All right, well, let's kick things off. Good morning, everyone. I'm Mark Carden, the North American Food Retail and Food Distribution Analyst out at UBS. Thanks so much for joining us today. Super excited to have the team from Chefs' Warehouse. We've got Chris Pappas, the company's founder, chairman, president, and CEO. Jim Leddy, the company's CFO. We're going to dive right into questions, and I appreciate you guys joining us today.
Thank you. Thanks for having us.
All right, well, you know, just being at ICR and a big consumer focus, obviously just the state of the consumer, I think, is on a lot of people's minds. It's been a pretty choppy macro for restaurants overall in terms of yield to traffic data for quite some time. Yet your end demographic has held up a bit better. You put out guidance for the year ahead, which you guys look pretty optimistic about what's coming ahead. We'd just love to learn a little bit more about what's going on with your core consumer today.
Yeah. Well, as we said, you know, we haven't reported earnings yet for the fourth quarter, but we said the fourth quarter looked very strong. And we still remain very cautiously optimistic. Our customers' customer seems pretty healthy. They continue to spend. You know, we've diversified the company so much the last 10 years from just super high-end to upscale casual. You know, we do a lot with cruise ships, all the better hotel groups, caterers, bakeries, anything food away from home, ghost kitchen. So we saw a lot of strength, and we see the bookings for 2026. You know, a lot of customers share a lot of data because they want to make sure that we're prepared for their needs. So we don't see any real slowdown in our customer's customer base.
That's great. And then just in terms of, if you think about some of the potential tailwinds that we might have in the year ahead, you have obviously a pretty strong presence in the Northeast, highly taxed region. You have SALT reform, which could be impacting potentially some of your customers. Rates could be coming down. We have tax cuts in general from the One Big Beautiful Bill. How would you expect these dynamics to impact your business? Is it enough to really move the needle for you guys historically when you've seen similar periods of more cash going into pockets?
Yeah. I mean, we don't model it in, right? It'd be great to have a tailwind. You know, the world seems like it's in some sort of chaos, but more money to consumers, obviously, is a good thing, but again, you know, we are diversified. What we hear from our customer base is people still want to go out. I mean, besides your local restaurants, right, your every week customers that are there once, twice, three times a week or doing takeout, celebratory spending is still very strong. People going out for birthdays, anniversaries, weddings, events, christenings, bar mitzvahs. People enjoy having a great dinner at a great restaurant, and I think that's going to continue, and if more consumers have a little more disposable income, it's not going to hurt, for sure.
Yeah, I could see that. And how about just in terms of inflation? There's some moving data points out there. Beef inflation went way up. Maybe it's peaked at this point, but between that and the potential for disinflation and other categories, just what are you guys seeing in general on the inflationary front, and how are you thinking about, call it, the next six months?
You know, we have. I'll go back to Chris's point about diversified. We have 90,000 SKUs that go through our distribution centers. At any given time, some are deflationary, some are inflationary, and we've seen some pretty extreme examples, beef prices in 2025, chocolate prices given some of the weather and where chocolate is made or produced, dairy and eggs, and we've seen them come back to earth, but with 90,000 SKUs, even the tariffs, you have so much opportunity to provide alternatives. You have a lot of opportunity to manage prices effectively. What really matters is sequential price movement, more so than year over year. I know we report year over year, but what a customer remembers is what they were paying a month ago or maybe a couple of weeks ago, not really a year ago.
And so we can manage through that pretty effectively, even with all of the volatility in certain categories. In 2025, the first three quarters, aggregate inflation was in the 3% range, which is kind of like an ideal range for a food distributor that serves our customer base. So I think, you know, we built our guidance on kind of a normal range, and it always ends up a little different, but we're not expecting anything materially different than what we've seen recently.
Got it. And then you touched on tariffs within there. Obviously, you have some of your imports, you know, would have some exposure to tariffs. You guys mitigated that quite well over the course of the past year. It's possible that, you know, there's a chance some of those could get rolled back in the year ahead. Just how are you thinking about the tariff outlook in general and your ability to adapt, so to speak?
Yeah. I think, again, our team did a great job last year. You know, we did tie up a little more working capital than normal, taking positions, you know, trying to get ahead of possible tariffs. I think that's kind of mitigated right now. I think that the president's pulled back on some tariffs. I think he's got other people to fight with at this point. But a lot of our products, again, you know, come from Spain, Italy, France. You know, I mean, we pull from 50 countries, right, over 5,000 producers. So I think it's just like Jim said, we're so well diversified, having lived through so many disruptions over, you know, the past 40 years since, you know, we started the business, that we have backups to just about everything. So, you know, some things there are no substitutes.
You know, olive oil, there's not enough olive trees here to supply 1% of our needs. So, you know, something like that, we're going to live with the tariff. You know, concern sometimes is the dollar, too. You know, a weaker dollar drives prices up as well. But, you know, nature finds a way. You know, our supply channels, our producers, some have eaten some of the increases, right? So, you know, they didn't pass on the complete tariff. You know, remember, the tariff is on the goods. It's not on freight, which is a big part of cost, right? So there's other things. So we manage really well. You know, we like inflation. We don't like massive inflation. It's too disruptive. It hurts our customers. But, you know, we pass on just about, you know, whatever hits us.
So, you know, we don't sell a lot of contract customers, so we don't have that kind of risk. And we kind of like more expensive boxes. We make more money. So, you know, from the business side, it's pretty good. But again, overall, too much inflation. Like what happened with beef, you know, no one likes to see beef up 30%-40%. It's very disruptive. So, you know, normalization, you know, same with eggs. Eggs, you know, with the bird flu. Speculation, eggs went from $1 or something a dozen to $10 a dozen. You know, a lot of unhappy customers. So, you know, normalization, you know, what I always dreamed about was 1%-3% inflation with a little volatility was kind of perfect for what we do. And it kind of looks like we're getting back to, you know, somewhere between 1% and 4%.
We'll see what happens.
See what happens. So maybe, you know, you touched on, built this business over the course of 40 years. You obviously operate in a very attractive subsegment of food distribution. Are you surprised that nobody has really been able to replicate what you guys have done at scale? What's really allowed you to pull apart from the pack in that sense?
Yeah. Well, there's no lack of competition, right? So, you know, we compete in a very competitive market, but I think that when you look at it and somebody else said something about a different business. I think it was the beverage business, how big it is and why there's so many, you know, little mini brands that are capturing market share. We compete in food away from home. It's a $400 billion food away from home market. So, you know, what we do is, you know, it's really hard. You know, it's easy to fill up a warehouse with lots of boxes and buy containers of products and try to go out and sell a lot of commodities, and it's very competitive, and, you know, your margins are going to be less and your overall EBITDA is probably going to be smaller.
We chose this path years ago, you know, experimenting into different categories and different parts of, you know, selling to different types of customers. And what we found was really what we built on was the culture of we loved dealing with creative chefs. You know, we loved dealing with independent restaurants and the process of being their partner, you know, finding products for them, introducing them to the market, you know, watching them catch on, watching our customers succeed, intrigue the American public. And we watched the whole transformation of, you know, consumption in the U.S. of wanting better food. And, you know, we still have that passion. I think it's really hard when you get to a certain size. So, you know, even though we're a $4+ billion, we're relatively small in the bigger picture.
So, you know, building the long tail that we have and supporting it and warehousing it and building it into a model where you will have more losses, you will have more merchandise that expires, you know, fresh, you know, fish not sold on Friday is not better on Saturday, right? Either as lettuce or tomatoes or fresh cheese. So you have to build that kind of mentality and culture into your purchasing departments, into your sales force, that sense of urgency. Rome is always burning, you know. So it's late-night calls. It's a lot more service that's required and a lot more inventory on the long tail that is usually against the thought process of lowering your costs in a typical broadline distribution business. So we're kind of an outlier, and we'd like to stay that way.
I think we're so far ahead with, you know, our supply channels. A lot of what we buy is from small producers, you know, sometimes we're their only customer, right? So it's kind of like we're exclusive or we are the producer because of how much is produced and how much we buy. So we contract a lot with producers with our own labels. So we do act as a manufacturer, not as a private label brand, as a real brand. So I think over 40 years, we've built a lot of our brands into small, you know, mini brands. And I think we've positioned ourselves to, you know, we're not trying to be an $80 billion mass broadliner, but we look at our addressable market as about $50 billion. And we're approaching now, you know, starting to approach 10% of that.
We think that we can easily, you know, double the business over the next six years.
Great. And then maybe from a category standpoint, you guys entered into beef, took a little while, but now Allen Brothers is a very strong brand in the category. More recently, you entered produce and have been building up your presence in that category. Are you where you guys want to be yet in produce? And then as you think about additional categories down the road, are there any that you think you still need to get a better presence in in order to perfect your cross-selling model?
Great question. So, you know, the company originated as an importer of specialty foods, right? Cheeses, olive oils, and we continue to progress, and right now, protein is a very strong division in our business. You know, we look at all the categories still in the very early stages. We think protein will double. We think our presence in fresh goes with our overall model. You know, we're not trying to build the country's largest produce division, but we are trying to build a specialty produce division that fits in with our culture. We'll sell a lot of the commodities, but we think that division will probably triple, quadruple as our other categories continue to grow, so you know, we always use our example as like a four-legged stool, you know, specialty, produce, meat, non-foods. They're all important to us.
It's more part of, you know, our core customers are still the, I call it, a 100-seat independent restaurant or cafe. We'd like to be their primary supplier, and to do that, you have to touch all categories. You know, even though we do a tremendous amount of business with hotels like this and cruise ships, we're more niche players in that market. You know, we're selling categories where we're extra strong. You know, a lot of that, you know, does go out to bid, so it's not our primary business, but you know I think what's driving a lot of our growth is, you know, concentrating on being the core supplier to our core customer, but also being able to sell a much larger audience of customers a good amount of product and not be the primary.
I think we're, you know, and obviously category expansion and territory expansion is a big part of our growth as well for the years to come.
As you guys have built out more of a national footprint, do some of those non-independent customers, those hotel chains, those cruise ship companies, do they become any more attractive to allocate more business to? Or is it you guys have a kind of sweet spot mix today and wouldn't really want to change that?
We're not going after giant national chains. It's just not what we do. We don't want to, you know, devote the resources and veer away from what we're really good at and then maybe not perform as well for our core customers. We've seen a lot of competitors do that. I don't think you can be everything to everybody. But I think as we continue to grow, we'll have more solution. We pride ourselves on being a solution company. And again, that takes a massive amount of dedication to training of who we hire and being able to, you know, I think the future of distribution, it'll be bifurcated. And the path that we're on is to be more of a consultant to our customers, to have people on staff who really understand their business, understand the ingredients, the food, understand what they're up against, which today is labor.
I don't think that's going to change much. I think everyone has the labor challenge to recruit enough people into the industry. They're hard jobs, right? Long hours. So I think finding more and more solutions for customers who have to do more with less is key to our success. And that's where we are putting resources and partnerships. And so far, we're finding great success at it.
Great. Maybe that's a good segue into the sales force. Just there's been a lot of movement with some of the larger competitors just between what percentage of compensation should come from base, what percentage should come from variable. When you think about the Chefs' Warehouse sales force, what's the optimal balance between variable comp and base comp?
Comp and base comp. You know, commissions is always a very touchy subject. Comes up quarterly in our human resource meetings, and you know, we try to align our sales force with what we're trying to achieve. Obviously, you know, make more money for our shareholders and at the same time provide them a great work environment and a more balanced lifestyle, so what we learned really in this process was our salespeople were actually, many of our salespeople were actually working too hard, right? Because their phone is always on, you know, taking orders all weekend, at nighttime, and I think our capabilities digitally have really improved that lifestyle, so it's kind of rebalanced how we can think about commissions. I think there's no doubt that we all want to produce more with less. We are a for-profit business, right?
People are nothing against people, but people are very expensive, but I don't think we ever veered off the respect we have that they add a lot of value, and we're going to need a sales force. It's going to look different. They're going to be more consultants. They're going to be better trained than when I started the business 40 years ago, and we just have to give them the tools to be more efficient, and they probably will be able to see more accounts with the tools we're giving them, and we'll probably have less people. That's still to be determined. We are seeing a lot of efficiencies, but they play such an important role, so we continue to hire. We've never taken our foot off the pedal. If we find great people, we hire them, and we're not afraid to overhire.
I think the big three, you know, a lot of pressure being a public company, right? You got to hit your quarters. So, you know, I think that the whole technology drum that you will not need as many people. I think it's something that's happening, is going to happen, but we still believe that we need to keep up, continue to hire really talented people because we're a growth company and we're constantly undermanned in what I feel that what we need to feed the growth.
Maybe turn to margins then, just in terms of your Investor Day. You guys highlighted, you know, plan to essentially hit 6.5%-7% Adjusted EBITDA margin by fiscal 2028. Maybe Jim, how would you bucket some of the most impactful initiatives to helping you get to that level?
Yeah, we kind of laid it out at our Investor Day. We had a kind of a waterfall slide. I always like to go back to that. And, you know, the first part is just continue to develop and build the Chefs' Warehouse model, what Chris so eloquently described in terms of bringing in all the categories of the diversity of SKUs, the training of a young sales force in an immature market as they grow and, you know, along with the business and become more experts and really become the primary supplier for our customer base in those markets. So it's just continue to do that. And we have so many operating companies and markets that are in different phases of maturity that there's still a lot of runway to develop a true Chefs' Warehouse in those markets. The second thing is really just continue to scale.
There's two components to that. The first is we're coming off of a very big investment period coming out of COVID where we accelerated some buildout of distribution capacity in multiple high-growth markets that we kind of put on hold during the COVID period. And at the same time, we did a lot of really important strategic acquisitions during that period. So then, you know, in late 2023, we kind of pivoted and said, we're going to slow down M&A for a little while and we're going to grow into this capacity and integrate these acquisitions. And that's going to generate operating leverage and is going to be an important component to reaching our, you know, $5 billion and 7%, you know, type of goals for 2028.
And then the third thing I'd say about that scale is. I'll go back to that waterfall that we had put up on Investor Day. Was just really a lot of tactical initiatives across the company, whether it's in our operations with technology and automation that we're putting in our distribution centers, whether it's in procurement and pricing with continually improved technology using AI for dynamic pricing as well as more dynamic demand forecasting. Chris talked about our digital platform. We're making significant investments into our digital platform. And they're giving much better real-time data to our sales reps to go into a customer. They have real-time data on their phone telling them what they haven't been buying, how inelastic or elastic is their pricing for certain products, just giving them more information and improving our customer's experience as well.
Great. So we've got a couple of minutes left. Maybe just turning to M&A right now. You guys obviously went through a big spurt of M&A during the 2022, 2023 timeframe, put a bit of a pause on it. More recently, you guys bought a specialty player out in Colorado. How are you guys thinking about the M&A environment today and what's the pipeline looking for the year or two ahead?
Well, I think we needed a little pause. You know, we had a lot to digest. We had facilities going up that we still have facilities going up to finish. We had a lot of IT projects. You know, we did so many because of COVID in such a short period of time. It was very distracting. So we needed that break and it proved to be a good decision. You know, we're just getting better and better at everything that we're doing. As Jim just laid out, it's kind of a, you know, it was like a Goldilocks. You know, we're getting better at purchasing. We're getting better logistics. We're getting better at sales. We're getting better at managing pricing. And today we remain extremely opportunistic. You know, if there's something really, really good that we like and it's fairly priced, we are absolutely going to look at it.
But at the same time, you know, with the organic growth, you know, nearing almost double digit, that's a lot of growth just to manage. And it's extremely profitable, right? It's not distracting. It's what we do. Texas is almost like a, it's like a startup for us. You know, we invested into Texas. We put together a bunch of little small companies and a larger company. It wasn't a perfect fit. You know, that's why we knew the market was ready for us. There was nobody like us to buy. So we took good little businesses and now we're retrofitting facilities. We're hiring people. We think Texas is almost like an acquisition. We acquired Texas. And now we have to build the business. So a new facility in LA, a building that we could triple our business. You know, that business is growing double digits.
Florida, almost like we entered another country. We entered a very small, a few million-dollar business. Today, you know, that's trending $300+ million. So, you know, feeding that growth, so I think we have enough going on that we could be extremely opportunistic, and if something really good comes up, our debt leverage is way down. You know, we're probably going to, you know, be under two at a certain period of time unless we buy something, so we're creating enough dry powder ability that something good comes up. We don't have to leverage up like we did in the past to buy something, so I like our position.
Fantastic. Well, that brings us to time. Please join me in thanking Chris and Jim.
All right. Thank you.
Thanks much.