The Chefs' Warehouse, Inc.

Good morning, ladies and gentlemen. Welcome to the Chef's Warehouse Second Quarter 2023 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, Sal.

Thank you, Operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman, and CEO of and Jim Letty, our CFO. By now, you should have access to our second quarter 2023 earnings press release. It can also be found at www.chefswarehouse.com under the investor relations section. 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 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 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 are going to provide a business update and go over our second quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on the Chef's Warehouse website under the Investor Relations section, titled Second Quarter 2023 Earnings Presentation. 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?

Thank you, Alex, and thank you all for joining our second quarter 2023 earnings call. As we noted during our first quarter earnings report, the strong snapback in demand coming out of the Omicron variant of the COVID-19 pandemic in the second quarter of 2022 provides a difficult year over year comparison to the second quarter of 2023. As we had anticipated, for the first time since the onset of the COVID-19 pandemic, second quarter business activity returned to more normal seasonal trends. While April and May were strong months 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. 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 second quarter as compared to the second quarter 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 and center of the plate were approximately 5.9% higher than the prior year second quarter. Gross profit margins decreased approximately 43 basis points. Gross margins in the specialty category decreased 70 basis points as compared to the second quarter of 2022, while gross profit margins in the center of the play 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 five-year goal to leveraging the significant investments we have been making in infrastructure, capacity expansion, 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 one. This is the Chef's Warehouse today. We have grown from approximately 1.6 billion in revenue in 2019 to an estimated 3.3 billion 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 US, Canada, and the Middle East. The past few years, despite the impact of COVID, we continue to invest in facility expansion, new market entrance, product category growth, and most importantly, key talent. We expect to leverage these investments into profitable growth as part of our five-year goals and beyond. Please refer to slide two 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 experience via continual development of our digital customer-facing platforms. 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 to serve the Philadelphia region and optimize our distribution footprint in New York to the Mid-Atlantic. As we grow and scale, we expect to see the benefits of these investments as we target $5 billion in revenue and $300 plus million in adjusted EBITDA over the next five to six years. Additionally, we anticipate strengthening free cash flow as the percentage of revenue allocated to CapEx gradually moves from one and a half to two percent range down to one to one and a half percent range over time. If you refer to slide three, 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 2023 adjusted EBITDA growth of approximately 25% over the same period in 2022. And our full year guidance implies a similar year-over-year growth rate. As we grow and scale over the next five 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. The achievement of these goals will depend on our ability to continue to execute on the three primary pillars of the Chef's 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 continue to add across our regions and markets. The cross-selling strategy combined with various levels of operational synergies we employ to drive acquired adjusted EBITDA margin higher over time. 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 the best culinary expertise and operational talent in the industry. The investments we are making, combined with our three pillars of growth, provide our teams with the right platform to enhance and grow the Chef's Warehouse business model forward. Focused on our shared vision to be the number one partner for chefs, providing them with the world's finest specialty food products and ingredients, best in breed technology, and a team dedicated to delivering superior support and service. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended June 30, 2023, increased approximately 36.1% to $881.8 million, from 648.1 million in the second quarter 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 second 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. Gross profit increased 33.6% to $208.4 million for the second quarter of 2023 versus $156 million for the second quarter 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 million for the second quarter of 2023, from $124.5 million for the second quarter 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. On an adjusted basis, operating expenses increased 42.2% versus the prior year's second quarter, and as a percentage of net sales, adjusted operating expenses were 17.8% for the second quarter of 2023, compared to 17.1%. for the second quarter of 2022. Operating income for the second quarter of 2023 was $25.3 million compared to $27.6 million for the second quarter 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 3.5 million for the second quarter of 2023, compared to 6.3 million expense for the second quarter of 2022. Our GAAP net income was 9.9 million, or 25 cents per diluted share for the second quarter of 2023, compared to net income of 16.9 million, or 42 cents per diluted share for the second quarter of 2022. On a non-GAAP basis, we had adjusted EBITDA of 51.1 million for the second quarter of 2023, compared to 45.3 million for the prior year's second quarter. Adjusted net income was 14.4 million, or 35 cents per diluted share for the second quarter of 2023, compared to 20.9 million, or 51 cents per diluted share for the prior year's second quarter. Turning to the balance sheet and an update on our liquidity. As disclosed in the recently filed 8 , On July 7, 2023, we completed the sixth amendment to our ABL credit facility, increasing the facility line from $200 million to $300 million. Other than a slight increase in the fixed coupon component, terms remained materially unchanged. At the end of the second quarter, prior to the July ABL upsize, we had total liquidity of $144.9 million, comprised of $59.6 million in cash and 85.3 million of availability under our ABL facility. As of June 30th, 2023, net debt was approximately 661.5 million, 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 3.25 billion to $3.35 billion, gross profit to be between $774 million and $797 million, and adjusted EBITDA to be between $199 million and $207 million. Regarding our updated guidance, please make note of the following for modeling purposes. We currently expect interest expense for the remaining two quarters of 2023 to be approximately $12.5 million per quarter on average. Similarly, we expect depreciation and amortization to average approximately $15 million per quarter over the same period. Our full-year estimated diluted share count is approximately 45.7 million shares. For reporting purposes, we currently expect our senior 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?

Thank you, Tom. We will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove yourself from the list. For participants using speaker equipment, it may be necessary to pick up your shunt set before pressing the star keys. The first question we have comes from Alex Slagel from Jefferies. Please go ahead.

Thank you. Good morning. I wanted to ask on the guidance and the cadence and margins this year and you know, with the second quarter 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. 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.

Yeah. Hey, Alex, thanks for the question. Yeah, I think the two large acquisitions that we completed during the quarter, as well as the seasonality of Chef's Middle East combined, those are three big companies that we would anticipate would have an impact on the third quarter. So I think, number one, the second quarter, coming in where it was, was not too far off of our expectations. We built our guidance on the second quarter coming in kind of in the low 6% range. We missed that by about 20, 30 basis points. We talked about the impacts of a 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 third quarter, the back half of the year, it's going to be a little more of the normal cadence, but those three acquisitions will bring up the third quarter a little bit versus what we would have seen in the past.

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?

No. I mean, I think with 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 the kind of sudden decline in certain protein categories that took, took a little bit of an impact on our margin. Uh, we had some, uh, obviously we talked about, we're carrying some overhead expenses that, you know, compared to the operating leverage that was created last year, kind of gives you a, an outsized difference on the percent of revenue on OpEx. And those things just came together, um, and, uh, impacted, uh, the EBITDA margin a little bit in the quarter and mostly impacted by June.

All right. That's helpful. Thank you.

Thanks.

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

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, you know, on the outside with you all, but I know you diversified that into other types of protein.

Yeah, it was, um, it was a very abnormal, uh, quarter for, uh, for protein cells. You know, when you look at, uh, you know, what we look at, you know, is the amount of animals coming through the system and, uh, 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. And that's what compressed some of our protein margins. And it caught the whole market. Andy, you know, by surprise, and, you know, it's not the first time that this has happened, but it did catch us by surprise and it cost us a little bit of margin compression. You know, again, as Jim said, you know, we kind of tracked pretty much to our expectations. You know, we had a pretty good quarter. I mean, we had great organic sales. We had great placements. We had customer growth. And it was kind of an odd quarter, you know, between the, you know, coming into July as well, you know, with the massive heat waves. And we had, you know, we lost a few days of business with all the crazy smoke coming over from Canada. All the outdoor cafes were closed. So, you know, team did a great job, you know, grabbing as much business as possible. I think our customers overall, their customer is spending. You know, you got a lot of travel. Right this past quarter, I think overseas, we've read reports up to 200% of travel. A lot of the wealthy clientele of our customers are traveling after being locked up for a few years with COVID. Looking at all that, it was a pretty good quarter with that damn beef market causing a few bumps.

Andy, I'd just add that, you know, you really have to put the quarter in the context of the first half of the year, you know, Q1 and Q2 combined compared to last year, 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 year. Last year's second quarter was, you know, an incredible confluence of extreme demand, really strong rising prices, and incredible operating leverage. So the quarter came in, you know, 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 first six months and 25% year-over-year adjusted EBITDA growth. 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.

okay um no that's really helpful i'm going to use a tortured uh analogy or metaphor but uh has the smoke cleared on the beef markets in the outdoor cafes uh uh you know um we're here in uh in bucala connecticut and the weather is beautiful so uh we hope it continues actually too chilly so really odd and uh beef prices are starting to firm up. You're starting to see price increases.

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 a better way, more so than some disruption in demand from weather?

Yeah, I would say that that's true. So we expected to come in about 20 or 30 basis points in adjusted EBITDA margin better than we delivered. So, you know, a couple million dollars. We did not expect, you know, 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.

That's completely understandable given, you know, I look back at how good last year's second quarter was. And 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. You know, I mean, the sales are doing good even with June, you know, having disruption, certainly versus what I expected. So I'm thinking more in 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, you know, 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 the hiccup, or is it going to be a balance between the gross margin and the cost structure?

Yeah, it's going to be a balance. Yeah, 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 three large acquisitions, normally our third quarter would be slightly lower adjusted EBITDA margin than the second quarter. You know, I think the fact that we undershot a little bit on the second quarter, it'll be, you know, probably, you know, the cadence will be more normal in terms of the fourth quarter. We expect it to be stronger, assuming that demand holds up and you have, you know, a really good fourth quarter like most food distributors do. You know, the guidance implies what the second half will be, and we haven't changed it. Yeah.

All right, thank you.

Thanks, Andy.

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

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, and really be more, uh, have more service in that business? Just trying to understand how quickly that, that industry has recovered.

Um, I think it's recovering, but to you, but, um, I, I wouldn't say it's back to, uh, uh, you know, a hundred percent, uh, you know, depends, uh, you know, which part of the country and, uh, you know, um, what part of the cities or like Vegas. I think it's, I think it's more right now what, what we're hearing from our customers. It's you know, after that crazy period last year, you know, when everything opened up you have more normality and maybe too much too much travel overseas for their for, you know, customers, customers. So, you know, you take like Miami Beach, you know, last year was, you know, the last few years were obviously one of the only places open and everybody was coming. And I think they're, you know, the opposite's happening this year that people are traveling overseas and other places. So, you know, in a way it's given them a chance to build back labor. I still think they are struggling. You know, we are hearing, you know, from certain customers that the They still don't have the labor force to meet, you know, 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, you know, weekends they still get a big crowd. They're keeping prices up to make their bottom line, and there's still enough customers willing to pay really high rates. okay, you know, for them to be profitable. I mean, that's what it looks like from my seat, you know, the kind of strategy from, you know, especially the high end. I mean, it's very expensive, you know, when I see the rates that they're posting, you know, for, say, a Monday, Tuesday, Wednesday in Napa Valley. And they're quieter than they were last year, for sure. So I think, yeah, yeah. My best shot at it is the dollars are getting much more spread out. 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 huge. off the charts, but the amount of people coming in is still not back to normal.

Great. Thanks for that, Collar. And then just on the two- to three-year targets that you guys laid out here on the adjusted EBITDA, can you maybe talk about some of the factors that would determine whether you come in at the low end or the high end of that EBITDA margin target? Is If you make more acquisitions, you 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 six and a quarter or the 7%. Yeah.

You know, our organic growth, you know, what we always call our core business, you know, that tracks pretty, you know, much to our expectation, you know, at the what we call the higher end of the margin, uh, expectation. So, uh, you're absolutely right. You know, it really depends, uh, who we acquire. And, uh, we've acquired a lot of companies that are much lower margin than a typical chef warehouse. And yeah, it usually takes us, uh, a few years to chef at size it. So, um, I always say, uh, You know, we could be bigger than our expectation, but margin might be a little lower because we bought more companies that we're fixing. You know, still great EBITDA, but we're still in fixed mode. And if we buy less, you know, volume will be less, but probably margin will be higher because it'll be more organic growth, you know, which tends to be at a higher margin.

Great. Thank you very much.

Thanks, Peter.

Thank you. The next question we have comes from Kelly Daniel from BMO Capital Markets.

Please go ahead. Good morning, Chris and Jim. Thanks for taking our question. I wonder if we could talk 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, or maybe just help us think through that line item for the next several quarters.

Yeah, thanks, Kelly. There's a couple of things there. I mean, in terms of, once again, the unevenness, you know, 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. you know, that's a good portion of the year-over-year difference in operating leverage. You know, we completed two very large produce company acquisitions, one at the end of the first quarter, so that was fully in the second quarter, and one, you know, somewhat in the beginning of the second quarter. And produce companies come with a higher percentage of operating expenses. So, you know, that was, you know, 20 or 30 or so basis points of that difference right there. And then, you know, we have, we had a couple of, we had a large facility coming in online in Florida. So we're not adding that back anymore. That's impacting our OpEx. And that just goes to, you know, the discussion that we are carrying overhead right now that we will fully leverage. You know, we're creating that 30 to 60% capacity and that we will grow organically into over the next two, three, four, and five years that, you know, going to Peter's question, that's going to be a big driver of us getting to that kind of 6.25 to 7%, you know, over the coming years. So those are the three main components of that. And we expect that it will come down Currently, we expect that in the second quarter. I'm sorry, in the back half of the year.

Okay, that's helpful. And just to be clear, were there any other acquisitions beyond Hardee's and Greenleaf? Those are the last two I had, but the M&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.

Yeah, you have to understand that it's all the acquisitions we completed since the second quarter or since the third quarter of last year. So we did Chef's Middle East, which is a multi-hundred million dollar company we didn't have last quarter. The three big acquisitions, Chef's 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-in to our business. We did the produce fold-in last December into our Sid Wainer business in New England, and we did the small fold-in in Canada. So there have been some smaller acquisitions that contributed to that as well in terms of the year-of-year contribution.

Yeah, but really the organic growth is really driving the top line, Kelly.

I guess maybe just 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?

No. I think, you know, we went into the year with original guidance based on organic growth. We adjusted our guidance when we were reporting 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.

And just one last follow-up. What's driving the higher DNA outlook?

That's acquired growth, so... The adjustment to the DNA 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 DNA, but also impacting EPS's higher interest rates and the higher level of debt that we added to fund those acquisitions.

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 how the landscape maybe has changed for some of the costs of these new facilities.

Yeah, well, I mean, these buildings have been in the hopper for a while, Kelly, you know, pre-COVID, basically. So, you know, the building in, which is not up and running yet in Richmond, California, I mean, that's, you know, that's a cost that we, you know, we negotiated, I think it was pre-COVID. The building in LA was, I think, pre-COVID. 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, I'll take that back. The market is strong for warehousing. I mean, it's gotten very expensive. As of late, we're hearing a little softness. Amazon's subleasing a lot of buildings. I always call it the Amazon effect really drove you know, the price of warehousing to double close to cities. So these buildings, you know, they were expensive, but they were pre-negotiated really for, you know, just the basic rate to rent them. You know, to build them, you know, the costs were a little higher because all the costs went up during COVID, which we're starting to see some normalization as the supply chains come down. So, You know, we got L.A. open now. We got Florida open. Richmond will open next year. And South Jersey, you know, right outside of Pennsylvania is halfway open. You know, we moved in and now we're finishing that building. So that's the exciting part. You know, we're adding a lot of capacity to be able to, you know, accelerate organic growth and to do very creative fold-ins.

Thank you. Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from Todd Brooks from the Benchmark Company. Please go ahead.

Hey, good morning to you both. Just a couple quick questions here. One's 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 sized as 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?

Yeah. Well, I mean, they're... The revenue is unlocked, so they're growing faster than most of our other businesses because they were very constrained on the size of their buildings. 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 creative 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. There are old facilities. A lot of routes we're able to synergize by combining routes, and that's the way we make money. 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 four or five 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.

And if you look at your M&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 and different verticals or maybe new market entry? Are there a decent amount of fold-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?

Um, I mean, as we expected, I mean, last year was, you know, extraordinarily busy because of all the buildup of COVID of businesses that, you know, we had negotiated on. So, uh, uh, I think that was a little, uh, you know, a little too frothy right now. I think we're being more surgical Todd. Uh, you know, we're really, you know, organic growth is our top priority. You know, we've invested in a lot of talent, you know, uh, gearing up for the Florida building. We've added, I would say, 20 plus new sales reps to get ready to hit the streets. We've made a really big investment in trying to build up the team to grow organically, which we know is the most profitable growth. There's always golden 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 Um, yeah, I mean, we're always looking, you know, to finish our map, right? We're not in the Carolinas in Georgia. We're not in Colorado. Um, I think those are secondary as far as the importance. I mean, if there's something great, you know, we'll, you know, we've always been opportunistic, but really driving more business into Texas facilities right now, driving more business in Florida and LA and, you know, 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.

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 two quarters in. We saw continued inflation across both verticals in the second quarter. I guess any surprises about where we've tracked year-to-date from an inflationary standpoint 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.

Yeah, 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, you know, most of the disinflation in 23, just given the extreme inflation that we saw throughout 22. And you've seen that kind of play out. You know, we reported moderate kind of 3.5% inflation. That was primarily offset by the impact of product mix in the quarter. 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 trend would continue. 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 in center-of-the-play 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 and 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. Okay, great. Thanks to you both.

Thank you.

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

All right, thanks for taking my question. Just a couple 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, you know, really came to light in the second quarter?

No, not really. You know, I would say that, you know, the two big produce companies that we added, we talked about on the Q1 call 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, you know, We did two 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 nine months now, has performed really, really well and just in line with expectations.

Yeah. 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's 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 four or five weeks of inventory and now you have a margin blip. I think that's the only thing really that caught us by surprise that, you know, kind of hurt our expectations. I mean, we, we tracked pretty close to what we expected the quarter to be. And really the, the only big surprise was that that blip in, in the protein margins that kind of caught everybody by surprise.

Gotcha. That's helpful. And Chris, you just kind of touched on what I wanted to ask next around protein. I mean, you, you know, for a long time, these kind of short-term, you know, spikes in protein categories has, you know, come up from time to time and, you know, not a big surprise and, 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 second quarter or if you think this is going to bleed into the third quarter results.

Yeah, I mean, if If I was that good, I'd be in Bermuda, you know, just playing the commodity markets, to be honest with you. It's so hard. I mean, optimistically, you know, it should turn. You know, I mean, it should turn around and prices should go up. And, you know, we exceed, you know, on our expectations of margin. I mean, historically, you know, 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. 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. You know, do we continue to win when we're, you know, fighting for new business and new opening? The answer is yes. So, you know, 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. So, you know, overall, I think the team did a great job. And, you know, the protein market, it's... It can be very surprising sometimes when you speak to the packers. 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 are very expensive to bring to maturity, and they want to get paid for them. Packers are waiting for prices to go back up before they start to kill you know, more animals than they're killing right now, waiting for prices to go back up in the streets. So it's kind of a cat and mouse game.

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

Thank you.

Thanks, Ben.

Thank you. So that was our final. Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the call back over to Chris Popos for closing remarks. Steve, go ahead, sir.

Thank you, and we thank everybody for joining our earnings call. You know, 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 We really did a great job gaining customers and gaining placements, 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.

Thank you, Sam. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.