The Chefs' Warehouse - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to The Chefs' 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, Alexandros Aldous, General Counsel, Corporate Secretary, and Chief Government Relations Officer. Please go ahead, sir.

Alexandros Aldous (General Counsel, Corporate Secretary, and Chief Government Relations Officer)

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 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 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, 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 Chefs' 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. We will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Chris Pappas (Founder, Chairman, and CEO)

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. 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 in center of the plate were approximately 5.9% higher than the prior year second quarter. Gross profit margins decreased approximately 43 basis points.

Gross margin 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 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 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 1. This is The Chefs' Warehouse today.

We have grown from approximately $1.6 billion in revenue in 2019 to an estimated $3.3 billion+ based on the guidance we updated and raised today for 2023. Along the way, we have grown our truck fleet to 1,000+, 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 continued to invest in facility expansion, new market entrants, product category growth, and most importantly, key talent. We expect to leverage these investments into profitable growth as part of our 5-year goals and beyond. 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 experience via continual development of our digital customer-facing platforms. We expect the growth and capacity from the infrastructure capital deployed from 2019 to date, combined with the projects coming online over the next 24-36 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, and 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+ million in adjusted EBITDA over the next 5-6 years. Additionally, we anticipate strengthening free cash flow as the percentage of revenue allocated to CapEx gradually moves from 1.5%-2% range, down to 1%-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 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, 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 Chefs' Warehouse unique growth model in 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 Chefs' 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?

Jim Leddy (CFO)

Thank you, Chris. 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 2Q 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 $0.25 per diluted share for the second quarter of 2023, compared to net income of $16.9 million, or $0.42 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 $0.35 per diluted share for the second quarter of 2023, compared to $20.9 million or $0.51 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 Form 8-K, 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 dilutive for the full year, and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you. At this point, we will open it up to questions. Operator?

Operator (participant)

Thank you, Phil. 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 handset before pressing the star keys. The first question we have comes from Alex Slagle from Jefferies. Please go ahead.

Alex Slagle (SVP and Equity Research Analyst)

Thank you. Good morning. Wanted to ask on the guidance and the cadence and margins this year 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. Perhaps just some thoughts on that, and I guess also with the Middle East having a different seasonality on the U- than the US business, just if that plays any part into the mix?

Jim Leddy (CFO)

Yeah. Hey, Alex. Thanks for the question. I think the two large acquisitions that we completed during the quarter, as well as the seasonality of Chef Middle East combined those are three big companies that we would anticipate would have an impact on the third quarter. I think number one, the second quarter, you know, coming in where it 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 the 2 things that came together in June to take a little bit of froth off of margins. Overall, you know, a very strong quarter. I think, I think the third quarter, the back half of the year, it's gonna be a little more on the normal cadence. Those 3 acquisitions will bring up the third quarter a little bit versus what we would have seen in the past.

Alex Slagle (SVP and Equity Research Analyst)

Okay, that makes sense. 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, or a change in trade-down dynamics?

Chris Pappas (Founder, Chairman, and CEO)

We had a really strong organic revenue and volume quarter. You know, 8% year-over-year organic sales growth and volume growth, very moderate inflation. It was really, it was really just a couple of weeks in June. I think the biggest impact was the sudden decline in certain protein categories that took, took a little bit of an impact on our margin. We had some, 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 an outsized difference on the percent of revenue on OpEx those things just came together, and impacted the the EBITDA margin a little bit, in the quarter and mostly impacted by June.

Alex Slagle (SVP and Equity Research Analyst)

All right. That's helpful. Thank you.

Chris Pappas (Founder, Chairman, and CEO)

Thanks.

Operator (participant)

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

Andrew Wolf (Managing Director, Senior Equity Analyst)

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

Chris Pappas (Founder, Chairman, and CEO)

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. You know, 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. 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.

It caught it caught the whole market, Andy, by surprise and it's not the first time, but this has happened. It did catch us by surprise, and it cost us a little bit of margin compression. As Jim said, you know, we kind of tracked pretty much to our expectations. We had a pretty good quarter. I mean, we had great organic sales. We had great placements. We had customer growth.

It was kind of an odd quarter between the coming into July as well with the massive heat waves, and we lost a few, we lost a few days of business with all the crazy smoke coming over from Canada. All the outdoor cafes were closed. 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 this past quarter. I mean, I think overseas we've read reports up to 200% of travel.

A lot of the wealthy, you know, 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, I mean, it was a pretty good quarter with that damn beef market causing a few bumps.

Jim Leddy (CFO)

Andy, I just add that, you know, you really have to put the quarter in the context of the first half of the year 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 an incredible confluence of extreme demand, really strong rising prices, and incredible operating leverage. The quarter came in right in the range that we expected. If you combine it with the, you know, the first half of the year, within the context of the first half of the year, you know, 14% year-over-year organic growth, for the first six months, and 25% year-over-year adjusted EBITDA growth.

That's very similar to what our full year guidance implies on a full year basis. 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.

Andrew Wolf (Managing Director, Senior Equity Analyst)

Okay, no, that's really helpful. I'm gonna use a tortured, analogy or metaphor, but, has the smoke cleared on the beef market on the outdoor cafes?

Chris Pappas (Founder, Chairman, and CEO)

You know, we're here in bucolic Connecticut, and the weather is beautiful, so we hope it continues. Actually, too chilly, so really odd, and beef prices are starting to firm up. You're starting to see price increases.

Andrew Wolf (Managing Director, Senior Equity Analyst)

It sounds like the beef market going completely opposite, all expectations, is what drove, you know, you guys a little below your budget. Is that a better way, more so than some disruption in demand from weather?

Chris Pappas (Founder, Chairman, and CEO)

I would say that that's true. We expected to come in about 20-30 basis points in adjusted EBITDA margin better than we delivered. 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.

Andrew Wolf (Managing Director, Senior Equity Analyst)

That's completely understandable, given, I look back at how good last year's second quarter was. I just wanna 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. I'm thinking more on the margin. Would it be right to think that to get to your guidance it's gonna be more.

What's the balance gonna be between improved, 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 gonna improve a little more because, you know, because the econd quarter had the hiccup, or is it gonna be a balance between the gross margin and the cost structure.

Chris Pappas (Founder, Chairman, and CEO)

It's gonna 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. You know, normally our third quarter, has a slightly lower gross 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 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 a really good fourth quarter, most, food distributors do. The guidance implies what the second half will be, and we haven't changed it.

Andrew Wolf (Managing Director, Senior Equity Analyst)

Yeah. All right, thank you.

Chris Pappas (Founder, Chairman, and CEO)

Thanks, Andy.

Operator (participant)

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

Peter Saleh (Managing Director and Restaurants and Food Distributors Analyst)

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 on, in that business? Just trying to understand how quickly that industry has recovered.

Chris Pappas (Founder, Chairman, and CEO)

I think it's recovering, Peter, 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, too much travel overseas for their customers.

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 they're the opposite's happening this year, people are traveling overseas and other places. 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. 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. 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. That's what it looks like from my seat the kind of strategy from, especially the high end. I mean, it's very expensive when I, when I see the rates that they're posting for, say a Monday, Tuesday, Wednesday in Napa Valley. They're quieter than they were last year, for sure. My best, my best shot at it is the dollars are getting spread, 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. What we hear from our airport customers is, you know, 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.

Peter Saleh (Managing Director and Restaurants and Food Distributors Analyst)

Great. Thanks for that color. Then just on the 2-3-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 it, if you, if you make more acquisitions, do 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 6.25% or the 7%.

Chris Pappas (Founder, Chairman, and CEO)

Our organic growth, you know, what we always call our core business, tracks pretty much to our expectation, you know at what we call the higher end of the margin, expectation. You're absolutely right. You know, it really depends, who we acquire.

Jim Leddy (CFO)

We've acquired a lot of companies that are much lower margin than a typical Chefs' Warehouse, and it usually takes us a few years to Chef-size it. I always say, 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 fix mode, and if we buy less, you know, volume will be less, but probably margin will be higher 'cause it'll be more organic growth, you know, which tends to be at a higher margin.

Peter Saleh (Managing Director and Restaurants and Food Distributors Analyst)

Great. Thank you very much.

Jim Leddy (CFO)

Thanks, Peter.

Operator (participant)

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

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

Good morning, Chris and Jim. Thanks for taking our question. I was wondering 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, through that line item for the next several quarters.

Jim Leddy (CFO)

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. The 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 in the, somewhat in the beginning of the second quarter. And produce companies come with a higher % of operating expenses.

That was 20 or 30 or so basis points of that difference right there. We have a couple of, we had a large facility coming online in Florida, so we're not that 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%-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 gonna be a big driver of us getting to that kind of 6.25%-7%, you know, over the coming years.

Those are the three main components of that. We expect that it will come down. Currently, we expect that in the, in the second quarter. I'm sorry, in the back half of the year.

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

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

Jim Leddy (CFO)

You have to understand that it's all the acquisitions we completed since the 2nd quarter of last year, or since the 3rd quarter of last year. We did Chef Middle East, which is a multi-hundred-million-dollar company we didn't have last quarter. The three big acquisitions were Chef Middle East, Hardie's, Greenleaf, then we did two smaller acquisitions. You know, over that time, we did the Mike Hudson acquisition out on the West Coast, which is a fold into our a business. We did the produce fold in last December into our Sid Wainer business in New England, we did the small fold in Canada. There have been some smaller acquisitions that contributed to that as well in terms of the year-over-year contribution.

Chris Pappas (Founder, Chairman, and CEO)

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

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

I, I guess, maybe just, I'll ask another way. 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?

Jim Leddy (CFO)

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

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

Just one last follow-up. What's, what's driving the higher D&A outlook?

Jim Leddy (CFO)

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

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

Okay, okay, helpful. 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, you know, exactly what you need there? Help us just kind of think about how that has, how the landscape maybe has changed for some of the costs of these new facilities.

Chris Pappas (Founder, Chairman, and CEO)

Yeah. Well, I mean, these buildings have been in the hopper for a while, Kelly, pre-COVID, basically. 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 L.A. was, I think pre-COVID. We started we negotiated on that. I think the buildings that are coming online now, Florida as well, you know, was pre-COVID. You know, the market is very strong. Actually, it's actually, you know, I'll take that back. The market is strong for warehousing. I mean, it's gotten very expensive. As of late, you know, we're hearing a little softness.

You know, Amazon's subleasing a lot of buildings. I always call it the Amazon effect, really drove the price of warehousing to double close to cities. These buildings they were expensive, but, they were prenegotiated really for just the basic, basic rate to rent them. To build them 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. You know, we got L.A. open now, we got Florida open, Richmond will open next year, South Jersey right outside of Pennsylvania, is halfway open.

We moved in, and now we're finishing that building. That's the exciting part. You know, we're adding a lot of capacity to be able to accelerate organic growth and to do, very, creative fold-ins.

Kelly Bania (Equity Research Analyst - Food Retail and Distribution)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then 1 now. The next question we have comes from Todd Brooks from The Benchmark Company. Please go ahead.

Todd Brooks (Equity Research Analyst - Restaurants and Packaged Food)

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, 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, is the revenue unlocked from the ability to service more customers?

Chris Pappas (Founder, Chairman, and CEO)

\The revenue is the revenue is unlocked, so they are growing they're growing faster than most of our other businesses 'cause they were very constrained on, 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 in a creative fold-in every day, I would because they're really low risk. 'Cause mostly what we're taking is, is the sales team and the increased sales, and we're able to really get rid of a lot of the fixed overhead, right?

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

Todd Brooks (Equity Research Analyst - Restaurants and Packaged Food)

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 in 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?

Chris Pappas (Founder, Chairman, and CEO)

Sure. I mean, as we expected, I mean, last year was extraordinarily busy because of all the buildup of COVID, of businesses that we had negotiated on. I think that was a little too frothy. Right now, I think we're being more surgical, Todd. You know, 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+ new sales reps to get ready to hit the street. We 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 fold-in opportunities, and we're always negotiating them. You know, it really comes down to price, and I think being patient is prudent at this point. New markets, we're always looking to finish our map, right? We're not in the Carolinas and Georgia, we're not in Colorado. I, I think those are secondary as far as the importance. I mean, if there's something great, 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. That's what we're trying to do right now.

Todd Brooks (Equity Research Analyst - Restaurants and Packaged Food)

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

Jim Leddy (CFO)

Yeah, I think, it's kind of played out pretty similar to our expectations. I mean, obviously, we've said earlier on, on multiple calls before this, that, we expected the base effect to drive, you know, most of the disinflation, in 2023, just given the extreme inflation that we saw throughout 2022. You've, you've seen that kind of play out. You know, we, we've 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 know, you're starting to see some deflation in some of the larger commodities that kind of went crazy in 2022. I would expect that the disinflation trend would continue. More moderate year-over-year inflation, but sequential kind of slight deflationary to flattish.

Sequentially, from Q1 to Q2, we saw low mid-low single-digit deflation in specialty prices, and we saw low single-digit inflation sequentially in center of the plate prices in aggregate. We did have the, you know, 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. That's kind of the way it's been playing out, and we would expect that it's gonna continue to play out that way.

Todd Brooks (Equity Research Analyst - Restaurants and Packaged Food)

Okay, great. Thanks to you both.

Jim Leddy (CFO)

Thank you.

Operator (participant)

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

Ben Klieve (Equity Research Analyst)

All right, thanks for taking my question. Just a couple of quick ones from 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?

Jim Leddy (CFO)

No, not really. I would say that we, 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 with an average EBITDA margin, that was slightly lower than our average. We did two large acquisitions few months ago. We haven't really seen anything from a margin perspective, surprise us. Our Middle East acquisition which we've had for almost nine months now, has performed really, really well and just in line with expectations.

Chris Pappas (Founder, Chairman, and CEO)

I mean, the only real big surprise was how the protein markets behave. I mean, that caught, you know, the whole industry really by surprise, where the sound is there's not enough great cattle and the market's tight, and, you know, prices obviously are high. 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. I think that's the only thing really that caught us by surprise that hurt our expectations.

I mean, we tracked pretty close to what we expected the quarter to be, and really the only big surprise was that blip in the protein margins that kind of caught everybody by surprise.

Ben Klieve (Equity Research Analyst)

Gotcha. That's helpful. Chris, you just kind of touched on what I wanted to ask next around protein. I mean, for a long time, these short-term spikes in protein categories has, you know, come up from time to time and 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 gonna bleed into the third quarter results.

Chris Pappas (Founder, Chairman, and CEO)

I mean, if I was that good, I'd be in Bermuda just playing the commodity markets, to be honest with you. It's so hard. I mean, optimistically it should turn, you know? 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. We've learned being in this business now for quite a while to be patient. The business is strong, you know.

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 fighting for new business and new opening? The answer is yes. You know, when I see our team performing at that point, I know we're gonna get rewarded. Obviously, we know that there's some bumps in the road sometimes. You know, overall, I think the team did a great job and, you know, the protein market, it could be very surprising sometimes when you speak to, when you speak to the packers. Overall, prices have to go back up because there's just not enough animals.

Right now, it seems like, you know, the animals that the farmers own, were very expensive to, you know, to bring to maturity, and they wanna 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 street. It's kind of a cat-and-mouse game.

Ben Klieve (Equity Research Analyst)

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

Chris Pappas (Founder, Chairman, and CEO)

Thank you.

Andrew Wolf (Managing Director, Senior Equity Analyst)

Thanks, Ben.

Operator (participant)

Thank you. 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 Pappas for closing remarks. Please go ahead, sir.

Chris Pappas (Founder, Chairman, and CEO)

Thank you, and we thank everybody for joining our earnings call. You know, we're very proud of the CW team across the US and Canada and the Middle East. They did a phenomenal job once again in a kind of a squirrely quarter, but we really did a great job gaining customers and gaining placements. We're very optimistic of all the investments that we are making. We think the team is really geared and built to really perform over the next many, many years. We thank you again for joining, and we look forward to you joining us on our next call.

Operator (participant)

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