Chefs' Warehouse Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to The Chefs' Warehouse Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded.

Speaker 1

I would now like to turn the

Operator

conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir.

Speaker 2

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 Q2 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section.

Speaker 2

Throughout this conference call, we'll be presenting non GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non GAAP financial measures used by other companies. Quantitative reconciliations of our non GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our 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.

Speaker 2

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 ks 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 2nd quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on The Chefs' Warehouse website under the Investor Relations section titled 2nd quarter 2023 earnings presentation.

Speaker 2

Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Speaker 3

Thank you, Alex, and thank you all for joining our Q2 2023 earnings call. As we noted during our Q1 earnings report, the strong snapback in demand coming out of the Omicron variant of the COVID-nineteen pandemic in the Q2 of 2022 provides a difficult year over year comparison to the 2nd quarter of 2023. As we had anticipated, for the first time since the onset of the COVID-nineteen pandemic, 2nd quarter business activity returned to more normal seasonal trends. While April May was strong month and came in as expected, In June, we did experience some impact from the air quality issues from the Canadian wildfires and extreme heat and severe weather across many of our markets. In addition, volatility in certain protein categories resulted in moderate gross profit dollar pressure.

Speaker 3

Overall, for the quarter, our team delivered strong year over year organic revenue growth and adjusted EBITDA, and our recent acquisitions performed well. A few highlights from the Q2 as compared to the Q2 of 2022 include 8.1% organic growth in net sales. Specialty sales were up 11.4% organically over the prior year, which was driven by unique customer growth of approximately 8.7%, Placement growth of 11.9% and specialty case growth of 10%. Organic pounds in center of the plate were approximately 5.9% higher than the prior year Q2. Gross profit margins decreased approximately 43 basis points.

Speaker 3

Gross margin in the specialty category decreased 70 basis points as compared to the Q2 of 2022, while gross profit margins in the center of the plate category decreased 174 basis points year over year. Jim will provide more detail on gross profit and margins in a few moments. In addition to providing the quarter results and the update to our 2023 guidance, We thought it would be helpful to share with our team members, shareholders, customers and suppliers as well as all interested parties Our 5 year goal to leveraging the significant investments we have been making in infrastructure, capacity expansions, strategic acquisitions and geographical growth. Please refer to the slides posted on the Investor Relations section of our website at www.chefswarehouse.com. Please refer to Slide 1.

Speaker 3

This is The Chefs' Warehouse today. We have grown from approximately $1,600,000,000 in revenue in 2019 to an estimated $3,300,000,000 plus based on the guidance we updated and raised today for 2023. Along the way, we have grown our truck fleet to 1,000 plus and we now operate out of 51 distribution centers across the U. S, Canada and the Middle East. The past few years, despite the impact of COVID, we continue to invest in We expect to leverage these investments into profitable growth as part of our 5 year goals and beyond.

Speaker 3

Please refer to Slide 2. Our capital allocation is primarily focused on creating capacity expansion In high value markets, we expect to drive incremental operating leverage through organic growth, technology and process improvements to drive ongoing improvement in operational efficiency and investments in an easier and enhanced customer We expect The growth in capacity from the infrastructure capital deployed from 2019 to date combined with the projects coming online over the next 24 to 36 months to create approximately 60% growth in capacity. These include our recent projects completed in Southern California, Florida and Texas as well as projects underway In the United Arab Emirates, the U. S. Northwest, Northern California as well as Southern New Jersey serve the Philadelphia region and optimize our distribution footprint in New York to the Mid Atlantic.

Speaker 3

As we grow in scale, we expect to see the benefits of these investments as we target $5,000,000,000 in revenue and 300 plus 1,000,000 in adjusted EBITDA over the next 5 to 6 years. Additionally, we anticipate strengthening free cash flow As a percentage of revenue allocated to CapEx gradually moves from 1.5% to 2% range down to 1% to 1.5% range over time. If you refer to Slide 3, we are carrying certain cost increases associated with these investments in the near term. It is important to note that despite this, We have delivered first half of twenty twenty three adjusted EBITDA growth of approximately 25% over the same period in 2022, and our full year guidance implies a similarly year over year growth rate. As we grow in scale over the next 5 years, we expect to leverage these investments along with future acquisitions to deliver economies of scale, continued market share gains and gradually improving adjusted EBITDA margins over this time.

Speaker 3

The achievement of these goals will depend on our ability to continue to execute on the 3 primary pillars of The Chefs' Warehouse unique growth model and the food away from home industry. The integration over time of acquired companies, brands and the talent we have added and continued to add across our regions and markets. The cross selling strategy combined with various levels of Generating operating leverage as we grow organically into the significant capacity creation we have invested in the last few years and we expect continue to add to key markets. We remain focused on developing, promoting and adding best culinary expertise and operational talent in the industry. The investments we are making combined with our 3 pillars of growth provide our teams with the right platform to enhance and grow The Chefs' Warehouse business model forward, focused on our shared vision to be the number one partner Chefs providing them with the world's finest specialty food products and ingredients, best in breed technology and a team dedicated to delivering superior for service.

Speaker 3

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?

Speaker 4

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended June 30, 2023 increased approximately 36.1 percent to $881,800,000 from $648,100,000 in the Q2 of 2022. The growth in net sales was the result of an increase in organic sales of approximately 8.1%, as well as the contribution of sales from acquisitions, which added approximately 28% to sales growth for the quarter. Net inflation was 3.6% in the 2nd quarter, consisting of 5.7% inflation in our specialty category and inflation of 1.1% in our center of the plate category versus the prior year quarter.

Speaker 4

Gross profit increased 33.6 percent to $208,400,000 for the Q2 of 2023 versus $156,000,000 for the Q2 of 2022. Gross profit margins decreased approximately 43 basis points to 23.6%. Gross profit dollar growth and margins were primarily impacted by year over year product mix changes, partially due to the increase in hospitality related business versus the prior year quarter, combined with a sharp decline in certain protein category prices during June of 2023. Selling, general and administrative expenses increased approximately 43.8% to $179,000,000 for the Q2 of 2023 from $124,500,000 for the Q2 of 2022. The primary drivers of higher expenses were higher depreciation and amortization and higher compensation and benefit costs, facility and distribution costs associated with higher year over year volume growth and the impact of acquisitions.

Speaker 4

On an adjusted basis, operating expenses increased 42.2% versus the prior year's Q2. And as a percentage of net sales, adjusted operating expenses were 17.8% for the Q2 of 2023 compared to 17.1% for the Q2 of 2022. Operating income for the Q2 of 2023 was $25,300,000 compared to $27,600,000 for the Q2 of 2022. The decrease in operating income was driven primarily by higher operating costs, including higher depreciation and amortization and stock compensation costs associated with acquisitions, partially offset by higher gross profit. Income tax expense was $3,500,000 for the Q2 of 2023 compared to $6,300,000 expense for the Q2 of 2022.

Speaker 4

Our GAAP net income was $9,900,000 or quarter of 2022. On a non GAAP basis, we had adjusted EBITDA of $51,100,000 for the Q2 of 2023 compared to $45,300,000 for the prior year's Q2. Adjusted net income was $14,400,000 or $0.35 diluted share for the Q2 of 2023 compared to $20,900,000 or $0.51 per diluted share for the prior year's Q2. Turning to the balance sheet and an update on our liquidity. As disclosed in the recently filed 8 ks, on July 7, 2023, We completed the 6th amendment to our ABL credit facility, increasing the facility line from $200,000,000 to 300,000,000 Other than a slight increase in the fixed coupon component, terms remained materially unchanged.

Speaker 4

At the end of the Q2 prior to the July ABL upsize, we had total liquidity of $144,900,000 comprised of $59,600,000 in cash $85,300,000 of availability under our ABL facility. As of June 30, 2023, net debt was approximately $661,500,000 inclusive of all cash and cash equivalents. Turning to our full year guidance for 2023. Based on the current trends in the business, we are providing our full year guidance as follows. We estimate that net sales for the full year of 2023 will be in the range of $3,250,000,000 to 3,350,000,000 Gross profit to be between $774,000,000 $797,000,000 and adjusted EBITDA to be between 199,000,000 at $207,000,000 Regarding our updated guidance, please make note of the following for modeling purposes.

Speaker 4

We currently expect interest expense for the remaining 2 quarters of 2023 to be approximately $12,500,000 per quarter on average. Similarly, we expect depreciation and amortization to average approximately $15,000,000 per quarter over the same period. Our full year estimated diluted share count is approximately 45,700,000 shares. For reporting purposes, we currently expect our senior are included in the fully diluted share count. Thank you.

Speaker 4

And at this point, we will open it up to questions. Operator?

Operator

Thank you, sir. We will be conducting a question and answer session.

Speaker 1

The first question we have comes from Alex Slagle from Jefferies. Please go ahead.

Speaker 5

Thank you. Good morning. I wanted to ask on the guidance The cadence of margins this year and with the Q2 back to normal seasonality and the EBITDA margin sort of falling right into that range. As I look ahead to the 3Q and think about the typical 5%, 6% EBITDA margin we've seen in the past, I mean, it suggests a Pretty big 4Q to get to the guide. So perhaps just some thoughts on that.

Speaker 5

And I guess also with the Middle East having a different seasonality than the U. S. Business, just if that plays any part into the mix?

Speaker 4

Yes. Hey, Alex, thanks for the question. Yes, I think the 2 large acquisitions that we completed during the quarter as well as the seasonality of Chefs' Middle East combined, those are 3 big companies that we would anticipate would have an impact on the Q3. So I think number 1, the second quarter Coming in where it was, was not too far off of our expectations. We built our guidance on the 2nd quarter coming We're kind of in the low 6% range.

Speaker 4

We missed that by about 20, 30 basis points. We talked about the impacts of the Couple of things that came together in June to take a little bit of froth off of margins, but overall a very strong quarter. So I think the 3rd quarter the back half of the year, it's going to be a little more of a normal cadence, but those three acquisitions will bring up the Q3 a little bit versus what we would have seen in the past.

Speaker 5

Okay. That makes sense. And you noted the June activity was a little different and impacted by that smoke and the heat waves In some of the regions outside of that, did you see any signs of incremental pullback in demand or a change in trade down dynamics?

Speaker 4

No. I mean, I think, we had a really strong organic revenue and volume quarter, 8% year over year organic sales growth and volume growth, very moderate inflation. It was really just a couple of weeks in June. I think the biggest impact was The kind of sudden decline in certain protein categories that took a little bit of an impact on our margin. We had some Obviously, we talked about we're carrying some overhead expenses that compared to the operating leverage that was created last year kind of gives you an outsized difference on the percent of revenue on OpEx.

Speaker 4

And those things just came together and impacted The EBITDA margin a little bit in the quarter and mostly impacted by June.

Speaker 5

All right. That's helpful. Thank you.

Speaker 3

Thanks.

Operator

Thank you. The next question we have comes from Andrew Wolf from CL King. Please go ahead.

Speaker 1

Hi, good morning. Could you give a little color on what changed in the choppiness in the protein markets? I usually think Prime beef, something with the prime beef that's hard to track outside on the outside with you all that I know you diversified that into other types

Speaker 3

Yes, it was a very abnormal Quarter for protein sales. When you look at what we look at is the amount of animals coming through the system And the outlook is that there's not enough cattle in the system. Prices will remain high and continue to go higher for the next few years. I think we've been talking about that in the last few calls. And for whatever reason, there was a blip where the market just went the other way.

Speaker 3

And that's what compressed some of our protein margins. And it caught the whole market, Andy, by surprise and It's not the first time, but this has happened, but it did catch us by surprise and it cost us a little bit of Margin compression. Again, as Jim said, we kind of track pretty much to our expectations. We had a pretty good quarter. I mean, we had great organic sales.

Speaker 3

We had great placements. We had Customer growth and it was kind of an odd quarter between the coming into July as well with the Massive heat waves and we had we lost a few days of business with all the crazy coming over from Canada, all the outdoor cafes were closed. So team did a great job Grabbing as much business as possible. I think our customers overall, their customer is spending. You got a lot of travel Right.

Speaker 3

This past quarter, I mean, I think overseas, we've read reports up to 200% of travel. So A lot of the wealthy clientele of our customers are traveling, have to be in locked up for a few years with COVID. So All that looking at all that, I mean, it was a pretty good quarter with that damn beef market causing a few bumps.

Speaker 4

Andy, I'd just add that. You really have to put the quarter in the context of the first half of the year, Q1 and Q2 combined compared to last and then also in the context of our full year guidance. We didn't construct the guidance on delivering the profitability that we did last Last year's Q2 was an incredible confluence of extreme demand, really strong rising prices and incredible operating leverage. So the quarter came in kind of right in the range that we expected. If you combine it with the first half of the year within the context of the first half of the year, 14% year over year organic growth for the 1st 6 months and 25% year over year adjusted EBITDA growth.

Speaker 4

And that's very similar to what our full year guidance implies on a full year basis. So I think it's just the unevenness of the comparison that really caused a little bit of confusion as we came into the first half of the year.

Speaker 6

Okay. No, that's really helpful. I'm going to use a tortured analogy or metaphor, but has the smoke cleared on the beef market, on the outdoor cafe?

Speaker 3

We're here in bucolic, Connecticut and the weather is beautiful. So We hope it continues. It's actually too chilly. So really odd and beef prices are starting to firm up. You're starting to see price increases.

Speaker 6

So it sounds like the beef market kind of going completely opposite all expectations is what drove you guys a little below your budget. Is that better way to more so than some disruption in demand from weather? Just

Speaker 4

trying to Yes. I would say that that's true. So we expected to come in about 20 basis points or 30 basis points in Adjusted EBITDA margin better than we delivered. So a couple of $1,000,000 We did not expect the consensus models had us close to 7 That was built off of last year. We didn't expect to come in there in the context of our full year guidance.

Speaker 6

That's completely understandable given I look back how good last year's Q2 was. I just want to ask about one other question, kind of a follow-up to some of the things Alex was asking about, was The back half guidance, I mean, the sales are doing good even with June having disruption, Certainly versus what I expected. So I'm thinking more on the margin. Would it be right to think that you're To get to your guidance, it's going to be more what's the balance going to be between improved sort of I know you want me to look at it in halves, but we're kind of in a short sighted sense. Is the gross margin going to improve a little more because the second quarter had Or is it going to be a balance between the gross margin and the cost structure?

Speaker 4

Yes, it's going to be a balance. Yes, it's going to be a balance, Andy. We don't guide by quarter, but the comments I just mentioned about the change in seasonality due to the 3 large acquisitions. Normally, our Q3, the slightly lower gross adjusted EBITDA margin than the 2nd quarter. I think the fact that we undershot a little bit on the 2nd quarter, It will be the cadence will be more normal.

Speaker 4

In terms of the Q4, we It to be stronger assuming that demand holds up and you have a really good 4th quarter like most food distributors do. The guidance implies what the second half will be and we haven't changed it.

Speaker 6

All right. Thank you.

Speaker 3

Thanks, Andy.

Speaker 1

Thank you. The next question we have comes to Peter Saleh from BTIG. Please go ahead.

Speaker 7

Great. Thanks. I wanted to ask maybe first On the Hospitality business, I know this is maybe one of the segments that was latest to recover post COVID, what are you seeing there? And are you seeing, I guess, the hotels and your customers that you serve? Do They now have the labor to reopen and really be more have more service in that business.

Speaker 7

Just trying to understand how quickly that industry has recovered?

Speaker 3

I think it's recovering, Pafir, but I wouldn't say it's back To 100%, depends which part of the country and What part of the cities or like Vegas? I think it's more right now what we're hearing from our customers, it's after that Crazy period last year when everything opened up. You have more normality and maybe Too much travel overseas for their customers' customers. So you take like Miami Beach, Last year was the last few years were obviously one of the only places open and everybody was coming. And I think the opposite is happening this year that people are traveling overseas and other places.

Speaker 3

In a way, it's given them a chance to build back labor. I still think they are struggling. We are hearing from certain customers that They still don't have the labor force to meet 100% demand. And I think part of the strategy that we've seen is they're keeping prices Pretty high. So maybe there's not the tourism that normally there is in Napa Valley, Monday through Thursday, weekends they still get a big crowd.

Speaker 3

They're keeping prices up to Make their bottom line and there's still enough customers willing to pay really high rates, okay, for them To be profitable, I mean, that's what it looks like from my seat, the kind of strategy from us, especially the high end. I mean, It's very expensive. When I see the rates that they're posting for, say, Monday, Tuesday, Wednesday in Napa Valley. And they're quieter than they were last year for sure. So I think My best shot at it is the dollars are getting spread much more spread out.

Speaker 3

We're seeing a lot of areas do 120% of what we expected and we're seeing other areas do 90% of expectations. And what we hear from our airport customers is the amount of business that they're doing for People leaving is off the charts, but the amount of people coming in is still not back to normal.

Speaker 7

Great. Thanks for that color. And then just on the 2 to 3 year targets that you guys laid out here. On the adjusted EBITDA, can you maybe talk about some of the factors that would Expect you'll be closer to the low end, if you make less, you'll be at the high end. Just trying to understand some of the factors that will drive us either closer to the 6.25% or the 7%.

Speaker 4

Yes.

Speaker 3

Our organic growth, we always call our core business, That tracks pretty much to our expectation at what we call the higher end of the margin Expectations. So you're absolutely right. It really depends who we acquire. And we've acquired a lot of companies that are much Lower margin than the typical Shep Warehouse and usually takes us a few years to shepherd size it. So I always say, we could be bigger than our expectation, but margin might be a little lower because we bought more companies that we're fixing.

Speaker 3

Still great EBITDA, but we're still in fixed mode. And if we buy less, volume will be less, but probably margin will be higher because it'll be more organic growth, which tends to be at a higher margin.

Speaker 7

Great. Thank you very

Speaker 4

much. Thanks, Peter.

Operator

Thank you. The next question we have comes from Kelly Bania from BMO Capital Markets. Please go ahead.

Speaker 8

Good morning, Chris and Jim. Thanks for taking our question.

Speaker 1

Hi, Jim.

Speaker 3

I was

Operator

wondering if we could talk

Speaker 8

a little bit about Expenses for the quarter and just how that came in relative to your plan? I think guidance would suggest that the back half expense dollars need to come down and just curious what buckets that would be in, maybe just help us think through that line item for the next several quarters.

Speaker 4

Yes. Thanks, Kelly. There's a couple of things there. I mean, in terms of once again the unevenness, In Q1, we created a really good amount of operating leverage year over year because of the comparison, And we outperformed in Q1. It's kind of the opposite in Q2 because of the comparison.

Speaker 4

That's a good portion of the year over year difference in operating leverage. We completed 2 very large produce company acquisitions, 1 at the end of the first quarter, so that was And produce companies come with a higher percentage of operating expenses. So that was 20 or 30 or so basis points of that difference right there. And We have we had a couple of we had a large facility coming online in Florida. So we're not adding that back anymore.

Speaker 4

That's impacting our OpEx. And that Goes to the discussion that we are carrying overhead right now that we will fully leverage. We're creating that 30% to 60% capacity, and that we will grow organically into over the next 2, 3, 4 5 years. That going to Peter's question, that's going to be a big driver of us getting to that kind of 6.25% to 7% over the coming years. So Those are the 3 main components of that, and we expect that it will come down.

Speaker 4

Currently, we expect that in the second quarter I'm sorry, in the back half of the year.

Speaker 8

Okay. That's helpful. And just To be clear, were there any other acquisitions beyond Hardee's and Greenleaf? Those are the last 2 I had, but the M and A contribution was a lot stronger than we had thought. So just maybe can we walk through either what's contributing to that or how to think about what is driving that line item?

Speaker 4

Yes. You have to understand that it's all the acquisitions we completed since the Q2 or since the Q3 of last year. So we did Chefs' Middle East, which is a multi $100,000,000 company we didn't have last quarter. The 3 big acquisitions, Schasz Middle East, Hardee's, Greenleaf and then we did a couple of smaller acquisitions. Over that time, we did the Mike Hudson acquisition out on the West Coast, which is a fold into our business.

Speaker 4

We did the produce fold in last December into our Sid Wehner business in New England, and we did the small fold in in Canada. So there have been some smaller acquisitions that That's attributed to that as well in terms of the year over year contribution.

Speaker 3

Yes. But really the organic growth is really driving The top line, Kelly.

Speaker 8

I guess, maybe just I'll ask another way. So, of the announced Acquisitions that we've had kind of releases on, has anything changed with respect to your organic adjusted EBITDA outlook for the year?

Speaker 4

No, I think We went into the year with our original guidance based on organic growth. We adjusted our guidance when we report in Q1 to reflect the Hardee's and Greenleaf acquisitions, as well as the upside from Q1. And so no, nothing's really materially changed in terms of our organic growth.

Speaker 8

And just one last follow-up, what's driving the higher D and A outlook?

Speaker 4

That's acquired growth. So The adjustment to the D and A is primarily higher depreciation and amortization with the acquisition of Hardee's and Greenleaf, which are large acquisitions, Higher stock compensation associated with those acquisitions. And then not in D and A, but also impacting EPS is Higher interest rates and the higher level of debt that we added to fund those acquisitions.

Speaker 8

Okay, okay, helpful. And maybe just ask a longer term question just about the new capacity that you're adding. Maybe just help us have a little more color on what you're seeing out there in terms of costs and locations? And are you finding exactly what you need there? Or help us just kind of think about the how that has how the landscape maybe has changed for some of the costs of these new facilities?

Speaker 3

Yes. Well, I mean, these buildings have been in the hopper for a while, Kelly, pre COVID basically. So the building in which is not up and running yet In Richmond, California, I mean, that's a cost that we negotiated. I think it was pre COVID. The building in LA was, I think, pre COVID.

Speaker 3

We started we negotiated on that. So, I think the buildings that are coming online now, Florida as well, was pre COVID. So the market is very strong. Actually, it's actually I'll take that back. The market is strong for warehousing.

Speaker 3

I mean, it's gotten very expensive. As of late, we're hearing a little softness, Amazon subleasing a lot of buildings. I always call it the Amazon effect really drove The price of warehousing to double close to cities. So these buildings, they were expensive, but They were pre negotiated really for just the basic rate to rent them. To build them, the costs were a little higher All the costs went up during COVID, which we're starting to see some normalization as the supply chains come down.

Speaker 3

We got LA open now, we got Florida open, Richmond will open next year and South Jersey, right outside of Pennsylvania is halfway open. We moved in and now we're finishing that building. So that's the exciting part. We're adding a lot of capacity to be able to Accelerate organic growth and to do very creative fold ins.

Speaker 8

Thank you.

Operator

Thank The next question we have comes from Todd Brooks from The Benchmark Company. Please go ahead.

Speaker 1

Hey, good morning, Deepa. Just a couple of quick questions here. One is a follow-up on the last line of questioning. Chris, if you look at the Florida facility or maybe the Southern California facility, Since there's a little more time that that's been up and running, how fast are those facilities opening up what you had Sizes meaningful revenue opportunities to grow in those markets. I'm just trying to get a sense of these new facilities come on, How quick is the revenue unlock from the ability to service more customers?

Speaker 3

Yes. Well, I mean, there The revenue is unlocked. So they are growing faster than most of our other businesses because they were very constrained on the size of their building. So I would say they're living up to our expectation, growing at a very quick pace and really it's the opportunity to do very accretive fold ins. I've said that I think for the past 10 years, if I could do an accretive fold in every day, I would because they're really low risk because Mostly what we're taking is the sales team and the increased sales and we're able to really get rid of a lot of The fixed overhead, right?

Speaker 3

They're old facilities, a lot of routes we're able to synergize by combining routes And that's the way we make money, right? The more dollars on a truck that can go out every day, the more GP dollars that fall to the bottom line. So My expectations really LA will double over the next 4, 5 years. Florida might triple to quadruple. So I think that that's a great expectation and that's a great ROI on building out those buildings.

Speaker 1

And if you look at your M and A pipeline Of opportunities, Chris, how does it mix out as far as shots on goal for fold ins in these type of markets versus either New platforms in different verticals or maybe new market entry, are there a decent amount of bolt ins that you're always working on? Or are there more just With generational changes and some of these firms coming out of COVID and just being ready to sell and move on.

Speaker 3

I mean, as we expect, I mean, last year was extraordinarily busy because of all the buildup of COVID Businesses that we had negotiated on. So I think that was a little too frothy. Right now, I think we're being more surgical, Todd. We're really organic growth is our top priority. We've invested in a lot of talent, Gearing up for the Florida building, we've added, I would say, 20 plus new sales reps To get ready to hit the street.

Speaker 3

So, we made a really big investment in trying to build up the team to grow organically, which we know is the most profitable growth. And there's always folding opportunities and we're always negotiating them. It really comes down to Price and I think being patient is prudent at this point. New markets, Yes. I mean, we're always looking to finish our map, right?

Speaker 3

We're not in the Carolinas and Georgia. We're not in Colorado. I think those are secondary as far as the importance. I mean, if there's something great, we'll always been opportunistic, but Really driving more business into Texas facilities right now, driving more business in Florida and LA and wherever we have capacity is at the top of the list because that really is where the biggest flow through for EBITDA will be. And that's what we're trying to do right now.

Speaker 1

Hey, thanks, Chris. Jim, one quick one for you and then I'll jump back in the queue. I think the inflation outlook entering this year was kind of plus or minus 5% when you were contemplating the initial revenue guidance. We're 2 quarters in. We saw continued inflation across both verticals In the Q2, I guess, any surprises about where we track year to date from an inflationary standpoint?

Speaker 1

And anything you can share with us on outlook for Inflation, deflation that you're thinking about in the second half of the year? Thanks.

Speaker 4

Yes. I think it's kind of played out Pretty similar to our expectations. I mean, obviously, we've said earlier on multiple calls before this that, we expected the base effect to drive Most of the disinflation in 2023 just given the extreme inflation that we saw throughout 2022. And you've seen that kind of play out. We've reported moderate kind of 3.5% inflation that was primarily offset by the impact of product mix in the quarter.

Speaker 4

I mean, looking forward, I would expect that You're starting to see some deflation in some of the larger commodities that kind of went crazy in 2022. And so I would expect that the disinflation So more moderate year over year inflation, but sequential kind of slight deflationary to flattish. Sequentially from Q1 to Q2, we saw low single digit deflation in specialty prices and we saw low Kind of single digit inflation sequentially incentive to plate prices in aggregate. We did have The sharp decline in a couple of weeks in June, but it didn't cause the overall quarter to be sequentially deflationary, because April May were kind of more normal kind of strong months. So that's Kind of the way it's been playing out and we would expect that it's going to continue to play out that way.

Speaker 1

Okay, great. Thanks to you both.

Speaker 4

Thank you.

Operator

Thank you. The final question we have comes from Ben Khaleef from Lake Street Capital Markets. Please go ahead.

Speaker 6

All right. Thanks for taking my questions. Just a couple of quick ones for me. First of all, on the Acquired Businesses. Was there anything that you guys have been surprised with, particularly on the margin side from any of these Kind of more major acquisitions that you've made over the past few quarters that really came to light in the second quarter?

Speaker 4

No, not really. I would say that we the 2 big produce companies that we added, we talked about on the Q1 that they were slightly dilutive for the full year because they came in at an average EBITDA margin that was slightly lower than our average. But in terms of we did 2 large acquisitions a few months ago. We haven't really seen Anything from a margin perspective surprise us. And our Middle East acquisition, which we've had for Almost 9 months now, has performed really well and just in line with expectations.

Speaker 4

Yes.

Speaker 3

I mean the only real big surprise was how the protein markets behave. I mean that caught the whole industry Really by surprise where the sound is there's not enough great cattle and the market Tight and prices obviously are high and then all of a sudden you had a blip where you had a dip In pricing and everybody has 4 or 5 weeks of inventory and now you have a margin blip. So think that's the only thing really that caught us by surprise that kind of hurt our expectations. I mean, we track pretty close to what we expected That kind of caught everybody by surprise.

Speaker 6

Got you. That's helpful. And Chris, you just kind of touched on what I wanted to ask next around protein. I mean, For a long time, these kind of short term spikes in protein categories has come up time to time and not a big surprise, frankly, not much you can do about it. I'm wondering the degree to which you perceive the effect of this to have been contained within the 2nd quarter or if you think this is going to bleed into the 3rd quarter results?

Speaker 3

Yes. I mean, if I was that good, I'd be in Bermuda, just playing the commodity markets, be honest with you, it's so hard. I mean, optimistically, it should turn. I mean, it should turn around and prices should go up and we exceed On our expectations of margin, I mean historically, at a certain point it does turn and the margin goes for you. It's like you're sitting at the table, eventually the cards start to come your way.

Speaker 3

So we've learned being in this business Now for quite a while to be patient, the business is strong. I mean the most important thing From my seat is, are we gaining customers? The answer is yes. Are we gaining placements? The answer is yes.

Speaker 3

Do we continue to win when we're fighting for new business and new opening? The answer is yes. When I see our team performing at that point, I know we're going to get rewarded. And obviously, we know that there's some bumps in the road sometimes. Overall, I think the team did a great job and the protein market, it's It could be very surprising sometimes when you speak to the packers.

Speaker 3

So Overall, I think prices have to go back up because there's just not enough animals. Right now, it seems like The animals that the farmers own were very expensive to bring to maturity and they want to get paid for them. And packers are waiting for prices to go back up before they start to kill more animals than they're killing right now, Waiting for prices to go back up in the street. So it's kind of a cat and mouse game. Got you.

Speaker 6

Okay. Very good. I appreciate you all taking my questions. I'll get back in line.

Speaker 4

Thank you. Thanks, Ben.

Operator

Thank you. So that was our final. Ladies and gentlemen, we have reached

Speaker 1

the end of our question and answer session.

Operator

I would now like to turn the call back over to Chris Palpos for closing remarks. Please go ahead, sir.

Speaker 3

Thank you, and we thank everybody for joining our earnings call. We're very proud of the CW team across the U. S. And Canada and the Middle East. They did a phenomenal job once again in kind of a squirrely quarter, but we really did a great job gaining customers and gaining placements.

Speaker 3

And we're very optimistic of all the investments that we are making. And we think the team is really geared and built to really perform over the next many, many years. So we thank you again for joining and we look forward to you joining us on our next call.

Operator

Thank you, sir. Ladies and gentlemen, that concludes today's conference.

Speaker 1

Thank you for joining us.

Operator

You may now disconnect your lines.

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Earnings Conference Call
Chefs' Warehouse Q2 2023
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