Q1 2023 The Chefs' Warehouse Inc. Earnings Call
[music].
Good day and welcome to the chefs warehouse first quarter 2023 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Mr. Alex audits.
Counsel. Please go ahead Sir.
Thank you operator, and 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 first quarter 2023 earnings press release. It can also be found at www Dot chefs warehouse dot com under the Investor Relations section throughout this conference call, we will be presenting non-GAAP .
Financial measures, including among others historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently differently than 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 todays press release before we begin our formal remarks I need to remind everyone that part of our discussion today will include forward looking statements.
<unk> 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 todays 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 first quarter results in detail and then we will open up the call for questions.
With that I will turn the call over to Chris Pappas, Chris. Thanks.
Thank you Alex and thank you all for joining our first quarter 2023 earnings call.
Customer demand was strong during the first quarter of 2023, despite several significant weather events, especially in our west coast markets revenue trends improved gradually from January into February and March as dining away from home and the upscale casual at the higher end customer segments continue to grow.
Both in terms of new customer openings and placements per customer.
In addition to our organic growth, we completed several acquisitions in important growth markets, such as Texas, and California, as we continue to enhance our strategy of expanding market share in the regions, we serve category growth to grow relevance with our customers and driving synergies via <unk>.
<unk> investments consolidation and operational technological improvements.
Few highlights from the first quarter as compared to the first quarter of 2022 include 17, 1% organic growth in net sales specialty sales were up 15, 9% organically over the prior year, which was driven by unique customer growth of approximately <unk>.
One 2% placement growth of 18, 7% and specialty case growth of 16, 8%.
Organic pounds in center of the plate Ware.
Approximately 14, 4% higher than the prior year first quarter.
Gross profit margins increased approximately 64 basis points.
Gross margin in the specialty category increased 65 basis points as compared to the first quarter of 2022, while gross margin in the center of the plate category decreased 68 basis points year over year Jim.
Jim will provide more detail on gross profit and margins in a few moments.
As previously announced we closed a number of key acquisitions during the first quarter and in the first few weeks of the second quarter of 2023.
Late January we added Mike Hudson Specialty foods located in the Napa Valley region to our Northern California.
Additionally, during the second quarter, we acquired Greenway produce and specialty foods Greenleaf is located in Brisbane, California, and provides <unk> with a robust produce and specialty partner, both complementing and enhancing our presence in the broader Bay area.
The addition of these companies and brands to our portfolio provides us with a great platform for category growth cross selling opportunities and synergies across many of the vibrant markets in the region.
In late March we closed the acquisition of harder fresh foods, a premier fresh food distributor with deep local roots in Dallas, Houston, and Austin, Texas. The acquisition also includes Texas Harvest company a value added process Division in Houston. The addition of parties comes at a great.
Time in the chefs warehouse growth story in the region.
Our specialty broadline facility continues to grow at a fast pace and we recently opened our brand new state of the Art Allen brothers processing operations located in Dallas, together and with a continuous focus on investing in people and facilities. The chefs warehouse Allen brothers and <unk> will be a trip.
Full force of unparalleled quality, and Uncompromised service, which will benefit our customers in Texas and accelerated growth throughout the region.
The decision, we made to invest in talent and facility expansion during the challenging years impacted by Covid combined with strong local leadership has allowed us to continue accelerating both organic and acquired growth in a very controlled manner across our platform and markets.
During the first quarter, we began the phased move in process into our new 200000 square foot facility in Florida.
Our specialty business is operational and we expect center of the plate processing for both meat and fresh seafood to start operations in the coming months.
As part of this move we are fully consolidating.
Our specialty sales and operations our protein processing plant located in southern Florida, and portions of our fresh seafood processing operations located in the central region of the state. This new facility will provide ample capacity for category and customer expansion since.
Just to growth with our key categories and processing operations in one location with ample room to add bolt and acquired growth for years to come.
As we are closing on a six months since chefs middle East joined our family of companies and brands. We are pleased with every aspect of our integration.
Our shared culture vision and go to market approach has provided a solid transition a roadmap to our plan for growth in the region.
<unk> performance has exceeded our expectation and the region continues to display significant growth, both demographically and economically.
We are currently in the design phase of our planned facility expansion in Dubai, and we look forward to continued success and growth to come.
I would like to thank each and every one of our 4000 plus team members for their dedication and commitment to excellence that drives the chefs warehouse high quality and high touch service model, providing an ever evolving platform for growth for chefs warehouse.
Our customers and our supplier partners. We are beyond excited to be certified by great place to work for the second year in a row. This is the result of continuous efforts to place our talent at the epicenter of our operation and at the heart of who we are as a company.
Which added approximately 23.4% sales growth for the quarter.
Net inflation was 4.4% in the first quarter, consisting of 5.5% inflation in our specialty category and inflation a 3.2% in our center that played category versus the prior year quarter.
Gross profit increased 44.4% to $169.7 million for the first quarter of 2023 versus $117.5 million for the prior year quarter.
Gross profit margins increased approximately 64 basis points to 23.6%.
As price inflation in aggregate is continued to moderate we remain focused on driving gross profit dollar growth.
Which allows us to improve operating leverage as we grow in scale shifts warehouse.
Selling general and administrative expenses increased approximately 41.8% to $156 $1 million for the first quarter of 2023 from.
From $110 $1 million for the first quarter of 2022.
Primary driver of higher expenses were higher compensation and benefit costs facility costs and distribution costs associated with higher year over year volume growth.
On an adjusted basis operating expenses increased 42.6% versus the prior year first quarter and as a percentage of net sales adjusted operating expenses were 19% for the first quarter of 2023 compared to 18.8% for the first quarter of 2022.
Operating income for the first quarter of 2023 was $11.9 million compared to six $3 million for the first quarter of 2022.
The increase in operating income was driven primarily by higher gross profit, partially offset by higher operating costs.
Income tax expense was zero point $5 million for the first quarter of 2023 relatively unchanged versus the first quarter of 2022.
Our GAAP net income was $1.4 million or four cents per diluted share for the first quarter of 2023.
Unchanged compared to net income of $1.4 million or four cents per diluted share for the first quarter of 2022.
On a non-GAAP basis, we had adjusted EBITDA of $32.8 million for the first quarter of 2023 compared to 21 and a half million dollars for the first quarter of the prior year. Adjusted net income was $4.6 million.12 per diluted share for the first quarter of 2023 compared to $3.6 million or.
10 cents per diluted share for the prior year first quarter.
Turning to the balance sheet and an update on our liquidity at the end of the first quarter. We had total liquidity of 227.5 million comprised of $91.7 million in cash and $135 $8 million of availability under our ABL facility as.
As of March 31, 2023, net debt was approximately $576 million inclusive of all cash and cash equivalents.
Turning to our full year guidance for 2023 based.
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 3.2 billion to $3.3 billion.
Gross profit to be between $768 million and $792 million and adjusted EBITDA to be between $199 million and $270 million.
Regarding our updated guidance. Please me make note of the following for modeling purposes.
We currently expect interest expense for the remaining three quarters of 2023 to be approximately 11 11.
11 million per quarter on average.
Similarly, we expect depreciation and amortization two average approximately $11.8 million per quarter over the same period.
While we do not provide guidance by quarter. Please note that due to the uneven nature of the build back of demand in 2022 combined with the non core self insurance related expenses recorded in the fourth quarter of 2022. We currently we currently expect our 2023 second quarter in fourth quarter adjust.
Did EBIT margin performance to return to a pattern more consistent with pre pandemic years.
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 cow.
For the full year. Thank.
Thank you and at this point, we will open it up to questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys and and to withdraw your question. Please <unk> and at the time will pause momentarily to us embar roster.
Ooh.
And the first question will come from Alex Slagle, what the Jeffries. Please go ahead.
Hey, good morning congratulations.
And then ask on the the acquisition.
I Wonder if you could talk a bit more on the synergies and how these accidents shins in year growth strategy in from the outside these look like really grand opportunities very good set for shaft. Just curious on in the background have these transactions came about.
Yeah separately, you can provide any thoughts on how much the increase in the sales and EBITDA Guy.
These contributed versus maybe the one Q upside any <unk>.
Chinese.
Sure It will break it up I'll take the beginning of that one.
So.
Greenleaf in San Francisco.
We know this company for over 14 years.
Kind of been growing side by side with us.
More on the Protos side and they eventually got into selling <unk>.
More specialty.
Ironically, we try to we try to buy them I think it was 14 years ago when they first traded to this group.
They've done a marvelous job the reputation as.
As the high end best produce in the San Francisco region. So we've always admired him and.
The opportunity to have them join the chef group.
As we build out there on the whole Bay area, which is a very big business for us between R. R. Alan brothers steak and seafood business. There that's over 200 plus million in our ship warehouse business.
Our reach we go all the way to Tahoe to Sacramento, We do the whole Bay area you know.
San Francisco downtown still really hasn't come back. So that's taking time, but we've been our management team has done a great job really reaching where the people are.
Everywhere from Silicon Valley, and like I said, all the way up to Tahoe.
Saint Louis Obispo Monterey so.
Now being able to start with synergize.
With the with Greenlee, we really think we can help grow their their produce and we think that.
Customers that don't overlap, we could start to solve a lot of our proteins and a lot of our specialty items and.
Long term, we loved the brand we could see extending the brand down into.
Arizona, San France, I mean, Arizona L. A in Las Vegas, like we're doing with a lot of our other category expansion. So it creates a very dynamic selling environment. It's similar to what we're doing in other markets.
And Jim I mean, I don't know how much more information did you want to comment on hardee's at all.
Why don't you do San Francisco and I'll go back to holidays.
Sure Yeah. So overall the combination of hardee's and.
Greenlee than the other kind of small talk in that we completed in the first quarter added about 12, Inc. The incremental revenue added about 12% to our.
Year over year topline Grosso I think you know our prior guidance was 13% to 14% year over year top line growth, it's now 25% to 26%.
About 10% of that is Ah Ah Ah Ah M&A and an additional 2% of organic growth. So.
On a full year basis now of that 25, and 26% growth, 18% is combination of M&A wrap from last year and the incremental ads from Q1.
And the recent Q2 M&A.
And about 2% of incremental organic growth, so going from kind of a 6% to seven or 8%.
Organic growth for the year and in terms of adjusted EBITDA contribution. It's about 70 30, so the incremental adjusted EBITDA.
From our prior guidance to our updated guidance about 70% of that contribution is from.
Mmk and about 30%.
Is the incremental is from additional organic growth and that includes the.
The strength, we saw in Q1 and then.
Some adjustment up for the remainder of the year.
Yeah.
Yeah.
So I'm switching to to Texas.
Hardee's acquisition.
Something again, we've been Ah we've been looking at for quite a quite a while a few years now.
You know, we've we built our our CW our major hub is Dallas right now.
That business has been growing.
Faster than our expectations. The team there is doing a phenomenal job we think that.
Texas is one of our biggest opportunities.
To really have massive growth over the next 10 years for many reasons. Obviously they have population grow up a lot of companies have moved their people are moving there there's a lot of wealth.
And there really isn't anybody like shifts warehouse. So we opened R. R. Alan brothers.
A facility, where we are now cutting steaks, and we think that business is going to grow exponentially.
So we were looking for something a little bigger platform to accelerate our growth.
Because we need to put another facility in Houston, and we're looking at obviously Austin and San Antonio and Hardy is kind of gave us that reach you know they touch every market.
Well with size so they had the I always say.
Most important thing I'm looking for is people and routes and they gave US a lot of that so with.
You know what their introductions into a into all the major cities and major accounts. We think we can accelerate the growth of selling more specialty and Allen brothers.
And I think it's gonna work out really great for for our expansion plan. So we're really excited to have the hardest team and they give us another element of growth too. They do process. So they do have a very a boutique type of business that we think we continue to grow especially in today's environment.
Where you know a lot of hospitality is challenged.
On labor, having more solutions.
Become a much better partner to a lot of the major customers and we think that division will grow exponentially as well.
That's very helpful. Thank you and just follow up you can talk about some of the <unk> the corner what it looked like in the April it sounds like it is a pretty gradual build to march from the commentary but.
He.
Any thoughts on how it turned it into April underlying traffic trying to cross your your customer base of all things changed.
Yeah.
The first quarter was kind of as expected, maybe a little bit stronger than expected I think January and February .
We're good months for January and February obviously, you're coming out of the fourth quarter. Your strongest month in December and you can.
Fall off a cliff into January and that's normal, but we had a little bit higher strength, but it was a very gradual build as we expected.
We did have some I think in in late February and early March pretty significant weather events in the northwest in in in in Northern California markets, There were certain days where.
Certain regions, we couldn't actually deliver but that really didn't impact us materially in terms of the overall business in the the strength of our customer demand April has been a good month.
It continued to to build seasonally there was some noise around the calendar with Easter being a different week in the school vacations being a different week, but other than that April seemed to be pretty decent month.
Thank you.
The next question will come from Peter Silly with B T. Igene. Please go ahead.
[noise], great good morning, and congrats on a another great quarter.
Given the news this morning Darden buying Bruce.
I was just curious if you guys.
I can't comment and if you guys do any business with Bruce and what your relationship is with the fine dining division over at Jordan.
Yeah, I'm, sorry, who disheartened by today.
[noise] Rus hospitality.
Mmm, Chris Oh, they bought Ruth's Chris.
Didn't hear about that.
We didn't.
Hear that this morning, yeah that was yeah.
That was before you guys that came on.
I mean, I don't know if you guys cared to comment if not we can just move on to something else.
Yeah.
Again, we really don't do much with with Ruth I mean.
Great business, but you know our our focus is again more the thousands of independent restaurants and in smaller groups around North America. So.
Darden you know, we do business with Darren by accident, we do business property with everybody, but again, it's not are not our real focus not are not not not the growth market that we.
We really target will do business, but again our focus is.
Over a thousand people in sales were knocking on doors and doing what we do best.
Mhm.
Understood. Okay, and then just I I noticed that you know inflation moderated a little bit here.
4.4%.
With a quarter any thoughts on the on on inflation on on a <unk> basis for the rest of the year.
Just if you could just remind us again, how that impacts your overall gross margin I think there's still some concern among investors that moderating inflation Angela potentially deflation can have an impact on your margins just any thoughts that'd be helpful. Thank you.
Yeah sure Peter Yeah, I think inflation is played out kind of the way that we expect them and I think a lot of the industry expected.
Lee moderating from 20% last year throughout 22, and then down to kind of low to mid single digits. This quarter.
We expect the base effect of 22 to continue to drive the year over years. We expect continued moderation we saw some sequential deflation on specialty prices from Q4 into Q1, but that's normal seasonality.
And Senator the play prices were fairly flat sequentially.
So I just think that we're returning to more normal.
Inflation dynamics and you know.
We'll see how it plays out the rest of the year in terms of how it affects our margins.
There's many impacts to our gross profit margins of product mix.
The inflation or deflation.
And seasonality.
So once again going back to our prepared remarks, we focus on growing gross profit dollars above adjusted Opex.
And so you have to look at us on a full year basis, especially given our comments regarding the cadence of 2022.
And on a full year basis or guidance implies that we have a nice <unk>.
Growth rate gap with gross profit dollars in managing our opex efficiently and effectively.
[noise] great. Thank you very much.
The next question will come from Kelly Mania with BMO capital markets. Please go ahead.
Good morning, Good morning, <unk>, Thanks for taking my question.
Alright.
Back to that comment about.
The focus on the grass profit dollar growth.
I'm just talking about here I think he made a similar comment several months ago about how may be the industry shifted a little bit away from a percentage.
Tell us focusing on on gross profit dollars.
Can I take your mainly address inflation moderate.
Curious, if there's any process or procedures that <unk> that maybe support that the whole organization kind of focusing on on the dollars anything on on pricing or compensation that you've changed or is this just consistent with how you've always kind of manage the data.
Yeah.
A good question Kelly I mean, it's pretty consistent.
You know I.
I think is.
And so you go up and down first of all we've never had like 25% inflation [laughter] overnight.
We are in uncharted territory, but you know I mean, you Gotta respect competition and you got to respect you know you know.
How much we all want to make more money, but there's a lot of pain, when you're passing on that type of inflation to your customers and.
I mean, it's it's really you know if you were making 30% on on a 30 dollar box and you know now that box is $60.
You don't really need we'd need to make 30% to make <unk>.
More gross profit dollars and get a leverage on your overheads. So you know each of our managers you know every every city, we do business with is a little different that makes it a little different so uhm, we're very margin focus and and you are correct. You know we look at the way we incentivize our sales teams and it's a mix.
<unk> of margin, it's a mix of gross profit dollars. It's a mix of of gross profit dollars per drop right I mean, the costly as part.
Of the business is is is making deliveries right those trucks and all the people involved in loading and delivering so we do it on a daily basis. We have teams that are just constantly looking at at the business and the drop size in the mix and we're continuously trying to align.
<unk> you know the the focus of our sales team with the focus of the company and meeting R and meeting our goal. So if you if you start to see deflation, which we have started to see in certain in certain categories.
The ship could be more on gross profit margins again right. So.
Prices are coming down and dollars are starting to come down.
The key is not to give it all back.
As prices start to come down you could grab a few points more a margin. So the focus goes a little bit more on margin than when it's on the way up and you're just saying you drive the focus is more on gross profit.
So I think it's you know it's a constant you know captain at the wheel.
And these departments.
Managing to you know to get the kind of bottom line that we need to run the business and at the same time not allowed too much competition too.
Speaking into your business, because maybe you're speeding a little bit too much.
Okay. That's.
Very helpful. I guess, I'll say can you touch on in Florida, and any expansion there.
And what might be any of the costs associated with making it the transition person kind of some of the longer term savings [noise].
As you build out that new facilities in Florida.
Sure well again, we are consolidating so right now we have multiple small facilities. You know we ran out of space a long time ago and the business has been <unk>. The building has been delayed.
I would say, maybe a close to a year or so we've been operating very inefficiently.
For a very long time, so right now we're gonna consolidate most of our northern Ah Ah manufacturer bit processing of seafood.
Randall area.
Down into the the major new facility in Miami, We're gonna consolidate the meat processing that we are doing and popping out.
That facility in Miami, we're gonna consolidate chefs and or overstock warehouses into.
Into that facility. So I think Jen could give you more precise numbers, but we're.
We're gonna eliminate a lot of the inefficiencies you know, we'll have a higher opposite occupancy Coors.
To start with but the massive amount of opportunity to really grow.
Even faster and more efficiently.
It's we get we're gonna quickly eat up a lot of that cost.
And it's going to really accelerate growth, yeah, Kelly and just on the short term costs as Chris mentioned.
We've modeled the incremental rent an operating costs into our full year guidance. So from a guidance perspective this really.
Already in there it was already in there in our in our original guidance and and you know where this is one of our first facilities.
Along with a law that we're building up a full center of the play catch up for fishing and meat as well as produce capability and specialty all in the same building. So it's a long term investment and we expect to drive a lot of operating leverage.
You know in the next couple of years as we build the business.
Wonderful and then maybe just had one more.
Yeah, I think you mentioned and that really.
The impact of new customer opening.
And just thoughts on what you are hearing from your.
Restaurant customers and any relationships about how how new opening my involved and what might be a diner kind of environment.
Yeah.
I still think that's like a wait and see we have so many openings I mean, there's so many court <unk> our customers opening up more restaurants. So I think they are well funded.
I think where you might be a little slow down as maybe in some of the you know the new real estate projects, where maybe their funding is.
Is on hold and that could slow some of the most.
Most of these new buildings are putting a lot of restaurants into them as well as more of a draw to get people.
The office is so actually it's something very interesting that's been happening for the last year or two is.
We're we're seeing more business I think what's driving a lot of our successes the increase in more customers spread out, especially in Texas and.
In Florida, but you know as well and New York, and California, and all our major markets.
Restaurants are opening where the people are right. So unfortunately, you know some of our core city markets, where you know they depend on people coming to the office every day of those businesses. Unfortunately are are still you know underwater to a certain degree you know, they're very busy three days a week, maybe four but.
They're not they're not back to where they work, but the people that are not going in or eating where they're working or traveling or living and that's driving a lot of new volume.
To know to to the chefs companies so.
I think that restaurant towards continued to open restaurants, because that's what they do.
Where I'm at as of now we have not seen that slowed down.
So it would be interesting to see you know a year from now you know the tightening of credit if that's going to affect our.
Our customer base, but as of now we're really not seeing it.
Thank you.
The next question will come from Andrew Wolfe with C. L. King. Please go ahead.
[laughter].
Good morning so.
Chris on Hardee's kind of want to just ask you to revisit the value added business they bought in Houston.
To find kind of intriguing that you know the high end.
Foodservice World.
You know.
You know asking for accepting value added ideas.
Which really tells you something I mean, given that that's part of their differentiation is right you know chefs doing their own work, but could you just tell us a little about that business and where do you think that's kind of trend that that kind of you know outsourcing at least have some of that what I guess food preparation or some other kind of value added service.
Yeah.
Again, you know when when we say a lot of value added it's.
Their business is.
It has a broader customer base. So just think of maybe more airlines hubs, where they're preparing food think about more of the high end retailers who are looking for.
You know grabbing go products to sell that are put together and you know it's it's.
It's a it's a sale that you know if you're going to a market and you're looking for something to serve at home. That's quick so I think.
You know, it's not 100 per cent towards your restaurant customer you know where hotels. It in a lot of it is the hotels and caterers that.
Everyone today's challenge with the workforce. So it's more processing right. So it's cutting more you know fruits and vegetables, and and products that are faster you know peeling onions shopping.
Putting them in an environment, where obviously, they're fresh and it saves a lot of time.
And it allows them to get by without labor and I think that trend has been coming for a long time and it's really been an accelerated.
During the pandemic, where hospitality was hit the hardest and we lost the most people in the workforce.
I think everyone could say that it's better than it was but it's still challenging and it was challenging before the pandemic. So I don't think that's going to change much. So just the same way that we're cutting tons of steaks for restaurants hotels Steakhouses number one I think we do a better job at it because.
That's all our processing units do right.
Producing Uh huh.
Hi, Anne hamburgers, and we're cutting steaks and we are experts at it and most you know most the establishment don't have that kind of expertise right. You don't have you know a lot of trained butchers you don't have bands. So it was.
So I just think it's a gradual evolving industry and it was going that way anyway, and now it's accelerating because of the labor shortages. So you know hardee's has a great footprint throughout all of Texas, I mean, that's what's really exciting to us at <unk>.
Great organization, it's been around for a long time, great people very well run and you know the.
That's the thing that takes us the most time when we are entering a new market is you know making friends, it's a relationship business. So.
You need to build that trust you need to build the.
The credit history, and having someone like hardee's join chefs in a you know maybe the biggest market that we're entering in for food service that were not in.
That in Florida.
Gives us access to thousands of customers and.
We're starting to build a specialty department to be able to visit all the hardest customers and give them support to their existing sales staff and I think we're going to have tremendous success over the next 510 years.
Thanks, Chris.
That was actually escalated my follow up question, which is.
You know as you.
You know the strategy behind Hardee's and some of these other acquisitions.
Which are more customer focused.
Can you tell US you know in general broad strokes or citing examples.
How.
Well is the.
Synergy the shell synergy between protein, which say Allen brothers and.
And and and specialty both in you know cross selling and and you know consolidating the delivery and getting that delivery synergy where you alluded to already it. So it's you know it's an expensive part of the process would love to hear you know what the future as well, where where things are going I know, obviously you're building facilities.
Comminate that but there must be something in the field.
And do you know telling you. This is this is working loved here I'm not sure.
Yeah.
Great question, Andy It's a it's a balancing act right. So you know every market is is a little bit unique.
Our major cities are more unique than you know distributing in the suburbs.
Or in more into little Little city. So I think if you go back even you know.
If you if you look at some of the the.
Questions I've received over the past you know.
10 years 11 years, it's it's always been about.
You know what what makes chef SHAP right, so delivering into major cities. They you know.
Most restaurants do not have a lot of space basis, so expensive that their storage areas. You know you walk into a 14 million dollar build out restaurant with 300 400 seats.
Stairs and when you go downstairs into their storage area. It's like two closets. So that's really you know how we built our original model at chess knowing that they needed you know daily deliveries or four or five times, a week deliveries and we had to figure out the logistics.
And the ability to take orders late and.
And get get it there so they could prepare for lunch and that's kind of where the name evolved over time as the chefs warehouse, we realized we were there warehouse right.
Fast forward today, you know as we're combining a lotta these categories.
We realized that the cost of delivery.
But the cost of everything today is astronomical.
You know with inflation.
All the cost of labor you have to get more efficient so what customers would not accept maybe 14 years ago.
They wanted everything separated.
I don't think that that thought process exists today, you know and and where it does kind of our new facilities that we're building you know it is a hybrid I mean it allows obviously if if it's a big market like New York or.
L a or San Francisco, where you know you have a concentration of many many clients and a and a.
Close proximity we do we run those truck separately right. You know if you have 235000 dollar delivery of just protein or produce it could go on a separate truck, but my belief.
Is especially over the next X amount of years is that you have to figure out a way to lower the cost of your delivery and pass it on to the customer and.
And to do that it's it's would drop size.
And especially servicing so many hundred seat independent restaurants, who don't buy.
You know on a daily basis, especially you know there by a few hundred dollars of maybe groceries and a few hundred dollars or produce combining at finding a way to get efficient you know logistically it lowers our cost of delivery and it allows us to pass on a lot of the savings to our customers. So.
It's a it's a win win and you ask is the cross selling working I mean, if you look at our.
<unk> I mean, even before the pandemic uhm.
An industry that was growing organically you know food away from home I think it's maybe was 1% overall if you back out all the M&A from all the the big food.
Food distributors and we were growing you know mid to high single digits in years.
Before the pandemic, obviously now it's it's been accelerated it's all coming because we've successfully figured out how to cross out and it's not easy it's taking us a very long time.
But we believe that's one of our most you know our our ability to be a lot more flexible. So obviously, we're not as nimble as they're really little independent to still exists because they don't have all the protocols and food safety and everything that we stress is really important to our business and the safety.
Of our people and and delivering food and in the best manner, but I think our our roots you know.
Being owner operators and a lot of the companies that have join us were owner operators and keeping that flexibility and that entrepreneurial.
Spirit and the businesses of figuring out how to get it done is really driving R accelerated growth to a compared to most of our competitors.
Chris Thank you for that color I'll jump back into the queue.
Okay.
The next question will come from Todd Brooks with the Benchmark company. Please go ahead.
Okay. Thanks, good morning, guys.
Two <unk> two quick questions for you one and I don't know what you are looking to disclose here and put on the acquisitions announced.
Is there any discussion or color you can give us on may be multiples or deal structure as far as cash.
Cash upfront versus earn outs or or equity and then just generally funding this level of acquisition activity.
Yeah. Thanks.
So the the purchase price and everything will be disclosed in our 10-Q, which will file you know over the next week or so.
But just in just at a high level that both acquisitions were structured with no cash upfront one with a an earn out the other with a.
No.
And that'll be disclosed in our 10-Q, but the multiples we're right in known kind of our sweet spot of.
Six to eight times with a portion of that in earn out or some other form form of.
Deferred payment and I'm, sorry, what was the the second part of your question.
Just.
Can be funded out of existing availability or if if you'll have to access.
Additional unusual liquidity, yes.
Yeah. So if you recall, we we upsized are convertible security in December and we put about her.
Hundred and 20 million of cash on the balance sheet and that was targeted really specifically towards these two larger acquisitions hardee's and greenleaf.
So we funded.
We funded the purchase price out of that cash and we did a an incremental.
Moderate draw on our ABL just to bolster our cash position in the second quarter.
That's great Chairman then for either of you was very pleased with the the update to forward guidance from the fact that.
You're folding in a decent amount of acquired revenue and it really isn't impacting the margin structure that you had guided two at either the gross level or the.
EBITDA levels I know historically, a lot of times will acquire a property.
Or a company and chef needs to really work to get those acquired properties to corporate average margins here. There was no change to that guidance does it speak to either a the quality of these companies that you're buying here that they have already matured sorority at chef tight margins.
Or be does it speak to something within especially produced vertical that that's a higher EBIT.
Top margin business in court distribution. Thanks.
Actually actually just Oh, let Chris comment, but it's slightly dilutive to our original guidance, probably by about five or 10 basis points and that's just because on a combined basis.
Slightly below our average adjusted EBITDA margin not much. So there was a little bit the dilution and because they are highly produce they tend to be on the higher grocery profit margin side and higher opex site, but on an EBIT margin perspective, not much off of our average.
And.
Again, I mean, we we acquired businesses to grow them.
Right I mean, we really don't get much credit you know for the by so you know our planning when we're looking at.
What companies will join shack.
They are longterm propositions I mean, there's there's a lot of work to get the synergies and get the the bottom line margins that we're accustomed to so these are great companies and.
You know their margins are good and their their bottom lines are healthy, but overtime. Obviously, we expect our management teams to to integrate create cross selling get efficiencies and facilities, the back office synergies and and make them more profitable.
Than than they are today, so I think you're absolutely right. The way you were looking at it that you know the core shack business.
Is is higher margin or I would say more money to the bottom line right higher EBIT businesses. So these businesses do bring us backwards.
And we're able to make it up because we continue to get synergies and it continues to improve and all our core businesses to be able to acquire.
Acquire these businesses and by time to really get them up to what we call. The shots levels. So you know we're back in the first innings. It in these businesses, but I think are you know the momentum and I call. It the machine of chef.
Is able to carry us sent to keep producing the numbers that you are seeing and over time. These businesses will just get better and better.
Okay, great. Thank you both of congrats again.
Thank you thanks, Doug.
Again, if you have a question please tri star than one our next question will come from being Clyde with Lake Street. Please go ahead.
Hi, Thanks for taking my question and I had a great quarter guys. Just one one for me in the context of these initiations you guys had been quite public I think for awhile about your intention to expand our geographic lean to the locations that these acquisitions are in by category and so I'm curious now you know what these in hand.
As you look at your your you know your your portfolio do you still see kind of California, Texas in Florida.
To be under served with your with your current capabilities.
And produce as well being underserved or do you think that these acquisitions really sure that up and as such you may be looking elsewhere for future future expansion.
Yeah, I mean, I think we're always opportunistic you know again, we're we're not your typical you know food service company, we're not your typical foodservice expansion type.
Type of book, where you a line that you do.
Go into the market and an extra market next year, which is the most efficient.
Yeah. We are we say the great thing about chef, there's nobody like us the hard part is.
There's nobody like us really to acquire so we have to take a business that gets us into the clientele were looking for an.
And expand over that and that usually take some time so.
If there was another great business in Texas that fit into SHAP.
We were going to look at it you know in California, you know, we do have a big footprint, we have a a large new facility in southern California that has plenty of room for organic growth. It also has plenty of room to do more tucking and we know how you.
We know what great synergies, we get when we are able to tuck in a business into our existing facility. It's it's the most the most creative immediately to to our bottom line. So.
We are going to remain a I think interested.
And seeing businesses that they're in but we do have a great platform right now you know, Texas.
I look at Texas at 8 billion dollar market <unk>, so plenty of room to grow organically and plenty of room to be opportunistic, California again, California is a you know over a billion dollar market probably at this point, but in each region I think that's the business will double.
<unk> and triple.
When you look at Southern California, Southern California can be a billion dollar business for sure.
So we're still relatively small compared to the market size.
Got it got it that's very helpful. Very good congrats again on a very good quarter I'll get back to one.
Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mister Christopher patterns for any closing remarks. Please go ahead Sir.
Yeah.
Well, we thank everybody for joining our call today, we think with with any further questions. It was a great quarter I congratulate the the team at chaps, They put up a a lot of hard work and it was a very very busy quarter of acquisition.
And then moving into new facilities, and I think the numbers speak.
<unk> for themselves that they have done a tremendous job and we're really thankful to have such a great team and we look forward to everybody joining us for our next call. Thank you.
The confidence has now concluded. Thank you for attending today's presentation you may now disconnect.
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