Q3 2023 The Chefs' Warehouse Inc Earnings Call

[music].

Greetings and welcome to the chefs warehouse third quarter 'twenty took the Street earnings Conference call.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Alex Aldous General Counsel, corporate Secretary and Chief Gum, and Mint Relations Officer. Please go ahead.

Thank you.

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 third 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.

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 than similarly, titled non-GAAP financial measures used by it.

The company's <unk>.

Consultative 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 formal remarks I need to remind everyone that part of our discussions 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.

These are discussed in our annual report on Form 10-K, and quarterly reports on Form 10-Q, which are available on the SEC web site today.

Today, we are going to provide a business update and go over our third quarter results. In detail. 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 third quarter 2023 earnings call.

The third quarter business activity improved sequentially within the quarter following a softer than expected July and August primarily due to the placement.

The fourth of July holiday.

Higher than anticipated overseas travel.

Coming out of the summer season, the demand and pricing environment improved as more typical seasonal trends emerge.

As we moved into September we saw a significant sequential improvement in gross profit margins across our markets and.

And we expect this trend to continue as we move into the fourth quarter, a new year.

I would like to thank our teams across chefs warehouse for delivering strong growth in <unk>.

Customer acquisition placement growth and volume growth during the quarter.

We remain focused on providing our customers with the highest quality products and high touch service as we continue to grow categories integrate our recent acquisitions and drive organic growth across domestic and international markets.

A few highlights from the third quarter as compared to the third quarter of 'twenty to include.

Seven 1% organic growth in net sales.

Specialty sales were up eight 2% organically over the prior year, which was driven by unique customer growth of approximately 10, 8%.

<unk> growth of 14, 2%.

And specialty case growth of nine 1%.

Organic pounds in center of the plate were approximately $6, 6% higher than the prior year third quarter.

Gross profit margin decreased approximately 29 basis points.

Gross margin in the specialty category decreased 84 basis points as compared to the third quarter of 2022, while gross margins in the center of the play category decreased 104 basis points year over year.

Jim will provide more detail on gross profit margins in a few months.

During our second quarter call, we highlighted the near term growth related operating cost increases associated with the significant investments we have made in infrastructure capacity to facilitate future organic growth as well as the elevated level of acquisitions, we have made over the last.

A few years.

These expenses relate primarily to operating cost associated with facility expansion.

Higher acquisition related transition costs.

And insurance expense associated with our significant growth over the past 12 months.

Our expenses related to our core warehouse distribution and sales operation. Excluding these growth related investment costs remain in line with our expectations and historical trends.

We expect the impact of the near term elevated expense to lessen as we move into 2024 and 2025.

Operator: Greetings and welcome to the Chefs' Warehouse, third quarter, twenty-two-three earnings conference call. As a reminder, this conference is being recorded.

Well not a complete list of cost reduction and operational efficiency related efforts currently underway I would like to highlight a few of the more impactful projects and work streams aimed at contributing to expected operating leverage in 2024 and 2025. These.

Alex Aldous: I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer, please go ahead. Thank you, operator. Good morning, everyone.

Alex Aldous: With me on today's call, our Chris Pappas, founder, chairman and CEO and Jim Leddy, our CFO. By now, you should have access to our third quarter, twenty-two-three earnings press release. It can also be found at www.chefs' Warehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-gap financial measures, including, among others, historical and estimated EBITDAF and adjusted EBITDAF. As well as both historical and estimated adjusted net income and adjusted earnings per share.

Include.

Our anticipated opening and consolidation of multiple protein processing plants into northern California facility, we expect to open in the first half of 2024.

We expect to consolidate truck routes and operating more efficient operation utilizing an optimized labor force and technology platform with increased capacity for future growth.

We expect to continue to grow our digital capabilities and have recently added a process protein products to our online ordering platform.

Alex Aldous: These measurements are not calculated in accordance with GAP and may be calculated differently in similarly titled non-gap financial measures used by other companies. Quantitative reconciliations of our non-gap financial measures to their most directly comparable GAP financial measures appear in today's press release.

This adds to improving efficiencies in our customer support and sales operation.

We expect to reduce the acquired growth transition and integration costs going forward and we expect to begin to see the organic growth leveraging our recently added capacity in southern California, and Florida, Philadelphia, another fast growing regions, where we have recently.

Alex Aldous: Before we begin our formal 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 under 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 10K and quarterly reports on Form 10Q, which are available on the SEC website.

The distribution capability.

Our overall strategy for growth going forward has not changed.

And the three primary pillars of our unique growth model, which includes the integration of recently acquired companies Cross category and cross platform selling.

Alex Aldous: Today, we are going to provide a business update and go over our third quarter results in detail. Then we will open up the call for questions.

And driving future operating leverage through the capacity investments, we have made as we grow in scale.

Chris Pappas: With that, I will turn the call over to Chris Papis. Chris? Thank you, Alex, and thank you all for joining our third quarter 2020 Reearning School. The third quarter business activity improves sequentially within the quarter following a softer than expected July in August, primarily due to the placement of the Fourth of July holiday observed higher than anticipated overseas travel. Coming out of the summer season, the demand and pricing environment improved as more typical seasonal trends emerged.

As we target to average 4% to 6% organic growth over the next few years.

We're adapting our capital allocation models as follows.

We expect to gradually reduce capital expenditures to approximately 1% of revenue over the next two years to facilitate higher free cash flow conversion.

We are targeting two and a half times to three times net leverage.

Our year end 2025.

Our board of directors has authorized a two year share repurchase program up to $100 million of shares.

Chris Pappas: As we moved into September, we saw a significant sequential improvement in close-profit modules across our markets, and we expect this trend to continue as we move into the fourth quarter and new year. I would like to thank our teams across chefs warehouse for delivering strong growth and customer acquisition, placement growth, and volume growth during the quarter. We remain focused on providing our customers with the highest quality products and high touch service as we continue to grow categories, integrate our recent acquisitions and drive organic growth across domestic and international markets.

We are targeting 25 million to $100 million share repurchase by year end 2025.

Ultimate total repurchases if any will depend on our success in expanding our ability to allocate cash towards repurchase.

And then to our term loan maturing in 2029, which is currently underway.

Market conditions in free cash flow generation over the timeframe.

In terms of acquired growth going forward, we expect take advantage of potential accretive opportunities that may present themselves within this two year targeted capital allocation framework.

Chris Pappas: A few highlights from the third quarter as compared to the third quarter of 22 include 7.1% organic growth in that sale. Specialty sales were up 8.2% organically over the prior year, which was driven by unique customer growth of approximately 10.8%. Placement growth of 14.2% and specialty case growth of 9.1%. Organic pounds and center of the plate were approximately 6.6% higher than the prior year third quarter. Growth profit margin decreased approximately 29 basis points.

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.

Net sales for the quarter ended September 29 2023.

We used approximately 33, 2% to $881 8 million from $661 9 million in the third quarter of 2022.

The growth in net sales was the result of an increase in organic sales of approximately seven 1% as well as the contribution of sales from acquisitions, which added approximately 26, 1% to sales growth for the quarter net.

Chris Pappas: Growth margins and specialty category decreased 84 basis points as compared to the third quarter of 2022, while growth margins in the center of the plate category decreased 104 basis points year over year. General provide more detail on growth profit margins in a few moments. During our second quarter call, we highlighted the near term growth related operating cost increases associated with the significant investments we have made in infrastructure capacity to facilitate future organic growth as well as the elevated level of acquisitions we have made over the last few years.

Net inflation was two 3% in the third quarter, consisting of one 6% inflation in our specialty category and inflation of three 1% and our center of the plate category versus the prior year quarter.

Chris Pappas: These expenses relate primarily to operating costs associated with facility expansion, higher acquisition related transition costs and insurance expense associated with our significant growth over the past 12 months. Our expenses related to our core warehouse distribution and sales operation, excluding these growth related investment costs remain in line with our expectations and historical trends. We expect the impact of the near term elevated expense, the lesson as we move into 2024 and 2025. While that a complete list of cost reduction and operational efficiency related efforts currently underway, I would like to highlight a few of the more impactful projects and work streams aimed at contributing to expected operating leverage in 2024 and 2025.

Gross profit increased 31, 6% to $207 7 million for the third quarter of 2023 versus $157 8 million for the third quarter of 2022.

Gross profit margins decreased approximately 29 basis points to 23, 6%.

Gross profit dollar growth and margin during the quarter, primarily impacted by the weaker than expected summer season, as compared to a strong summer season in 2022.

Chris mentioned margins improved as we've moved through the quarter and our September gross profit margins was the highest month year to date in 2023.

Selling general and administrative expenses increased approximately 37, 9% to $179 6 million for the third quarter of 2023 from $130 3 million for the third quarter of 2022. The primary drivers of higher expenses were higher depreciation and amortization primarily driven by.

<unk> and higher compensation and benefits cost facility and distribution costs associated with higher year over year volume growth and the impact of certain acquisitions.

On an adjusted basis operating expenses increased 34, 8% versus the prior year third quarter and as a percentage of net sales adjusted operating expenses was 17, 9% for the third quarter of 2023 compared to 17, 6% for the third quarter of 2022.

Chris Pappas: These include our anticipated opening and consolidation of multiple protein processing plants into the Northern California facility we expect to open in the first half of 2024. We expect to consolidate trucks routes and operating more efficient operation utilizing an optimized labor force and technology platform with increased capacity for future growth. We expect to continue to grow our digital capabilities and have recently added our process protein products to our online ordering platform. This adds to improving efficiencies in our customer support and sales operations.

Operating income for the third quarter of 2023 was $25 5 million compared to $22 1 million for the third quarter of 2022. The increase in operating income was driven primarily by higher gross profit and lower other operating expenses, partially offset by higher selling general and administration expenses.

Versus the prior year quarter.

Income tax expense was $6 8 million for the third quarter of 2023 compared to $3 1 million expense for the third quarter of 2022.

Our effective tax rate in the third quarter of 2023 was primarily driven by a $2 $1 million charge in the current period for return to provision adjustments related to prior year tax returns.

Chris Pappas: We expect to reduce acquired growth transition and integration costs going forward and we expect to begin to see the organic growth leveraging our recently added capacity in Southern California. In Florida, Philadelphia, another past growing regions where we have recently expanded distribution capability. Our overall strategy for growth going forward has not changed, rooted in the three primary pillars of our unique growth model, which includes the integration of recently acquired companies, cross category and cross platform selling and driving future operating leverage through the capacity investments we have made as we grow and scale.

Our GAAP net income was $7 3 million or <unk> 19 per diluted share for the third quarter of 2023 compared to net income of $8 3 million or 21 per diluted share for the third quarter of 2022.

On a non-GAAP basis, we had adjusted EBITDA of $50 3 million for the third quarter of 2023 compared to 41 million for the prior year third quarter adjust.

Adjusted net income was $13 7 million or 33 cents per diluted share for the third quarter of 2023 compared to $16 4 million or <unk> 41 per diluted share for the prior year third quarter.

Chris Pappas: As we target average 4 to 6% organic growth over the next few years, we are adapting our capital allocation models as follows. We expect to gradually reduce capital expenditures to approximately 1% of revenue over the next two years that facilitate higher free cash flow conversion. We are targeting two and a half times to three times net debt leverage by year in 2025, and our board of directors have authorized a two-year share repurchased program up to $100 million of shares.

Turning to the balance sheet and an update on our liquidity at the end of the third quarter. We had total liquidity of $182 9 million comprised of $33 1 million in cash and $149 8 million of availability availability under our ABL facility.

During the quarter, we prepaid $20 million on our term loan maturing in 2029 so.

The remaining balance as of September 29, two.

2023 was 277 million and total net debt was approximately $668 1 million inclusive of all cash and cash equivalents.

Chris Pappas: We are targeting $25 million to $100 million share repurchased by year in 2025. The ultimate total repurchase, if any, will depend on our success in expanding our ability to allocate cash towards repurchase the amendment to our term loan maturing in 2029, which is currently underway, market conditions and free cash flow generation over the time. In terms of acquired growth going forward, we expect to take advantage of potential accretive opportunities that may present themselves within this two-year targeted capital allocation framework.

Turning to our full year guidance for 2023 based on the current trends in the business. We are providing our full year financial guidance as follows we estimate net sales for the full year of 2023 will be in the range of 335 billion to 345 billion.

Gross profit to be between $797 million and $812 million and adjusted EBITDA to be between $188 million and 196 million.

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.

Jim Leddy: With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on all the 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 September 29, 2023 increased approximately 33.2%, the $881.8 million from $661.9 million in the third quarter of 2022.

Thank you and at this point, we will open it up to questions operator.

Thank you we will now be conducting a question and answer session.

Jim Leddy: The growth in net sales was the result of an increase in organic sales of approximately 7.1%, as well as the contribution of sales from acquisitions, which added approximately 26.1% to sales growth for the quarter. Net inflation was 2.3% in the third quarter consisting of 1.6% inflation in our specific category and inflation of 3.1% in our center of the plate category versus the prior year quarter. Rose profit increased 31.6% to 207.7 million for the third quarter of 2023 versus 157.8 million for the third quarter of 2022.

If you would like to ask a question. Please press star and then one on your telephone keypad.

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One moment, please while we poll for questions.

The first question, we have is from Alex Slagle of Jefferies. Please go ahead.

Thanks, Good morning that question at all.

On the guidance just curious how much of the EBITDA Guide change was from the August dynamics versus any change in that for Q outlook. It sounds like when we last spoke at the beginning of August the gross profit trends were under some pressure from the shifts in seasonality and volatility in certain protein.

Jim Leddy: Rose profit margins decreased approximately 29 basis points to 23.6%. Rose profit dollar growth in margin during the quarter, but primarily impacted by the weaker than expected summer season, as compared to a strong summer season in 2022. As Chris mentioned, margins improved as we move through the quarter and our September growth profit margins for the highest month, year to date, in 2023. Selling general and administrative expenses increased approximately 37.9% to 179.6 million for the third quarter of 2023, from 130.3 million for the third quarter of 2022.

<unk>.

Yes.

<unk> had a little longer I guess two through August before getting better in September and October.

I guess the source of the reduction in EBITDA guidance.

Yes, Thanks, Alex for the question.

There's a little bit of both.

Definitely as you mentioned and as we've mentioned.

Ally in August were weaker than expected.

We didn't get the <unk>.

Benefit really of the price inflation is product mix essentially offset that so we didn't get the gross profit dollar growth, we expected to offset.

Jim Leddy: The primary drivers of higher expenses were hired depreciation and amortization, primarily driven by acquisitions, and higher compensation and benefits costs, facility and distribution costs, associated with higher year-over-year volume growth and the impact of certain acquisitions. Under an adjusted basis, operating expenses increased 34.8% versus the prior year third quarter, and as the percentage of net sales adjusted operating expenses with 17.9% of the third quarter of 2023, compared to 17.6% for the third quarter of 2022.

To generate the expense leverage on expenses.

And the second piece is really.

The impact of our.

Insurance renewals.

We are building in Florida, California.

And those those rates have gone up exponentially, we hit our insurance renewals during the third quarter and so we flowed through the elevated growth related expenses that we talked about in our prepared remarks.

So it was about 10 to 12 basis points on the <unk>.

Impact of the summer.

Jim Leddy: Operating income for the third quarter of 2023 was 25.5 million, compared to 22.1 million for the third quarter of 2022. The increase in operating income was driven primarily by higher growth profit and lower other operating expenses, partially offset by higher selling general and administration expenses versus the prior year quarter. Income tax expense was 6.8 million for the third quarter of 2023, compared to 3.1 million expense for the third quarter of 2022.

Then another 10 to 12 basis points on the impact of the elevated growth expenses.

Basically the adjustment to the guidance.

Got it.

With the shift in your capital allocation outlook is now providing room for buyback and more modest leverage targets versus historical levels and perhaps some other options out there with the converts I mean, how does this impact your longer term view on sales growth, which I think previously incorporated five to 10.

Percent growth from M&A.

Jim Leddy: A higher-effective tax rate in the third quarter of 2023 was primarily driven by a 2.1 million dollar charge in the current period for return to provision adjustments related to prior year tax returns. Our gap net income was 7.3 million or 19 cents per degree to share for the third quarter of 2023, compared to net income of 8.3 million or 21 cents per degree to share for the third quarter of 2022. On a non-gap basis, we had adjusted EBITDA of 50.3 million for the third quarter of 2023, compared to 41 million for the prior year third quarter. Adjusted net income was 13.7 million or 33 cents per degree to share for the third quarter of 2023, compared to 16.4 million or 41 cents per degree to share for the prior year third quarter.

If there's any implications on the longer term sales and EBITDA that you provided earlier in the year.

Yeah.

I think again I think we've always said Alex.

We're pretty optimistic.

The game has kind of shifted now with rates going so high.

We bought a lot over the past 12 months, especially that.

We are.

We're taking I would say a little pause too.

Integrate.

We have all these new buildings, we have some buildings that were unexpected that kind of fell in our lap that we're opportunistic so.

We have so much right now.

Unless there was an overwhelming.

That was transformative or.

Jim Leddy: Turning to the balance sheet and an update on our liquidity. At the end of the third quarter, we had total liquidity of 182.9 million, comprised of 33.1 million in cash and 149.8 million of availability under our ABL facility. During the quarter, we prepaid 20 million on our term law in the Churring in 2029. The remaining balance as of September 29, 2023 was 277 million and total net debt was approximately 668.1 million, inclusive of all cash and cash equivalents.

Something that just makes so much sense.

All these ways to finance those.

We thought that are better.

Better application of capital right now is to focus more on organic growth.

Continuing to improve our systems integrate the companies that we have bought.

And.

Really drive really drive the bottom line.

Until our rates become more attractive again.

Makes sense. Thank you.

Thanks, Alex.

Jim Leddy: Turning to our full-year guidance for 2023 based on the current trends in the business, we are providing our full-year financial guidance as follows. We estimate net sales for the full year of 2023 will be in the range of 3.35 billion to 3.425 billion. Gross profit to be between 797 million and 812 Million, and adjusted EBITDA to be between 188 million and 196 million. Our full year estimated deluded share count is approximately 45.7 million shares.

The next question, we have is from Mark Carden of UBS. Please go ahead.

Good morning. Thanks, so much for taking my questions wanted to just start off with inflation get your take on how the cadence played out and if there's any lingering issues with any particular categories. This quarter.

Yes.

Thanks for the question Mark.

Inflation has kind of played out throughout the year as we kind of expected and more driven by the base effect.

I think we've said before we've seen some.

Deflation in certain categories versus the crazy prices you saw last year, but overall, it's been a story of disinflation as we've gone through the year, we've gone from four 5% in the first quarter to you.

Jim Leddy: 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 deluded share count.

Really 2% to 5% this quarter.

We kind of expect that that trend to continue obviously, we have 55000.

Alex Aldous: Thank you, and at this point, we'll open it up to questions. Operator. Thank you.

<unk> in our warehouses. So there is products that are inflation slightly inflationary deflationary, but on an aggregate basis.

Operator: We will now 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 signal indicates your line is in the question queue. You might press star and then two if you would be necessary to pick up your hands fit before pressing the star keys. One moment please, while we pull for questions.

Inflation is really been disinflation this year.

But with deflation in certain categories that.

We're obviously.

Overshot last year.

Okay, Great and then just given the current economic backdrop are you expecting to see more of your growth over the next few quarters take place around expanding penetration of your existing accounts or from adding new business.

I think it's I think it's both I mean, we've seen a very healthy.

Alexander Slagle: The first question we have is from Alex Slagle of Jeffries.

Jim Leddy: Please go ahead. Thanks. Good morning. The question on the guidance is curious how much of the EBITDA guide change was from the August dynamics versus the change in the 4Q outlook. It sounds like when we last spoke at the beginning of August, the gross profit trends were under some pressure still from the shifts and seasonality and volatility in certain proteins and continued a little longer, I guess, through August before getting better in September and October.

Our pipeline of new business.

Restaurant tours opened restaurants, that's what they do right. So.

Our really good customers are continuing to open restaurants so.

That drives.

The replacement, we average about 7% to 10% of attrition through just natural leases.

Coming up for all sorts of different reasons. So we always need those new openings, but yes. There is a major focus with the.

The businesses that we've been developing.

Jim Leddy: I guess was this the source of the reduction in the EBITDA guide? Thanks, Alex, for the question. It was a little bit of both. Definitely, as you mentioned, and as we mentioned, July and August were weaker than expected. We didn't get the benefit, really, of the price inflation as a product mix essentially offset that. We didn't get the gross profit dollar growth we expected to offset, to generate the leverage on expenses.

We are in the produce business now we're heavily into the protein business.

The reason that we're outperforming really the market in our growth I think we do have industry, leading growth is because the way. We do go to the market that we are cross selling and introducing new categories into markets that we didn't have those categories.

I am pretty confident that's going to that's going to continue and really that's our business plan to continue that cross selling continue to grow all the markets that we've entered in.

Jim Leddy: The second piece is really the impact of our insurance renewals. We're building in Florida, California, and those rates have gone up exponentially. We had our insurance renewals during the third quarter. We flowed through the elevated growth-related expenses that we talked about in our prepared remarks. It was about 10 or 12 basis points on the impact of the summer, and then another 10 or 12 basis points on the impact of the elevated growth expenses.

Eventually.

We think there'll be a tailwind and that's where we really get that big pop and Thats kind of our history for almost 40 years.

Got it thanks, so much and good luck guys. Thanks.

Thank you.

The next question, we have from Pizza solar of BTG. Please go ahead.

Great. Thanks for taking the question.

I was hoping you could give us a little bit of update on some of the larger acquisitions and the integration of those acquisitions, maybe green leaf.

Alexander Slagle: That's basically the adjustment of the guidance. Got it.

Hard as that you made earlier this year and can you just give us an update on where you stand with those acquisitions and then more specifically with the chef Middle East My understanding is when you when you acquired.

Chris Pappas: With the shift in your capital allocation outlook, it's now providing room for buyback and more modest leverage targets versus historical levels and perhaps some other options out there with the converts. How does this impact your longer-term view on sales growth, which I think previously incorporated 5% to 10% growth from M&A? and if there's any implications on the longer-term sales and you've got views that you provided earlier in the year. Yeah, I think we've always said, Alex, that we're pretty optimistic.

That brand.

He was in need of additional capital for expansion with your updated guidance on Capex can you just kind of square for us how that looks and how much capital you can put into that brand going forward. Thank you.

Sure Peter.

I think it will start I'll start backwards, and then I'll, let Jim.

A little bit on that but yes, when we bought chef middle East.

No.

Chris Pappas: The game is kind of shifted now with rates going so high. We bought a lot over the past 12 months, especially that we're taking, I would say, a little pause to better integrate. We have all these new buildings. We have some buildings that were unexpected that kind of fell in our lap that were opportunistic. So we have so much right now that unless there was an overwhelming deal that was transformative or something that just made so much sense, there's always ways to finance those.

We knew that they were going to be constrained on space that was part of.

How we how we assess the value and.

It's a great company it throws off great free cash flow and the plan was to use that.

Part of that money to fund the.

The expansion, so I think thats business as usual and.

No.

That addition is already being built so we expect them to continue to grow in that business to continue.

Continued to prosper greatly.

Green leaf much different that kind of acquisition a company that we've known for over 15 years, a great brand in San Francisco It complements the way we go to market in San Francisco.

Chris Pappas: We thought that a better application of capital right now is to focus more on organic growth. You know, continue to improve our systems, integrate the companies that we have for it and really drive, you know, really drive the bottom line until rates become more attractive again.

Alexander Slagle: Makes sense. Thank you. Thanks Alex.

Operator: But it's a question we have. We have a small coin off you base.

Mark Carden: Please go ahead. Good morning. Thanks so much for taking my questions.

Mark Carden: What wanted to just start off with inflation, get your take on how the cadence played out and if there's any lingering issues with any particular categories this quarter. Thanks to the question Mark, you know, inflation is kind of played out throughout the year as we kind of expected more driven by the base effect. I think we've said before we've seen some deflation in certain categories versus the crazy prices you saw last year.

Mark Carden: But overall it's been a story of disinflation as we've gone through the year. Gone from, you know, 4%, 5% in the first quarter to, you know, really 2% to 1.5% this quarter and we kind of expect that that trend to continue. Obviously we have 55,000 products in our warehouses. So those products that are inflation, it's slightly inflationary, deflationary, but on an aggregate basis inflation has really been disinflation this year. But with deflation in certain categories that, you know, we're obviously overshot last year.

Mark Carden: Okay, great.

Plant is finally open I'm glad to say that it's doing better than expected, it's starting to sell more and more premium.

Alan brothers types proteins to the chef to the CW customers as well as the hardest customers and.

And the C. W. A business, which is which is pretty small compared to our other other markets is starting to get lots of traction opening up customers. You know every single day and starting to penetrate more and more of the hardiest customers. So it goes back to you know why we bought Hardy.

Chris Pappas: And then just given the current economic backdrop, are you expecting to see more of your growth over the next few quarters take place from expanding penetration of your existing accounts or formatting your business. I think it's I think it's both, I mean, we've seen a very healthy pipeline of new business. You know, restaurant tours open restaurants, that's what they do, right? So, you know, are really good customers are continuing to open restaurants.

Right to access Texas.

Faster, it's such a big state and we're very excited about the the long term growth of Texas and penile just add on the on the Capex question and the guidance. So the the project is underway, we're already spending money on it we're funding it out of the cash flow that CME generates.

It's the Capex as in our current.

Chris Pappas: So, that drives, you know, the replacement, you know, we average about 7% to 10% of attrition through just natural, you know, leases, you know, coming up or all sorts of different reasons. So we always need those new openings, but yes, there's a major focus, you know, with the businesses that we've been developing, you know, we're in the produce business now. We're heavily into the protein business. I think the reason that we're outperforming really the market, you know, in our growth.

2000, twenty-three capex guidance and is also in the capital allocation <unk>.

Plan that we announced earlier and so.

Just wanted to comment on that.

Great and then just a follow up.

We've heard some evidence that maybe that the higher end consumer.

Hiring some consumer is.

Not going to trade down a little bit and manage their check.

To a certain degree with you know maybe cheaper entrees and cheaper alcohol or are you guys seeing any evidence of that in your numbers I mean, your sales numbers are pretty good I just trying to see if there was any evidence that consumers are actually trading down.

Chris Pappas: I think we do have industry leading growth is because the way we do go to the market that we are cross-selling and introducing all our new categories into markets. That we didn't have those categories and I'm pretty confident that's going to continue and really that's our business plan. You know, to continue that cross-selling continue to grow all the markets that we've entered and, you know, eventually we think there'll be a tailwind. And that's where we really get that big pop.

Yeah, I mean, we're not in the alcohol business. So you know I don't think we can we can really comment on that.

What I've seen over the past almost 40 years is usually when the economy slows down some people usually.

I'd say, the overall mass market, probably drinks a little bit less expensively right.

Mark Carden: That's kind of our history for almost 40 years. Thank you. Thanks so much. Thank you.

But.

That's why you know.

The the food side historically, you know, we could see a little bit I mean, we probably saw a little bit over the summer.

Peter Saleh: The next question we have is from Peter Saleh of BTIG. Please go ahead. Great. Thanks for taking the question. I was hoping you could give us a little bit of an update on some of the larger acquisitions and integration of those acquisitions, maybe green leaf and hardy that you made earlier this year. It was an update on where you stand with those acquisitions. And then more specifically with the Chef Middle East, my understanding is when you acquired that brand, it was in need of additional capital for expansion.

I think this summer was you know very different than most most summers has so much I'd say travel our customers customer.

You know what we kept hearing with our customer is in Europe right. So.

We're busy we're not as busy as we would like you know we had the smoke from Canada you know.

Shut down a lot of the outdoor cafes, which hurt us during the summer.

It was a thousand different things that were going on you know we had lots of rain and then we had to heat and that so it was a really funky summer.

Peter Saleh: With your updated guidance on CAPX, can you just kind of square for how that looks and how much capital you can put into that brand going forward? Thank you. Sure, Peter. I think we'll start backwards and I'll let Jim opine a little bit on that. But yeah, when we bought Chefs' Middle East, we knew that they were going to be constrained on space. That was part of how we assess the value.

And as we started coming into September we started to see more I would say normalization of sales and then going into October.

Came in strong so.

From where we sit.

We think business is pretty good you know, we think most of our customers are doing pretty well we.

We think the pipeline going into the fourth quarter.

It looks it looks good.

Hearing about lots of parties lots of bookings.

So are people cutting back a little bit wouldn't be so surprised but I would say overall, our customers are doing pretty well.

Peter Saleh: And it's a great company. It throws off great free cash flow. And the plan was to use that part of that money to fund the expansion. So I think that's business as usual. And that addition is already being built. So we expect them to continue to grow and that business to continue to prosper. Green years, great brand in San Francisco, it complements the way we go to market in San Francisco. Probably our second largest market right now when you combine all the businesses that we own in Northern California.

[noise]. Thank you.

The next question, we have <unk> <unk> company. Please can I <unk>.

Hey, Thanks for taking my questions.

First just crush the gym on the <unk>.

The growth algorithm for the next couple of years.

Part of getting the efficiencies have these new facilities.

You've added you've talked about tucking in acquisitions and how valuable they can be.

Kind of building volume through this new capacity that you've added.

If we think about that 46% organic growth and I think historically, 5% to 10% from acquisition.

Peter Saleh: And that's kind of, you know, they run a great business and we'll just let them continue to run it, which chefs integrating slowly. So again, we can get that crossover sell. You know, they have a lot of clients that the other chef companies don't have. So we're introducing more and more products to those customers and vice versa. And that's kind of more of a steady eddy and hopefully continue to grow over the next 10 years as a great business.

Cause the new plan imply that we're at the 5% and that's new acquisition or do you see a period of digestion here, we may even be a little bit lower than five per cent garage for my question.

Yeah, that's a tough one.

We know you know things things can change so.

I I would say again in this kind of environment.

We're talking about today, we are much more focused on digesting all the acquisitions that we've that we've done the past say 24 months and driving driving more revenue to the same customers and continuing to open customers and.

Peter Saleh: You know, Hardies was an entry into Texas where we had a very small footprint. Another great company, a huge footprint throughout almost all of Texas. And that when I say we're still in the first inning, you know, we're still, you know, getting to know each other. We're starting to integrate slowly management teams, accessing their customer base. We opened up Alan Brothers Texas over the past year. So that plant is finally open and glad to say that it's doing better than expected.

Start to push volume into the into the new warehouses, we built.

Doesn't mean, we can't do.

Really smart bold in that.

The the the volume adds to lowering our overhead into these into these new facilities and and driving greater EBITDA to the bottom line. You know I think I think the message is more right now.

Peter Saleh: It's starting to sell more and more premium Alan Brothers types proteins to the chef, to the CW customers as well as the Hardies customers. And the CW business, which is pretty small compared to our other markets is starting to get lots of traction, opening up customers, you know, every single day and starting to penetrate more and more of the Hardies customers. So it goes back to, you know, why we bought Hardies, right, to access Texas, you know, faster.

Our job is to allocate capital and probably the best allocation of capital right now is to grow more organically unless there's a phenomenal phenomenal deal that makes unbelievable sense for us and our shareholders. We would rather you know put the put.

Put the capital to work hiring more salespeople and really pushing the organic growth, which were really good at to drive you know mid mid.

Peter Saleh: It's such a big stay. And we're very excited about the long-term growth of Texas. And Pete, I'll just add on the on the capex question and the guidance. So the project is underway. We're already spending money on it. We're funding it out of the cash flow that CME generates. It's the capex is in our current 2023 capex guidance and is also in the cappella allocation plan that we announced earlier. And so I just wanted to comment on that.

<unk> may be high single digit growth.

Organically. So I think we're gonna play the ball where lines right now.

That's helpful. Thanks, and then <unk>.

Jim you talked about.

Working to drive leverage she didn't really focus on digestion, if we're not <unk>.

EBITDA margins with acquisitions for the next couple of years I guess, how would you want us to think about the peace.

An improvement as you're really working towards integration indigestion of what's been acquired over the last two years.

Chris Pappas: Great, and then just a follow-up. We've heard some evidence that maybe the higher-income consumer is starting to trade down a little bit and manage their check to a certain degree with maybe cheaper entrees and cheaper alcohol. Are you guys seeing any evidence of that in your numbers? I mean, your sale numbers are pretty good just trying to see if there was any evidence that consumers are actually trading down. Yeah, I mean, we're not in the alcohol business, so, you know, I don't think we can really comment on that.

Yeah.

I think the.

Kind of two to three year in in five to six year plan that we laid out we reiterated on the queue to call I think that's that's still in play.

With with a target of mid mid sixes towards seven.

Over the next five years, you know, adding hardee's.

Which is a big revenue produce company with the lower EBIT margin debuted at us on a full year basis by 10 to 20 basis points of this year.

Chris Pappas: You know, over what I've seen over the past almost 40 years is usually when the economy slows down some. Yeah, people usually, I'd say the overall mass market probably drinks a little bit less expensively, right? But that's why, you know, from the food side, historically, you know, we could see a little bit. I mean, we probably saw a little bit over the summer. You know, I think the summer was, you know, very different than most, most summers, as so much, I say, travel, you know, our customer's customer.

So if you know if you exclude that based on the midpoint of our guidance.

You know our core business is back towards 6% and I think you know as Chris mentioned, we're going to focus on improving and integrating the significant amount of acquisitions that we've done.

So I think no definitely the $4 billion target a top line and and six per cent plus EBIT. Adjusted EBITDA margins are are you know I think of that between the organic growth capital allocation plan that we've laid out.

Chris Pappas: You know, what we kept hearing with our customer is in Europe, right? So, you know, we're busy. We're not as busy as we've liked. You know, we had the smoke from Canada, you know, which shut down a lot of the outdoor cafes, which hurt us during the summer. It was a thousand different things that were going on. You know, we had lots of rain and then we had heat and that. So it was a really funky summer.

We've made the we've made significant investments in M&A and infrastructure, we're going to continue to grow we're going to continue to build some facilities, but at a more moderate pace and our most profitable growth is organic growth into the capacity that we've invested in.

So I think I don't think it's materially change and as Chris mentioned will take advantage of accretive M&A opportunities that work within the capital allocation framework that we've we've laid out so I think the the fact that we're at kind of our peak investment cycle and we're going to start mining those investments of lines were.

Chris Pappas: And as we started coming into September, we started to see more, I would say, normalization of sales and then going into October, you know, it came in strong. So from where we sit, we think business is pretty good. You know, we think most of our customers are doing pretty well. We think the pipeline going into the fourth quarter looks well, looks good. You know, we're hearing about lots of parties, lots of bookings. So our people cutting back a little bit wouldn't be so surprised. But I would say overall our customers are doing pretty well. Thank you.

<unk> with the generating more free cash flow strengthening the balance sheet over the next couple of years in <unk>.

Potentially market conditions, allowing allocating some more of our cashed capital to returning some value to shareholders, depending on market conditions et cetera.

That's very helpful. Thank you both.

Thanks, a lot.

That makes question, we had some Andrew Ruth R. C. L just kind of hit.

Todd Brooks: The next question we have is from Todd Brooks of Bange Mall Company. Please go ahead. Hey, thanks for taking my questions.

Hi, Good morning, Thanks, Jim that last answer on Hardy. So it was kind of where I was going to ask you, but I still want to kind of.

Chris Pappas: First, just Chris or Jim on the growth algorithm for the next couple of years. Part of giving the efficiencies out of these new facilities that you've added. You've talked about tucking acquisitions and how valuable they can be kind of building volume through this new capacity that you've added. If we think about that, 4% to 6% organic growth and I think historically 5% to 10% from acquisition, does the new plan imply that we're at the 5% end of growth through acquisition or do you see a period of digestion here when we may even be a little bit lower than 5% growth from acquisition?

You know, you're <unk>, you're kind of getting us to the 35 basis points or so lower EBITDA margin guide for the year and.

Obviously, a little more than that for the fourth quarter.

You know I mean, I I appreciate the branch, but could you kind of frame it in terms of expectations.

I assume the summer.

You didn't have a crystal ball in the summer and I would assume also the insurance maybe it was a surprise so what about you know hardee's and the acquisitions in general you know are they.

Could you frame, whether they were a little sort of as a group or individually maybe heart. He's just a little more deluded than anticipated.

Chris Pappas: Yeah, you know, that's a tough one. As we know, things can change. So I would say, again, in this kind of environment, we're talking about today, we're much more focused on digesting all the acquisitions that we've done the past, say, 24 months and driving more revenue to the same customers and continuing to open customers and start to push volume into the new warehouses we built. Doesn't mean we can't do some really smart fold-ins that the volume adds to lowering our overhead into these new facilities and driving greater EBITDA to the bottom line.

And maybe for Chris you know if that is the case you know.

I would assume this is nothing like what you went through many years ago with the protein business, but you know any any qualitative view on where you.

Expect to produce to become you know not just strategically helpful for cross selling but you know a pretty profitable part of the business.

Thank you yeah yeah.

Shoot first and the.

I think business.

Pretty much tracking you know except for the funky summer.

It's tracking you know to expectation you know.

Most of our businesses I mean business is fine.

We had the headwind with some of the costs. We took on an extra building you know cause we got a good opportunity down in South Jersey to really consolidate we were desperate for space for that Pennsylvania, New Jersey market take pressure off of New York, and and our Maryland facilities. So.

Chris Pappas: I think the message is more, right now, you know. Our job is to allocate capital, and probably the best allocation of capital right now is to grow more organically. Unless there's a phenomenal, you know, phenomenal deal that makes unbelievable sense for us and our shareholders, we would rather, you know, put the capital to work, hiring more salespeople and really pushing the organic growth which we're really good at. To drive, you know, mid to maybe high single digit growth, you know, organically. So I think we're going to play the ball where it lies right now. That's helpful, thanks.

What parties I mean, it's a it's it's not up to the IBRA producing level of what check what we expect from our chef businesses, but we kind of knew that and it was kind of built into the price you know when we bought it. So you know nothing unexpected there.

I I think to explain you know why we're not gonna hit maybe the you know we have really high expectations. This year is like Jim said more headwind with the expenses you know so yeah, it's a little bit of Funkiness. During the summer since September came back you know strong October is coming in.

Jim Leddy: And then Jim, you talked about working to drive leverage through the business and really focused on digestion. If we're not muting EBITDA margins with acquisitions for the next couple of years, I guess, how would you want us to think about the pace of EBITDA margin improvement as you're really working towards integration and digestion of what's been acquired over the last two years. Yeah, I think, you know, the kind of two to three year and five to six year plan that we laid out, we reiterated on the Q2 call.

Pretty strong so overall our customer is is is doing fine.

You know we've been talking for years and years and you know I believe in you know.

A higher end our customer base, you usually does better than.

Than most smarter than most other sectors food away from home and were extremely diversified I mean people think that where you know they know us for you know selling super high end products, but we.

<unk>. So you know what we call upscale casual which is doing really well and I think our our mix N. R. A diversified customer base has proven to be really resistant. So I think it's like a little goldilocks I think it's a little bit more than expected on the on.

Jim Leddy: I think that's still in play, you know, with the target of mid six is towards seven over the next five years. You know, adding hardies, which is a big revenue produce company with a lower EBITDA margin to booted us on a full year basis by, you know, 10 or 20 basis points this year. So, you know, if you exclude that based on the mid point of our guidance, you know, our core business is back towards 6%.

The expenses due to the new buildings that we've taken on we've never.

But 12 companies in a year. So we had a lot of integration I think that we ended up estimated the integration cost of those businesses.

Jim Leddy: And I think, you know, as Chris mentioned, we're going to focus on improving and integrating the significant amount of acquisitions that we've done. So, I think, you know, definitely the $4 billion target of top line and 6% plus just a bit of margins are, you know, I think between the organic growth, the capital allocation plan that we've laid out, we've made the, we've made the significant investments in M&A and infrastructure. We're going to continue to grow, we're going to continue to build some facilities, but out of more moderate pace.

But you know I'm I'm blessed to say that you know, we're we're tracking pretty much too expectation with a little headwind on the expense side and a little funkiness of the summer.

And they will just add in terms of your in your question as it relates to Chris articulated well, but the guidance.

Assess middle eastern Green leaf or an.

Even hardy is performing pretty much as we expected we did report the.

The the non core customer the hardee's last we took an impairment for that in and when we reported in the second quarter, so that that impacted us a little bit but it was not the material driver.

Jim Leddy: And our most profitable growth is organic growth into the capacity that we've invested in. So, I think, I don't think it's materially changed. And as Chris mentioned, we'll take advantage of a creed of M&A opportunities that work within the capital allocation framework that we've laid out. So, I think the, the fact that we're at kind of our peak investment cycle and we're going to start mining those investments aligns well with generating more free cash flow, strengthening the balance sheet over the next couple of years. And potentially market conditions allowing allocating some more of our cash are capital to returning some value to shareholders, depending on market conditions, et cetera. That's very helpful. Thank you both. Thanks for that.

Of the change the guidance is really bit thin as we articulated the higher level of integration in transition costs and primarily the higher cost of insurance risk and places like Florida, and California, where insurance companies literally don't Wanna ensure you.

And that has come in higher than expected we don't expect.

That level of expense increases to continue in 24 and 25. So that's why we are highlighting them as growth expenses that have.

Impacted our guidance of this year.

Alright, Thank you both and one follow up Jim.

Did you say I just Wanna make sure I heard you right September had the best gross margin rate for the year is that.

Andrew Wolf: I make a question we have from Andrew Wolfe of CL King. Please go ahead. Hi, good morning, thanks. Jim, that last answer on Hardy's was kind of where I was going to ask you, but I still want to kind of, you know, you're kind of getting us to the 35 basis points or so low or even dumb arching guide for the year, and, you know, it's obviously a little more than that for the fourth quarter, but, you know, I mean, I appreciate the bridge, but could you kind of frame it in terms of expectations?

Yeah, we had our highest coast yeah. It was the highest gross profit margin months of the year yeah.

And is that sort of a seasonal expectation or or is that something we can kind of take into the models that gross.

Gross margins are kind of snapped at.

You know as you move into the fourth quarter gross profit margins historically have gone higher that's primarily driven by the holiday season.

But I think you know coming over the summer or teams just did a great job of focusing on gross profit dollar growth.

Andrew Wolf: I assume the summer, you know, you didn't have Chris the ball in the summer, and I would assume also the insurance, maybe was a surprise. So, what about, you know, Hardy's in the acquisitions in general, you know, are they, you know, could you frame whether they were little, sort of as a group or individual, and maybe Hardy's just a little more diluted than anticipated, and maybe for Chris, you know, if that is the case, you know, I would assume this is nothing like what you went through many years ago with the protein business, but, you know, any qualitative view on where how you expect the produce to become, you know, not just as strategically helpful for cross-selling, but, you know, a pretty profitable part of the business. Thank you. Yeah.

And you know the market seemed to kind of normal lives as Chris mentioned.

And as we mentioned in a prepared remarks, we we've seen that trend continue.

Into October so obviously, we can't predict the future, but it it did feel do you feel much better coming out of August and into September.

Thank you appreciate it.

Sure.

The next question to be having some kidney Banja <unk>. Please can I hate.

Good morning, Thank for for taking my question.

I was wondering if I could just go back to the sales outlets here, because what we're talking about a little bit of a weaker than expected summer <unk>.

Chris Pappas: I'll shoot first, Andy. I think business, it's pretty much tracking, you know, except for the funky summer, I think it's tracking, you know, to expectation. You know, most of our businesses, I mean, business is fine, you know, we had to headwind with some of the course, we took on an extra building, you know, because we got a good opportunity. Down in South Jersey, uh, to really consolidate, we would desperate to space for that Pennsylvania and New Jersey market, take pressure off of New York and, in our Maryland facilities.

Sales outlets. So can you just help us understand what component of sounds amazing.

<unk>.

Or other factors, maybe can you just elaborate on that.

Yeah, I think I think look I think this summer I think.

As we've talked about it.

It didn't fall off a cliff it just felt as Chris uses the word you know a little funky. It was it was softer than we'd expected, but overall.

Our organic growth has been you know.

Very solid the main issue.

Chris Pappas: So, you know, we, what parties, I mean, it's a, it's not up to the EBITDA producing level of what chef, what we expect from our chef businesses, but we kind of knew that, and it was kind of built into the price, you know, when we bought it. So, you know, nothing unexpected there. I think to explain, you know, why we're not going to hit maybe the, you know, we have really high expectations this year is like Jim said, more headwind with the expenses.

For us in the near term has been on the expense line related to the Brooklet expensive. So.

You know raising our our revenue guidance is is a combination of the strong organic growth that we've seen we reported.

9% case growth.

Double digit.

Customer and placement growth so we've been.

Organic growth hasn't been our issue, it's really been the the gross profit margin.

Chris Pappas: You know, so, yeah, it's a little bit of funkiness during the summer, then September came back, you know, strong October is coming in pretty strong. So, overall our customer is is doing fine. You know, we've been talking for years and years and, you know, I believe in, you know, a higher end customer base usually does better, you know, then most, most other sectors of food away from home. And we're extremely diversified.

Headwind that we had during the.

Sure a couple of months in the summer.

As well as the expenses.

[laughter].

Okay can you can can you help me to quantify somebody's expensive here, whether it I heard you call out really facility expansion integration insurance, maybe just.

Give us some 10 dollar amount to work with in terms of.

How much that is pressuring this year how much. It does continue into next year. When we should start to see that cycle can you help us kind of work.

Chris Pappas: I mean, people think that we're, you know, they know us for, you know, selling super high end products, but we sell, you know, what we call upscale casual, which is doing really well. And I think our, our mix and our diversified customer base has proven to be really resistant. So, I think it's like a little Goldilocks. I think it's a little bit more than expected on the, on the expenses due to the new buildings that we've taken on.

<unk> on that.

Yeah, I mean on the full year update on a full year basis, you know that it's pretty much the the impact of the summer's about you know as I mentioned 10, or 12 basis points and the impact of the growth related expenses about the same about 10 or 12 basis points. So.

And then you had hardee's dilution being.

Being about 10 or 15 basis points that will take you from 6.1% down to 5.7%, which is the mid mid point of our guide uhm.

Chris Pappas: We've never bought 12 companies in a year. So, we have a lot of integration. I think that we underestimated the integration cost of those businesses. But, you know, I'm blessed to say that, you know, we're, we're tracking pretty much to expectation with a little headwind on the expense side and a little funkiness of the summer.

Chris mentioned to a number of just highlighted a few of the work streams and projects that we have that will come to fruition over the next two years a lot of it is related to consolidated facilities in the northeast in the in the northwest we've already consolidated two facilities for the past two months into.

Jim Leddy: Yeah, and they all just add in terms of your, your question as a relates to Chris articulated well, but the guidance. Session Middle East and Green League for, and, you know, even Hardy's performing pretty much as we expected. We did report the, you know, the, the non core customer, the Hardy's lost. We took an impairment for that in, and when we reported in the second quarter. So, that, that impacted us a little bit, but it was not the material driver of the change to guidance.

Our new facility in Florida.

So we have a number of projects underway.

The investments, we're making in our digital platform will create more efficiencies. So we'll have some additional rent coming online next year, but we anticipate that those work streams and projects will more than offset that and so we don't expect to have that level. Obviously, the <unk> is the back half of next year will be.

More more of Ah Ah Ah leverage opportunities in the first half just given what we've seen in the back half of this year.

Jim Leddy: It's really been, as we articulated, the higher level of integration and transition costs, and primarily the higher cost of insurance risk in places like Florida and California where insurance companies literally don't want to ensure you. And that has come in higher than expected. We don't expect that level of expense increases to continue in 24 and 25. So, that's where we're highlighting them as growth expenses that have, you know, impacted our guidance, here.

Yeah, I think the frame it a little.

More Kelly.

What we're talking about a few million Bucks right. So you can imagine with I think we have 12 12 companies tend to great.

In a very short period of time and I think we you know maybe just under estimated the amount of like travel.

Jim Leddy: Great, thank you both. And one follow-up, Jim, did you say, I just want to make sure I heard you right, that September has the best gross margin rate for the year? Is that? Yeah, we had our highest gross, yeah, it was our highest gross profit margin month of the year. Yeah. And is that sort of a seasonal expectation, or is that something we can kind of bake into the models that gross margins are kind of not that?

Every team has to travel there we have to set up we're doing computer integrations you have the I T team you have the ops team we have sales training. So a lot of that as a one time you know headwind you know some of the insurance cost is it's going to linger, but again as we as we start to grow.

And to those buildings. So we opened up Florida, which was a tremendous undertaking which I'm. Most modern building we can't wait to show. It off you know that cost a was delayed and then it it cause other expenses. So you can say those are one time.

Jim Leddy: You know, as you move into the fourth quarter, gross profit margin historically have gone higher. That's primarily driven by the holiday season. But I think, you know, coming out of the summer, our teams just did a great job of focusing on gross profit, dollar growth. And, you know, the market seemed to kind of normalize, as Chris mentioned. And as we mentioned in our prepared remarks, we seen that trend continue into October. So, obviously, we can't predict the future, but it did feel, it did feel much better coming out of August and into September. Thank you, appreciate it. Right.

You know I think they might be one time, but the accountants might argue a little differently. So we had a lot of headwinds on the expense side integrating all those companies opening those buildings. We did not expect to open. Another building you know between Maryland, and New York, So we kind of got Lucky finding one.

You know commercial warehousing is is a tight market. So if you find something that fits your filters you kind of had a grab it so that was the big expense that we we didn't see coming but we're very lucky we got the building you know, we're getting closer to opening up.

Ah Richmond building in northern California, due to Covid that building was heavily delayed.

Kaleibanya: The next question we have is from Kaleibanya of the capital markets. Please go ahead.

Kaleibanya: Good morning. Thanks for taking our questions. I'm wondering if we could just go back to the sales outlook here because we're talking about a little bit of a weaker than expected summer, but we're raising the sales outlook. So, can you just help us understand what component of sales you're raising as it's just M&A or other factors, maybe can you just elaborate on that? Yeah, I think, I think, look, I think the summer, I think as we've talked about it, it didn't fall up a cliff.

Once that's open with consolidating multiple plants you know was taken out you know a big amount of duplicate overhead. It's gonna allow us to really you know continue to be the leader in that market. So I hate to say, we kind of have good problems. Because we are growing continued to grow. So fast you know you see the organic growth is.

Extremely healthy so I don't really worry when I have so much new business coming in and customers are choosing us.

You know to supply them can handle a little expense.

Headwind and.

Kaleibanya: It just felt as Chris uses the word, you know, a little funky. It was softer than we'd expected, but overall, our organic growth has been, you know, very solid. The main issue for us in the near term has been on the expense line related to the growth related expenses. So, you know, raising our revenue guidance is a combination of the strong organic growth that we've seen. We reported, you know, 9% case growth, double digit, you know, new customer and placement growth.

I'm glad summer's over I love summer, but it was a very strange summer you know all we kept hearing from you know, our our better customers where their.

Their customers were in Europe.

So it it was still that revenge travel I think you know you look at all the airlines and everything that was happening at the airports with the unbelievable exit as of Americans going to Europe and everywhere else they were going so.

We felt it was just still a rebalancing from from Covid, what we what we felt we saw during the summer and as we started getting into September we saw a big normalization again.

Kaleibanya: So, we've been organic growth hasn't been our issue. It's really been the growth profit margin, headwind that we had during the short couple of months in the summer, as well as the expenses. Okay, and can you, can you help maybe quantify some of these expenses here, whether it's, I heard you call out really facility expansion, integration, insurance, maybe just give us some dollar amount to work with in terms of how much that is pressuring this year, how much of those continue into next year when we should start to see those cycle.

What kind of forecasts, we had and it continued into October and hopefully it continues for the rest of the year and it is going to be a pretty strong season.

[noise] Kelly, we lose you.

I'm here can I get that.

About that.

The fourth corner.

Your your gross margin guidance.

<unk>, a pretty wide range with the low and kind of client pretty significant deceleration gross margin.

Kaleibanya: Can you help us kind of work through the math here on that? Yeah, I mean, on the full year update on a full year basis, you know, it's pretty much the impact of the summer is about, you know, as I mentioned, 10 or 12 basis points, and the impact of the growth really to expenses about the same, about 10 or 12 basis points, so, and then you had heartiest solution being about, you know, 10 or 15 basis points, you know, that'll take you from 6.1% down to 5.7%, which is the midpoint of our guide.

This map correctly, so is that is that.

Possibility it sounds like what you're saying <unk> I'm sorry.

Encouraging at this point, but maybe just walk us through.

Much conservatism isn't there a symphony.

Uhm faster that that'd impact press margins are you just trying to lose some some questionnaire.

I think it's more just getting to the full year guidance I mean, there's probably what 10 or 20 basis points gap. There. So I don't think there's anything significant there I would say, we generally have a little bit stronger gross profit margins versus the prior three quarters in the fourth quarter.

Kaleibanya: You know, Chris mentioned a number of, you know, just highlighted a few of the work streams and projects that we have that'll come to fruition over the next two years. A lot of it is related to consolidating facilities in the Northeast, in the Northwest. We've already consolidated two facilities for past two months into our new facility in Florida. So we have a number of projects underway that the investments we're making in our digital platform will create more efficiencies.

I don't think there's much different I think if you look at our implied guidance.

Full year, what we expect right now our full year gross profit margins will be very similar to last year unless it was a very strong year for us, especially with the back half of the year. So I don't think there's anything specific to call out there.

Kaleibanya: So we'll have some additional rent coming online next year, but we anticipate that those work streams and projects will more than offset that, and so we don't expect to have that level. Obviously, the back half of the next year will be more of a more of a leverage opportunity than the first half just given what we've seen in the back half of this year. I think the frame a little bit more Kelly, you know, we're talking about a few million bucks, right?

Thank you.

Thank you.

Thank you. The next question we have is something kidneys of extra ketchup. Please go ahead.

Alright, Thanks for taking my questions I have a couple on your capital allocation outlook first regarding Capex I'm wondering if you can characterize some of the capex related projects that you were considering that may no longer be on the table will give them a lower target and spent.

Kaleibanya: So you can imagine with I think we had 12 12 companies to integrate in a very short period of time and I think we, you know, maybe just underestimated the amount of like travel, you know, you know, every team has to travel there. We have to set up, we're doing computer integration, you have the IT team, you have the ops team, we have sales training, so a lot of that is a one time, you know, headwind, you know, somebody insurance courses is going to linger, you know, but again, as we, as we start to grow into those buildings, so we open the Florida, which was a tremendous undertaking, you know, it's a most modern building we can't wait to show it off.

You know I don't think it's.

A matter of we removed projects from the future spend it's the combination of we're kind of at the peak of the recent spend the projects that are coming online next year, where we're already spending money on our in our current guidance, we expect to to have obviously higher <unk>.

<unk> and so as a percent of revenue we feel pretty good about you know I think this year, we're probably going to come in somewhere around 1.5% of revenue we had originally forecast closer to 2% so.

So we expect to just kind of gradually bring that down towards 1% and and maybe even slightly lower than 1% beyond that beyond that in 25, and 26 and that'll help us.

Kaleibanya: You know, that cost a was delayed and then it cost other expenses, so you could say those are one time. You know, I think they might be one time, but the account might argue a little differently, so we had a lot of headwinds on the expense side, you know, integrating all those companies, opening those buildings. We did not expect to open another building, you know, between Maryland and New York, so we kind of got lucky finding one, you know, commercial warehousing is a, is a tight market, so if you find something that fits your filters, you kind of had a grab it.

Level up free cash flow conversions, so we can allocate more cash towards the balance sheet and potential share return prepurchase.

Gotcha Gotcha that makes sense.

Perfect and one other you talked about classy problems one of your classic problems historically has been investment into working capital to fund. The just the exceptional growth rate you've had I'm wondering you know as you consider the various levers to boost your free cash flow do you think there's any kind of material operational changes that can.

Can be made to extract cash out of your working capital balance or or are you running not about as lean as you can at this point.

Kaleibanya: So that was a big expense that we, we didn't see coming, but we're very lucky we got the building, you know, we're getting close at opening up our Richmond building and Northern California, due to COVID, that building was heavily delayed. Once that's open, we're consolidating multiple plants, you know, with taking out, you know, a big amount of duplicate overhead, it's going to allow us to really, you know, continue to be the leader in that market.

I think there's always opportunity immuno teams always work on.

Reducing shrink and and inventory management.

It's a continual process and that we've added some talent in the organization to really help us with that obviously, we we've brought our dsos down from pre pandemic levels were kind of in the in the low thirties and so we continue to work on that I would say the working capital.

Kaleibanya: So I hate to say we kind of have good problems, because we are growing, you know, continuing to grow so fast, you know, you see the organic growth is extremely healthy. So I don't really worry when I have so much new business coming in and customers are choosing us, you know, to supply them could handle a little expense. The headwind and I'm glad summer's over, I love summer, but it was a very strange summer, you know, all we kept hearing from, you know, our better customers were, you know, their customers were in Europe, so it was still that revenge travel I think, you know, you look at all the airlines and everything that was happening at the airports with the unbelievable exodus of Americans going to Europe and everywhere else they were going, so we felt it was just still a rebalancing from COVID, what we thought we saw during the summer.

You know will be will be driven by our growth and so with Ah. We don't expect to grow 30% in 2425 like we're gonna grow this year over 22 or an average of 25% since the pandemic.

That's kind of above average growth and even what we've guided too long term is nowhere near that so you know.

Obviously or working capital was a tailwind during the pandemic and it's been a headwind since we've grown significantly coming out of the pandemic, but we expect that to normalize as we go forward and that's part of the the free cash flow conversion bumped that will expect over the next two years.

Gotcha that makes sense as well very good well I. Appreciate you guys, taking my questions I'll get back to you.

Thanks Ben.

Kaleibanya: And as we started getting into September, we saw a big normalization again, you know, what kind of forecast we had and it continued into October and hopefully it continues for the rest of the year. And it's going to be a pretty strong season. Kelly, we lose you. I'm here.

Yeah No further questions at this time I would talk to <unk>.

Comment.

Yes, well, we thank everybody for joining us on our earnings call.

I think the chef team did a phenomenal job managing through.

You know through the summertime and into the fall.

Jim Leddy: Can I just ask one more about the fourth quarter. Your growth margin guidance seems to imply a pretty wide range with the low end kind of line, a pretty significant deceleration in the growth margin if I'm doing this math correctly. Is that a possibility? It sounds like what you're seeing in the growth margin line is very encouraging at this point, but maybe just walk us through how much conservatism is in there, if there's any factor that could impact growth margins or just trying to leave some push in there.

We don't expect less so we do thank everybody for all their hard efforts and we thank everybody for listening in and we look forward to our next earnings call.

Thank you have a great day.

This concludes today's teleconference. Thank you for joining us he may now disconnect your lines.

Jim Leddy: I think it's more just getting to the full year guidance. I mean, there's probably what a 10 or 20 basis point gap there. So I don't think there's anything significant there. I would say, you know, we generally have a little bit stronger growth profit margins versus the prior three quarters and the fourth quarter. I don't think there's much different. I think if you look at our implied guidance, our full year, what we expect right now, our full year growth profit margins will be very similar to last year, unless it was a very strong year for us, especially the back half of the year. So I don't think there's anything specific to call out there.

Kaleibanya: Thank you.

Ben Killiv: The next question we have is from Ben Killiv of Lake Street, capsule. Please go ahead. All right. Thanks for taking my questions. I have a couple on your capital allocation outlook first regarding catbacks. I'm wondering if you can characterize some of the catbacks related projects that you were considering that may no longer be on the table given a lower target in spend. You know, I don't think it's a matter of we removed projects from the future spend.

Ben Killiv: It's a combination of we're kind of at the peak of the recent spend, the projects that are coming online next year, we're already spending money on or in our current guidance. We expect to have obviously higher revenue. And so as a percent of revenue, we feel pretty good about, you know, I think this year we're probably going to come in somewhere around one and a half percent of revenue. We had originally forecast close to 2 percent.

Ben Killiv: So we expect to just kind of gradually bring that down towards 1 percent. And then maybe even slightly lower than 1 percent beyond that beyond that in 25 and 26. And that'll help us, you know, level up free cash flow conversions so we can allocate more cash towards the balance sheet and potential share return repurchase. Gotcha. That makes sense. Perfect. And one other, you know, you talked about classy problems. You know, one of your classy problems historically has been investment into working capital to fund the, you know, just the external growth rates you've had.

Ben Killiv: I'm wondering, you know, as you consider the various levers to boost your free cash flow, do you think there's any kind of material operational changes that can be made to extract cash out of your working capital balance or are you running that about as lean as you can? at this point. I think there's always opportunity. I mean, our teams always work on reducing shrink and inventory management. That's a continual process. And then we've added some talent in the organization to really help us with that.

Ben Killiv: Obviously, we've brought our DSOs down from pre-pandemic levels. We're kind of in the low 30s and so we continue to work on that. I would say the working capital will be driven by our growth. And so we don't expect to grow 30% in 24 and 25, like we're going to grow this year over 22, or an average of 25% since the pandemic. That's kind of above average growth and even what we've guided to long-term is nowhere near that.

Ben Killiv: So obviously, our working capital was a tailwind during the pandemic. And it's been a headwind since we've grown significantly coming out of the pandemic. But we expect that to normalize as we go forward. And that's part of the free cashflow conversion bump that we'll expect over the next two years. Gotcha. That makes sense as well. Very good. We'll appreciate you guys taking my questions. I'll get back in queue. Thanks, Ben. There are no further questions at this time.

Chris Pappas: I would like to turn the floor back over to Chris Popper for closing comments. Yes. Well, we thank everybody for joining us on our earnings call. I think the chef team did a phenomenal job managing through the summertime and into the fall. We don't expect less. So we do thank everybody for all their hard efforts and we thank everybody for listening in and we look forward to our next earnings call. Thank you. Have a great day.

Operator: This concludes today's teleconference. Thank you for joining us. You right now disconnect your line.