seeing as far as your suppliers' ability to get your product in a timely fashion?

I would say, because I just spent a few days with a lot of our suppliers at a food show, and again, cautiously optimistic that everything is getting much, much better. You know, there's blips. There's always something that, you know, we don't see and, you know, something pops up and something goes up, you know, 5%, 10%, 15% and we're all scrambling, you know, price-wise. But overall, there's a lot of optimism that, you know, they're going to be able to supply us and the supply chains are going to start to get better. You know, obviously, I think there will be some blips, but I think overall, there is a lot of optimism.

Okay, great. Thanks to you both.

Thank you.

Our final question is from Kelly Banya with BMO Capital. Please proceed with your question.

Hi, good morning. Thanks for taking our questions. A lot has been covered here.

Just wanted to see if you can help us understand, as you think about 2021, any costs that you would consider temporary, transitory, that maybe you can cycle, and how you're planning those kind of expenses in 2022 within your guidance.

So you're talking about 2021 transitory costs, not currently or in 22?

Really both, actually.

Okay. Well, I think the one thing that we've called out is obviously, I talked about earlier, is the expenses related to moving in to our new expanded facilities. Beyond that, we've already seen the increases in labor and wages. That's really kind of come across the entire industry, everybody resetting higher. That's obviously being passed on. As you can see in our adjusted EBITDA margins for Q4, we were able to get to adjusted EBITDA margins fairly commensurate with pre-COVID periods after for adjusting for the new acquisitions. So, you know, I think, you know, the major transitory costs that we had in 21 we've talked about earlier were in the summer of 21 when we, you know, brought in temporary labor and contract labor, which was, you know, a very good decision on our operator's behalf to do that. We were able to service our customers during the, during the snapback ramp that we saw of demand in the summer and into the fall. Obviously that's behind us. Our labor situation is at a much more close to normal type of pace. So we don't expect any really changes to the way we've modeled our guidance in terms of operating expenses.

That's helpful. And then just last one for me, any change or update to your outlook in terms of deflation? I think you called out last month a 3% to 5% deflation outlook is obviously a hard number to predict, but do you still feel comfortable in that range? And is that a good thing to bring some of those costs down for your customers?

Well, in terms of the way we've modeled it, obviously we can't predict it, but our thought process in the guidance was really that we saw some really very extreme inflation, especially in the center of the plate products. And so that's really based more on some of those categories in the center of the plate category coming back down, not towards 2019 prices, but, you know, coming off in terms of the average prices that we saw in 2021. And some of that deflation is also just driven by the year-over-year comps getting better in the back half of the year and potentially getting back more towards low single-digit year-over-year inflation or even possibly low single-digit deflation as you're comparing to the numbers that we saw from the second half of 21 from an inflation perspective. So um no we really haven't changed our outlook um obviously we'll be able to manage uh pricing such in in whether it's an inflationary or deflationary environment i think we've proven that over the last two years um and i'll just uh pass it to chris if he has any additional thoughts i mean kelly i mean you know you know the restaurant industry um i don't know over the last almost 40 years if i've ever seen them take down prices right so obviously some deflation

would be a great uptick for their bottom line because I don't think anyone's going to drop prices. So I think there is a lot of belief from our operators that they will capture some of that bottom line as prices... I think certain... Labor is not going down, but I think the supply chains and where so much of the inflation is coming from us... just the transportation and the increase per case, per pound. I think that at a certain point, we'll get some relief. And I think we will pass some of that along. And I think the restaurateurs are counting on that. So I think you do speak to a lot of the operator side. I think there is optimism that they will be able to capture that sort of deflation to the bottom line. You know, we're seeing a lot of products holding. You know, the demand is there. You know, I don't know what the crystal ball says overall, but, you know, what we're seeing is not a lot of pushback on price from our customer's customer, which is great news because there has been so much inflation, especially in the high-end proteins. But high-end seems to be, you know, really strong, the demand and price. I just said the cities, the states, that we have better weather and people aren't having trouble getting out of their driveways or slipping. The demand for the high-end, the high-end product seems extremely strong, so we're very optimistic.

Kelly?

It looks like Kelly has disconnected. 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.

Thank you.