00:03 Greetings and welcome to The Chefs' Warehouse Fourth Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. 00:11 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.

00:20 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 fourth quarter 2021 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. 00:40 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. 01:11 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. 01:28 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 fourth quarter results in detail. Then we will open up the call for questions. 01:54 With that, I will turn the call over to Chris Pappas. Chris?

01:58 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 in 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. 02:29 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%. 03:17 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 and inflation in a few minutes. 04:00 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 joining The Chefs' family of companies and brands. 04:18 Moving forward, we will look to leverage Capital Seaboard'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 in 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. 05:10 2021 was the 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. 05:39 While the labor and supply chain dynamics coming out of the reopening were certainly a challenge, we are incredibly proud of the entire Chefs' 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 to expect. 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. 06:14 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?

06:24 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 24, 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 a 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. 07:04 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. 07:28 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. 07:52 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. 08:14 Adjusted operating expenses increased 37.6% versus the prior year fourth quarter. And as a percentage of net sales, adjusted operating expenses were 17.2% for the fourth quarter of 2021 compared to 24.6% 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. 08:43 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. 09:12 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. 09:44 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. 10:00 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. Net debt as of December 24, 2021 was approximately $279 million, inclusive of all cash and cash equivalents. 10:26 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. 10:52 Our full year estimated diluted share count is approximately 42.5 million shares. We currently expect our senior unsecured convertible notes to be dilutive 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. 11:12 Thank you. And at this point, we will open it up to questions. Operator?

11:15 At this time, we will be conducting a question-and-answer session. Our first question is from Alex Slagle with Jefferies. Please proceed with your question.

11:46 Thanks. Good morning.

11:49 Good morning.

11:50 Congratulations on a good quarter. Just wanted to get — I'm curious in terms of what you've seen in trends in the 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 the sales and EBITDA ramp, what the slope should look like through the year?

12:33 Yeah. Thanks for the question, Alex. January in general — Q1, we normally plan very conservatively anyway. If you look back in history, we make 80% to 90% of our full year adjusted EBITDA from between Q2 and Q4. So, as Chris mentioned in his prepared remarks, the seasonality of Q1 for us is pretty dramatic. And you're coming off the busiest month of the year in December. As we mentioned, we had a very strong Q4; we saw trends that were very similar to pre-COVID periods. 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.

13:46 Okay. What you've seen from customers in terms of acceptance of the higher menu prices? I mean any pushback there or is that sort of in line with how it has looked recently?

14:03 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. 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.

14:37 Great. Thanks for the color there.

14:40 Yeah. I mean, just the customer feedback — I was just on the West Coast, obviously the weather is better and a lot of optimism that we've seen the worst of it. The pent-up demand at some point has to be unleashed. So just the conversations — the started off the bookings and the parties and all the events, the suburbs have been doing phenomenal. It's really the cities getting back to normality, cruise ships and I think those are the last two pieces for a full comeback, but I was really excited to see the optimism.

15:30 Great. Thank you.

15:34 Thank you.

15:35 Our next question is from Fred Wightman with Wolfe Research. Please proceed with your question.

15:41 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 versus 2019 levels or are you still below that December trend?

16:00 Well, I'm not sure what you mean by below the December trend. As I mentioned, the first quarter is affected seasonally and so we're seeing very similar trends as we saw in 2019. Although we've stopped 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 2022 and into 2023. So there is a lot of upside in the future from that business coming back as we haven't even modeled that into our guidance for 2022.

16:56 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?

17:04 Yeah. We expect to get back to 2019 volume levels by the end of Q4 of 2022. Correct.

17:12 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, or is there something else that drives the high end versus low end?

17:28 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 processing cost, 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.

18:17 Great. Thank you.

18:21 Our next question is from Peter Saleh with BTIG. Please proceed with your question.

18:28 Great. Thank you and congrats on great quarter. Jim, I wanted to ask on the inflation. It seems like inflation was a little hotter this quarter than it was even in the third quarter. You guys get a sense that we’ve peaked here on inflation, or is there more to come on inflation, how do you guys model this as we go into Q1 and into the balance of 2022?

18:58 Yeah. Thanks for the question, Peter. It was mainly in the center-of-the-plate products that we saw slightly higher inflation. We reported 18% inflation in Q3 and about 20% inflation on average between the two categories, specialty and center-of-the-plate in Q4. 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. Obviously, the labor situation and 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, we can't predict that with surgical accuracy but that's how we've modeled it. 19:48 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 the comps getting much better from a year-over-year perspective in the second half of the year as we are still in the first half of 2022. We're still lapping the inflation dynamics caused by the pandemic and it gets easier in the back half of the year.

20:15 Great. And then just on the acquisitions. Chris, you made several acquisitions over the past year. Can you talk about how you're viewing the market now? Are you kind of digesting what you've acquired, are you still looking for more? And then just lastly on that, can you 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? Thank you.

20:50 Sure. Every market that we're in is unique and we’re at a different stage of maturity depending on the facilities. Capital Seaboard was 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. So we thought Capital Seaboard was an interesting strategic acquisition to complement our Mid-Atlantic strategy; it gave us a lot of expertise in produce and seafood, two categories that we're trying to build nationwide, so it gave us a great building, a good team, good leadership. We're going to leverage that. Their top line and gross profit margins are pretty healthy, so the focus is adding our thousands of specialty items into their distribution and adding more of their proteins for them to make deliveries. Synergistically, it's not going to require many more trucks or people. That's really where we'll get the leverage. Taking that business from say $100 million to $200 million over the next few years, we should be able to get the EBITDA uptick through synergies and product mix. 22:24 In New England, we made a whole bunch of acquisitions the last few years; it's getting the buildings right, synergizing transportation. Our biggest expenses are drivers and trucks, especially today with labor and fuel costs. Over the next four or five years, as we figure out leveraging the sales force and transportation, we should be able to get the EBITDA uptick by synergizing all those businesses now that we have such a large footprint in New England. It's really the same in every market where you see us building a building, acquiring multiple businesses — it's that three to five-year plan of synergizing the sales force and technology and that's really where we get the EBITDA uplift.

23:19 Thank you very much.

23:24 Thanks, Peter.

23:24 Our next question is from Todd Brooks with Benchmark. Please proceed with your question.

23:31 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.

23:42 Thank you, Todd.

23:43 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?

24:10 Yeah. Thanks for the question, Todd. 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 we've talked about. We did mention a couple of the headwinds that we have in 2022 that we've modeled into our guidance. That is mainly moving into our expanded facilities in Southern California and in Florida. L.A. is actually underway now; we're moving in within the next month or two. We anticipate moving into Florida a few months after that. 25:00 The additional costs associated with those facilities are the major headwind that we have in 2022. We will lap that in 2023 and combine that with growth driven through those facilities. Hopefully, we'll get a few fold in acquisitions over the next couple of years into those facilities. We'll drive the leverage you're talking about, and in the rest of our business as we continue to grow and leverage our fixed asset base, I think you really see the uptick in 2023 and 2024 as some of the things Chris talked about in terms of synergizing and integrating recent acquisitions start to impact the bottom line.

25:56 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 guess, can you talk about Chefs' 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 the spike if it does manifest?

26:34 Great question. I just got back from the West Coast and there's a lot of optimism. Unless we get really unlucky with a bad mutation, what we're seeing is optimism in the warmer states that demand is building. We're trying to get ahead of it. My message to the teams is start hiring and start interviewing. I think it's going to be an extremely busy spring and summer and hopefully just continue to build because of all the pent-up demand. We're seeing shows booking and a lot of bookings for events and hospitality. 27:30 New York just announced they're getting rid of their mask mandates and are looking at the requirement for vaccines to get into restaurants. We're optimistic that a big sense of normality is coming back. In warmer states and people starting to travel again, we're seeing no hold back in spending. People are taking the increases we've seen with inflation and, thankfully, many of our customers are doing extremely well. So we're cautiously optimistic.

28:14 That's great, Chris. Thanks. And then a final one from 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 that allows you to kind of power through shortages with substitution in a lot of cases, but just how is the supply chain kind of holding up coming out of 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?

28:45 I would say, because I just spent a few days with many of our suppliers at a food show, cautiously optimistic that everything is getting much better. There are blips — something pops up and a product goes up 5%, 10%, 15% and we're scrambling price-wise. But overall, a lot of optimism that suppliers and supply chains will start to get better. Obviously, there will be some blips, but overall there is a lot of optimism.

29:25 Okay. Great. Thanks to you both.

29:29 Thank you.

29:33 Our final question is from Kelly Bania with BMO Capital. Please proceed with your question.

29:41 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 or transitory that maybe you can cycle out or how you're planning those kinds of expenses in 2022 within your guidance?

30:07 So you're talking about 2021 transitory costs or in 2022? 30:17 Okay. Well, I think the one thing that we've called out is the expenses related to moving into our new expanded facilities. Beyond that, we've already seen increases in labor and wages that's come across the entire industry; everybody is resetting higher. That's obviously being passed on, as you can see in our adjusted EBITDA margins for Q4. We are able to get to adjusted EBITDA margins fairly commensurate with pre-COVID periods after adjusting for the new acquisitions. 30:59 The major transitory costs that we had in 2021 we discussed earlier: in the summer of 2021 we brought in temporary and contract labor, which was a very good decision to service our customers during the snapback ramp in demand in the summer and into the fall. That's behind us. Our labor situation is much closer to normal. So we don't expect any major changes to the way we've modeled our guidance in terms of operating expenses.

31:49 That's helpful. And then just last one from me. Any change or update to your outlook in terms of deflation? I think you called out last month 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?

32:18 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 very extreme inflation, especially in center-of-the-plate products. That's based more on some of those categories in the center-of-the-plate category coming back down, not towards 2019 prices but coming off the average prices we saw in 2021. 33:02 Some of that deflation is also driven by year-over-year comps getting better in the back half of the year and potentially moving back toward low-single digit year-over-year inflation or even possibly low-single digit deflation as you compare to numbers from the second half of 2021. So no, we haven't changed our outlook. We'll manage pricing in both inflationary or deflationary environments. I think we've proven that over the last two years. I'll just pass it to Chris if he has any additional thoughts.

33:33 Yeah. Kelly, over the last almost 40 years, I've rarely seen restaurants take down prices. So obviously some deflation would be a great uptick for their bottom line because I don't think anyone is going to drop prices. I think many operators believe they will capture some of that bottom line improvement if prices ease. Labor is not going down, but I think supply chains — much of the inflation is coming from transportation and increases per case and per pound. At a certain point we'll get some relief and I think we'll pass some of that along. Operators are counting on that. 34:20 In conversations with operators, there is optimism that they will be able to capture that deflation to the bottom line. We're seeing many products holding; demand is there. I don't know the crystal ball overall, but what we're seeing is not a lot of pushback on price from our customers' customers, which is great given the inflation, especially in high-end proteins. High-end demand seems extremely strong. In cities and states with better weather, people are getting out and demand for high-end products seems very strong. So we're very optimistic.

35:30 Kelly? It looks like Kelly has disconnected.

35:40 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.

35:50 Thank you.