CHEF - NASDAQ

Good day, and welcome to The Chefs' Warehouse First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Alex Aldous, General Counsel. Please go ahead, sir.

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO and Jim Leddy, our CFO. By now, you should have access to our first quarter 2023 earnings press release. It can also be found at www.chefswarehouse.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 and similarly titled non-GAAP financial measures used by companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our 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 undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our first 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 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 in the upscale casual to 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 facility investments, consolidation and operational technological improvements. A 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 21.2%, placement growth of 18.7%, and specialty case growth of 16.8%. Organic pounds in the center-of-the-plate were 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 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. In late January, we added Mike Hudson Specialty Foods located in the Napa Valley region to our Northern California business. Additionally, during the second quarter, we acquired Greenleaf Produce & Specialty Foods. Greenleaf is located in Brisbane, California and provide Chefs 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 in synergies across many of the vibrant markets in the region. In late March, we closed the acquisition of Hardie’s 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 Hardie’s 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 Brother's process operations located in Dallas. Together and with a continuous focus on investing in people and facilities, the Chefs' Warehouse, Allen Brother's and Hardie’s will be a triple force of unparalleled quality and uncompromised service, which will benefit our customers in Texas and accelerate 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 phase move in process into our new 200,000 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, synergistic growth with our key categories and processing operations in one locations with ample room to add fold-in acquired growth for years to come. As we are closing on a six month 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. CME's 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 everyone of our 4,000 plus team members for their dedication and commitment to excellence that drive 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. Whether it is in actions around our workplace environment, our employee benefits, talent development, and training and investing in our team members career path, we aim to excel and surpass expectation as a true employer of choice. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended March 31, 2023, increased approximately 40.5% to $719.6 million from $512.1 million in the first quarter of 2022. A growth in net sales was a result of an increase in organic sales of approximately 17.1%, as well as the contribution of sales from acquisitions which added approximately 23.4% to 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 of 3.2% in our center-of-the-plate 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 has continued to moderate, we remain focused on driving gross profit dollar growth, which allows us to improve operating leverage as we grow at scale Chefs' Warehouse. Selling, general and administrative expenses increased roughly 41.8% to $156.1 million for the first quarter of 2023 from $110.1 million for the first quarter of 2022. The 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 $6.3 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 $0.5 million for the first quarter of 2023, relatively unchanged versus the first quarter of 2022. Our GAAP net income was $1.4 million or $0.04 per diluted share for the first quarter of 2023, unchanged compared to net income of $1.4 million or $0.04 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 $21.5 million for the first quarter of the prior year. Adjusted net income was $4.6 million, or $0.12 per diluted share for the first quarter of 2023, compared to $3.6 million or $0.10 per diluted share for the prior year first quarter. Turning to the balance sheet and 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 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 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 $207 million. Regarding our updated guidance, please make note of the following from modeling purposes. We currently expect interest expense for the remaining three quarters of 2023 to be approximately $11 million per quarter on average. Similarly, we expect depreciation and amortization to 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 expect our 2023 second quarter and fourth quarter adjusted EBITDA 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 dilutive for the full year, and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count for the full year. Thank you. And at this point, we will open it up to questions. Operator?

We will now begin the question and answer session. [Operator Instructions] And the first question will come from Alex Slagle with Jefferies. Please go ahead.

Hey, good morning, congratulations. I wanted to ask on the acquisition, I wonder if you could talk a bit more on the synergies and how these acquisitions fit into your growth strategy. I mean, from the outside, these look like really great opportunities, very good fit for Chefs. Just curious on the background how these transactions came about, separately, if you could provide any thoughts on how much of the increase in the sales and EBITDA guide these contributed verse maybe the 1Q upside and 2Q quarter to date trends?

Yes. Sure. We'll break it up. I'll take the beginning of that one. So, Greenleaf in San Francisco, we know this company for over 14 years. They've kind of been growing side-by-side with us, more on the produce side, and they eventually got into selling more specialty. Ironically, we tried to buy them, I think it was 14 years ago when they first traded to this group. And they've done a marvelous job. Their reputation is as the high end best produce in the San Francisco region. So we've always admired them. And the opportunity to have them join the Chefs Group. As we build out, they have a whole Bay area, which is a very big business for us between our Allen Brother's Steak and Seafood business there that's over 200 plus million in our Chefs' Warehouse business. Our reach, we go all the way to Tahoe to Sacramento. We do the whole Bay Area. San Francisco's 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 out to Tahoe down to San Luis Obispo to Monterey. So, now being able to start to synergize with Greenleaf. We really think we can help grow their produce. And we think that the customers that don't overlap, we could start to sell them a lot of our proteins and a lot of our specialty items. And long-term, we love the brand. We could see extending the brand down into Arizona, San Francisco -- I mean, LA and Las Vegas, like we're doing with a lot of our other category expansion. So it creates a very dynamic selling environment and 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 Hardie's at all?

Yes. Once you do with San Francisco and I'll go back to Hardie's.

Sure. Yes. So overall the combination of Hardie's and Greenleaf and the other kind of small tuck-ins that we completed in the first quarter, added about the incremental revenue added about 12% to our year-over-year top line growth. So, I think our prior guidance was 13% to 14% year-over-year top line growth. Its now 25% to 26%. About 10% of that is M&A and an additional 2% of organic growth. So, on a full year basis now of that 25% and 26% growth, 18%t is combination of M&A wrapped from last year and the incremental adds from Q1 and the recent Q2 M&A and about 2% of incremental organic growth. So going from kind of 6% to 7% 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 M&A and about 30% is the incremental is from additional organic growth and that includes the strength we saw in Q1 and then some adjustment for the remainder of the year.

So, switching to Texas, the Hardie's acquisition is something again we've been looking at for quite a while a few years now. We've built 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 growth, a lot of companies move there. People are moving there. There's a lot of wealth. And there really isn't anybody like Chefs' Warehouse. So, we opened our Allen Brother's facility where we're 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 Hardie's kind of gave us that reach. They touch every market with size. So they had the – I would say, the most important thing I'm looking for is people and routes and they gave us a lot of that. So with their introduction, into all the major cities and major accounts, we think we can accelerate the growth of selling more specialty and Allen Brother's. And I think it's going to work out really great for our expansion plan. So we're really excited to have the Hardie's 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 a lot of hospitality is challenged. On labor, having more solutions, you 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 a follow-up, if you could talk about some of the trends you saw through the quarter and what it looked like into April? It sounds like it was a pretty gradual build through March from the commentary. But any thoughts on how it trended into April underlying traffic trends across your customer base if anything's changed?

Yes. The first quarter was kind of as expected, maybe a little bit stronger than expected. I think January and February were good months for January and February. Obviously, you're coming out of the fourth quarter, your strongest month in December and you kind of 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 late February and early March pretty significant weather events in the northwest and in our Northern California markets. There were certain days where to certain regions we couldn't actually deliver. But that really didn't impact us materially in terms of the overall business and the strength of customer demand. April has been a good month. It continues to build seasonally. There was some noise around the calendar with Easter being a different week and school vacations being a different week. But other than that, April seemed to be a pretty decent month.

Thank you.

The next question will come from Peter Saleh with BTIG. Please go ahead.

Great. Good morning and congrats on another great quarter. Given the news this morning of Darden buying Ruth. I was just curious if you guys care to comment -- if you guys do any business with Ruth and what your relationship is with the fine dining division over at Darden?

Yes. I'm sorry. Who did Darden buy today?

Ruth's Hospitality.

Ruth's Chris.

Oh, they bought Ruth's Chris? Didn't hear about that.

Yes, we didn't hear that this morning.

That was a bit before you guys came on. I mean, I don't know if you guys care to comment. If not, we can just move on to something else.

Yes. Again, we really don't do much with Ruth. I mean, great business. But our focus is again more say, thousands of independent restaurants and smaller groups around North America. So Darden, we do business with Darden. By accident, we do business probably with everybody. But again, it's not our real focus, not the growth market that we really target. We'll do business, but again our focus is with over 1000 people in sales, we're knocking on doors and doing what we do best.

Understood. Okay. And then just I noticed that inflation has moderated a little bit here, 4.4% for the quarter. Any thoughts on the inflation on a go forward basis for the rest of the year? And 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 and/or potentially deflation can have an impact on your margins. Just any thoughts there would be helpful? Thank you.

Yes, sure Peter. Yes. I think inflation has played out kind of the way that we expected and I think a lot of the industry expected. Obviously, 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 2022 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 center-of-the-play prices were fairly flat sequentially. So, I just think that we're returning to more normal inflation dynamics. And 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. Product mix, there's the inflation and 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, our guidance implies that we have a nice growth rate gap with gross profit dollars and managing our OpEx efficiently and effectively.

Great. Thank you very much.

The next question will come from Kelly Bania with BMO Capital Markets. Please go ahead.

Good morning. Good morning, Chris and Jim. Thanks for taking our questions. Jim, I just wanted to go back to that comment about the focus on the gross profit dollar growth that we're just talking about here. I think you made a similar comment several months ago about how maybe the industry shifted, a little bit away from percentage towards focusing on gross profit dollars, particularly as this inflation moderates. And I was just curious if there's any process or procedures that you've changed that maybe support that the whole organization kind of focusing on the dollars, anything on pricing or compensation that you've changed or is this just consistent with how you've always kind of managed the business?

Yes. Good question, Kelly. I mean, it's pretty consistent. I think as you go up and down, first of all, we've never had like 25% inflation overnight. So, we are in uncharted territory. But I mean, you got to respect competition and you got to respect 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 really – if you were making 30% on a $30 box and now that box is $60. You don't really need – we need to make 30% to make more gross profit dollars and get a leverage on your overhead. So, each of our managers, every city we do business with is a little different, the mix is a little different. So, we're very margin focused. And you're correct. We look at the way we incentivize our sales teams. And it's a mix of margin, it's a mix of gross profit dollars. It's a mix of gross profit dollars per drop, right? I mean the costly part of the business 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 the business and the drop size and the mix and we're continuously trying to align the focus of our sales team with the focus of the company and meeting our goals. So, if you start to see deflation, which we have started to see in certain categories, the shift could be more on gross profit margins again, right. So, if 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 in margin. So the focus goes a little bit more in margin than when it's on the way up. And you're just saying, the focus is more on gross profit dollars. So, I think it's a constant captain at the wheel in these departments managing to get the kind of bottom line that we need to run the business. And at the same time, not allow too much competition to sneak into your business, because maybe you're speeding a little bit too much.

Okay. That's very helpful. I guess also, can you touch on Florida and the expansion there And what might be any of the near term costs associated with making the transition versus kind of some of the longer term savings as you build out that new facility in Florida?

Sure. Well again, we are consolidating. So, right now we have multiple small facilities. We ran out of space a long time ago. And the business has been -- the building has been delayed. I would say maybe close to a year. So, we've been operating very inefficiently for a very long time. So right now, we're going to consolidate most of our Northern manufacture -- processing of seafood in that Orlando area down into the major new facility in Miami. We're going to consolidate the meat processing that we are doing in Pompano. Into that facility in Miami, we're going to consolidate Chefs and our overstock warehouses into that facility. So I think Jim could give you more precise numbers, but we're going to eliminate a lot of the inefficiencies. We'll have a higher occupancy course to start with, but the massive amount of opportunity to really grow even faster and more efficiently. I think it's – we're going to quickly eat up a lot of that cost. And it's going to really accelerate growth.

Yes, Kelly, just on the short-term costs, as Chris mentioned. We've modeled the incremental rent and operating costs into our full year guidance. So, from a guidance perspective, there's really -- it's already in there, it was already in there in our original guidance. And where – this is 1 of our first facilities along with LA that we're building a full center-of-the-plate, cut shop [ph] for fish 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 in the next couple of years as we build the business.

Wonderful. And then, maybe just had one more. Chris, I think you mentioned in the release, the impact of new customer openings. And just thoughts on what you are hearing from your restaurant customers and your relationships about how new openings might evolve and what might be a tighter credit environment here?

Yes. I still think that's like a wait and see. We have so many openings. I mean, there's so many core customers opening up more restaurants. So, I think they're well funded. I think where you might see a little slowdown is maybe in some of the new real estate projects where maybe their funding is on hold and that could slow some of the – most of these new buildings are putting a lot of restaurants into them as well as more of a draw to get people into the offices. So, actually, it's something very interesting that's been happening for the last year or two, we're seeing more business. I think what's driving a lot of our success is the increase in more customers spread out especially in Texas and Florida. But as well in New York and California and all our major markets, restaurants are opening where the people are, right? So unfortunately, some of our core city markets where they depend on people coming to the office every day. Those businesses unfortunately are still underwater to a certain degree. They're very busy, three days a week, maybe four, but they're not back to where they were. But the people that are not going in are eaten where they're working or traveling or living and that's driving a lot of new volume to the Chef's' companies. So I think the restaurant tours continue to open restaurants, because that's what they do. And as of now, we have not seen that slow down. So it would be interesting to see a year from now, the tightening of credit if that's going to affect our customer base. But as of now, we're really not seeing it.

Thank you.

The next question will come from Andrew Wolf with C.L. King. Please go ahead.

Thank you. Good morning. So Chris, on Hardie's, kind of I want to just ask you to revisit the value added business they bought in Houston. To find kind of intriguing that, the high end foodservice world is asking for an accepting value added. Idea is which really tells you something, I mean, given that's part of their differentiation is right, Chefs doing their own work. But could you just tell us a little about that business and where you think that's going to trend that kind of outsourcing at least of some of the – what, I guess food preparation or some other kind of value added service?

Yes. Again, when we say a lot of value added, their business is – it has a broader customer base. So, just think of maybe more airline hubs where they're preparing food. Think about more of the high end retailers who are looking for grab and go products to sell that are put together. And it's a sale that if you're going to a market and you're looking for something to serve at home that's quick. So, I think, it's not 100% towards your restaurant customer. Where hotels -- and a lot of it is the hotels and caterers that everyone today is challenged with the workforce. So, it's more processing, right? So it's cutting more fruits and vegetables and products that are faster, peeling onions, chopping, putting them in an environment where obviously they are fresh, and it saves a lot of time, and it allows them to get by without labor. And I think that trend's been coming for a long time, and it's really been of course 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, steak houses. Number one, I think we do a better job at it, because that's all our processing units do, right? We're producing high end hamburgers and we're cutting steaks and we're experts at it. And most establishment don't have that kind of expertise, right? You don't have a lot of trained butchers, you don't have band saws. So I just think it's a gradual evolving industry and it was going that way, anyway and now it's accelerating because of labor shortages. So Hardie's has a great footprint throughout all of Texas. I mean that's what's really exciting to us. It's a great organization. It's been around for a long time, great people, very well run. And the thing that takes us the most time when we are entering a new market is making friends. It's a relationship business. So, you need to build that trust. You need to build the credit history. And having someone like Hardie's joined Chefs in a – maybe the biggest market that we're entering for foodservice that we're not in, that in Florida, gives us access to thousands of customers. And we're starting to build the specialty department to be able to visit all the Hardie's customers and give them support to their existing sales staff. And I think we're going to have tremendous success over the next 05:10 years.

Thanks, Chris. That was actually segue to my follow-up question, which is, as you – the strategy behind Hardie's and some of these other acquisitions, which are more customer focused. Can you tell us in general broad strokes or citing examples, how well is the synergy – the sales synergy between protein, let's say Allen Brother's and specialty both in cross-selling and in consolidating the delivery and getting that delivery synergy where you alluded to already. So, it's an expensive part of the process. I'd love to hear what the future is. Well, where things are going. I know obviously you're building facilities to accommodate that, but there must be something in the field telling you this is working? I'd love to hear about it.

Sure. Great question, Andy. It's a balancing act, right? So every market is a little bit unique. Our major cities are more unique than distributing in the suburbs or in more into little cities. So, I think if you go back, even if you look at some of the questions I've received over the past 10 years, 11 years, it's always been about what makes Chefs, right. So delivering into major cities, most restaurants do not have a lot of space. Space is so expensive that their storage areas, you walk into a $14 million build out restaurant with 300, 400 seats upstairs. And when you go downstairs into their storage area, it's like two closets. So, that's really how we built our original model at Chefs knowing that they needed 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 get it there, so they could prepare for lunch. And that's kind of where the name evolves. Over time as the Chefs' Warehouse, we realized we were their warehouse, right? Fast forward today, as we're combining a lot of these categories, we realized that the cost of delivery – the cost of everything today is astronomical. With inflation in 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 thought process exist today. And where it does kind of our new facilities that we're building, it is a hybrid. I mean, it allows obviously if it's a big market like New York or LA or San Francisco where you have a concentration of many, many clients in a close proximity. We do. We run those trucks separately, right. If you have a $2,000, $3,000, $5,000 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 to do that, it's with drop size. And especially servicing so many hundred seat independent restaurants who don't buy on a daily basis, especially they will buy a few hundred dollars of maybe groceries and a few hundred dollars of produce, combining it, finding a way to get efficient 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 win-win. And you ask, is the cross selling working? I mean, if you look at our growth, I mean even before the pandemic, an industry that was growing organically food away from home, I think it's maybe was 1% overall, if you back out all the M&A from all the big food distributors. And we were growing mid to high single digits in years before the pandemic, obviously now it's been accelerated. It's all coming because we've successfully figured out how to cross-sell. And it's not easy. It's taking us a very long time, but we believe that's one of our most. Our ability to be a lot more flexible. So obviously we're not as nimble as they're really little independents who still exist, 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 delivering food in the best manner. But I think our roots of being owner operators and a lot of the companies that have joined us were owner operators in keeping that flexibility and that entrepreneurial spirit in the businesses of figuring out how to get it done is really driving our accelerated growth compared to most of our competitors.

Chris, thank you for that color. I'll jump back into the queue.

Thank you.

Thanks Andy.

The next question will come from Todd Brooks with the Benchmark Company. Please go ahead.

Hey, thanks. Good morning guys. Two quick questions for you. One, and I don't know what you're looking to disclose here, but on the acquisitions announced, is there any discussion or color you can give us on maybe multiples or deal structures as far as cash upfront versus earn-outs or equity? And then just generally funding this level of acquisition activity?

Yes. Thanks, Todd. So the purchase price and everything will be disclosed in our 10-Q, which will file over the next week or so. But just at a high level that both acquisitions were structured with cash upfront. One with an earn out, the other with a note and that will be disclosed in our 10-Q. But the multiples are right in kind of our sweet spot of kind of six to eight times with a portion of that in earn-out or some other form of deferred payment. And I'm sorry, what was the second part of your question?

Just if this can be funded out of existing availability or if you'll have to access additional avenues of liquidity?

Yes. So if you recall, we upsized our convertible security in December and we put about $120 million of cash on the balance sheet. And that was targeted really specifically towards these two larger acquisitions, Hardie's and Greenleaf. So we funded the purchase price out of that cash and we did an incremental moderate draw in our ABL just to bolster our cash position in the second quarter.

That's great, Jim. And then for either of you, I was very pleased with the update to forward guidance and 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 to at either the gross level or the EBITDA level. I know historically a lot of times we'll acquire a property or 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've already matured that are already at Chef type margins? Or B, does it speak to something within the specialty produce vertical that that's a higher EBITDA margin business than core distribution? Thanks.

Actually just – I'll 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. They are slightly below our average adjusted EBITDA margin, not much. So, there was a little bit of dilution. And because they are highly produced, they tend to be on the higher gross profit margin side and higher OpEx side, but on an EBITDA margin perspective, not much off of our average.

Yes. And Todd, I mean again, I mean, we acquire businesses to grow them, right? I mean, we really don't get much credit for the buy. So, our planning when we're looking at what companies will join Chef. They are long-term propositions. I mean, there's a lot of work to get the synergies and get the bottom line margins that we're accustomed to. So, these are great companies. And their margins are good and their bottom lines are healthy. But over time, obviously, we expect our management teams to integrate, create cross selling, get efficiencies in facilities, the back office synergies, and make them more profitable than they are today. So, I think you're absolutely right the way you're looking at it that the core Chefs business is higher margin or I would say, more money to the bottom line, right, higher EBITDA businesses. So these businesses do bring us backwards. And we're able to make it up, because we continue to get synergies and continue to improve in all our core businesses to be able to acquire these businesses and buy time to really get them up to what we call the Chef level. So we're back in the first innings in these businesses, but I think our the momentum and I call it the machine of Chef is able to carry us and to keep producing the numbers that you're seeing and over time these businesses will just get better and better.

Okay, great. Thank you both and congrats again.

Thank you.

Thanks Todd.

[Operator Instructions] Our next question will come from Ben Klieve with Lake Street. Please go ahead.

All right. Thanks for taking my question and a great quarter guys. Just one from me in the context of these initiations. You guys have been quite public, I think, for a while about your intention to expand geographically into the locations that these acquisitions are and by category. And so, I'm curious now with these in hand, as you look at your portfolio, do you still see kind of California, Texas and Florida to be underserved with your current capabilities and produce as well? Being underserved or do you think that these acquisitions really shore that up and as such you're maybe looking elsewhere for future expansion?

Yes. I mean, I think we're always opportunistic. Again, we're not your typical foodservice company. We're not your typical foodservice expansion type of book where you align that you go into the market and the next to market next to you, which is the most efficient. We always 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 we're looking for and expand over that and that usually takes some time. So, if there was another great business in Texas that fit into Chef, we're going to look at it. In California, we do have a big footprint. We have a large new facility in Southern California that has plenty of room for organic growth. It also has plenty of room to do more tuck-ins. And we know how -- we know what great synergies we get when we are able to tuck-in a business into our existing facility. It's the most creative immediately to our bottom line. So we're going to remain, I think, interested in seeing businesses that fit in, but we do have a great platform right now. Texas, I look at Texas as a $1 billion market for Chefs. So plenty of room to grow organically, and plenty of room to be opportunistic. California, again California is a over $1 billion market probably at this point. But in each region, I think that the business will double and triple. When you look at Southern California, Southern California could be a $1 billion business for Chef. 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 in line.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Christopher Pappas, for any closing remarks. Please go ahead, sir.

Yes. Well, we thank everybody for joining our call today. We thank - we thankful for the questions. It was a great quarter. I congratulate the team at Chefs. They put up a lot of hard work. And it was a very, very busy quarter of acquisitions and moving into new facilities. And I think the numbers speak for themselves that they've 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.