Chefs' Warehouse, Inc. Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to The Chefs' Warehouse Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. 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 second quarter 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we'll be presenting non-GAAP financial measures including, among others, historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our second quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on The Chefs' Warehouse website under the Investor Relations section titled Second Quarter 2023 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our second quarter 2023 earnings call. As we noted during our first quarter earnings report, the strong snapback in demand coming out of the Omicron variant of the COVID-19 pandemic in the second quarter of 2022 provides a difficult year-over-year comparison to the second quarter of 2023. As we had anticipated, for the first time since the onset of the COVID-19 pandemic, second quarter business activity returned to more normal seasonal trends. While April and May were strong months and came in as expected, in June we did experience some impact from the air quality issues from the Canadian wildfires and extreme heat and severe weather across many of our markets. In addition, volatility in certain protein categories resulted in moderate gross profit dollar pressure. Overall, for the quarter, our team delivered strong year-over-year organic revenue growth and adjusted EBITDA and our recent acquisitions performed well. A few highlights from the second quarter as compared to the second quarter of 2022 include 8.1% organic growth in net sales. Specialty sales were up 11.4% organically over the prior year, which was driven by unique customer growth of approximately 8.7%, placement growth of 11.9% and specialty case growth of 10%. Organic pounds in center-of-the-plate were approximately 5.9% higher than the prior year second quarter. Gross profit margins decreased approximately 43 basis points. Gross margin in the specialty category decreased 70 basis points as compared to the second quarter of 2022 while gross profit margins in the center-of-the-plate category decreased 174 basis points year-over-year. Jim will provide more detail on gross profit and margins in a few moments. In addition to providing the quarter results and the update to our 2023 guidance, we thought it would be helpful to share with our team members, shareholders, customers and suppliers as well as all interested parties our 5-year goal to leveraging the significant investments we have been making in infrastructure, capacity expansion, strategic acquisitions and geographical growth. Please refer to the slides posted on the Investor Relations section of our website at www.chefswarehouse.com. Please refer to Slide 1. This is The Chefs' Warehouse today. We have grown from approximately $1.6 billion in revenue in 2019 to an estimated $3.3 billion based on the guidance we updated and raised today for 2023. Along the way, we have grown our truck fleet to over 1,000 and we now operate out of 51 distribution centers across the U.S., Canada and the Middle East. In the past few years despite the impact of COVID; we continued to invest in facility expansion, new market entrance, product category growth and most importantly, key talent. We expect to leverage these investments into profitable growth as part of our 5-year goals and beyond. Please refer to Slide 2. Our capital allocation is primarily focused on creating capacity expansion in high-value markets. We expect to drive incremental operating leverage through organic growth, technology and process improvements to drive ongoing improvement in operational efficiency and investments in an easier and enhanced customer experience via continual development of our digital customer-facing platforms. We expect the growth in capacity from the infrastructure capital deployed from 2019 to-date combined with the projects coming online over the next 24 to 36 months to create approximately 60% growth in capacity. These include our recent projects completed in Southern California, Florida and Texas as well as projects underway in the United Arab Emirates, the U.S. Northwest, Northern California, and Southern New Jersey to serve the Philadelphia region and optimize our distribution footprint in New York to the Mid-Atlantic. As we grow in scale, we expect to see the benefits of these investments as we target $5 billion in revenue and $300-plus million in adjusted EBITDA over the next five to six years. Additionally, we anticipate strengthening free cash flow as a percentage of revenue allocated to CapEx gradually moves from 1.5% to 2% range down to 1% to 1.5% range over time. If you refer to Slide 3, we are carrying certain cost increases associated with these investments in the near term. It is important to note that despite this, we have delivered the first half of 2023 adjusted EBITDA growth of approximately 25% over the same period in 2022 and our full year guidance implies a similar year-over-year growth rate. As we grow in scale over the next five years, we expect the leverage of these investments along with future acquisitions to deliver economies of scale, continued market share gains and gradually improving adjusted EBITDA margins over this time. The achievement of these goals will depend on our ability to continue to execute on the three primary pillars of The Chefs' Warehouse unique growth model in the food away from home industry. The integration over time of acquired companies, brands and the talent we have added and continue to add across our regions and markets; the cross-selling strategy combined with various levels of operational synergies we employ to drive acquired adjusted EBITDA margin higher over time; generating operating leverage as we grow organically into the significant capacity creation we have invested in the last few years and we expect continue to add to key markets. We remain focused on developing, promoting and adding the best culinary expertise and operational talent in the industry. The investments we are making combined with our three pillars of growth provide our teams with the right platform to enhance and grow The Chefs' Warehouse business model forward. Focused on our shared vision to be the number one partner for chefs, providing them with the world's finest specialty food products and ingredients, best-in-breed technology and a team dedicated to delivering superior support and service. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity.

Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended June 30, 2023 increased approximately 36.1% to $881.8 million from $648.1 million in the second quarter of 2022. The growth in net sales was a result of an increase in organic sales of approximately 8.1% as well as the contribution of sales from acquisitions, which added approximately 28% to sales growth for the quarter. Net inflation was 3.6% in the second quarter consisting of 5.7% inflation in our specialty category and inflation of 1.1% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 33.6% to $208.4 million for the second quarter of 2023 versus $156 million for the second quarter of 2022. Gross profit margins decreased approximately 43 basis points to 23.6%. Gross profit dollar growth and margins were primarily impacted by year-over-year product mix changes, partially due to the increase in hospitality related business versus the prior year quarter combined with a sharp decline in certain protein category prices during June of 2023. Selling, general and administrative expenses increased approximately 43.8% to $179 million for the second quarter of 2023 from $124.5 million for the second quarter of 2022. The primary drivers of higher expenses were higher depreciation and amortization and higher compensation and benefit costs, facility and distribution costs associated with higher year-over-year volume growth and the impact of acquisitions. On an adjusted basis, operating expenses increased 42.2% versus the prior year's second quarter and as a percentage of net sales, adjusted operating expenses were 17.8% for the second quarter of 2023 compared to 17.1% for the second quarter of 2022. Operating income for the second quarter of 2023 was $25.3 million compared to $27.6 million for the second quarter of 2022. The decrease in operating income was driven primarily by higher operating costs, including higher depreciation and amortization and stock compensation costs associated with acquisitions partially offset by higher gross profit. Income tax expense was $3.5 million for the second quarter of 2023 compared to $6.3 million for the second quarter of 2022. Our GAAP net income was $9.9 million or $0.25 per diluted share for the second quarter of 2023 compared to net income of $16.9 million or $0.42 per diluted share for the second quarter of 2022. On a non-GAAP basis, we had adjusted EBITDA of $51.1 million for the second quarter of 2023 compared to $45.3 million for the prior year second quarter. Adjusted net income was $14.4 million or $0.35 per diluted share for the second quarter of 2023 compared to $20.9 million or $0.51 per diluted share for the prior year second quarter. Turning to the balance sheet and an update on our liquidity. As disclosed in the recently filed 8-K, on July 7, 2023 we completed the sixth amendment to our ABL credit facility increasing the facility line from $200 million to $300 million. Other than a slight increase in the fixed coupon component, terms remained materially unchanged. At the end of the second quarter prior to the July ABL upsize, we had total liquidity of $144.9 million comprised of $59.6 million in cash and $85.3 million of availability under our ABL facility. As of June 30, 2023 net debt was approximately $661.5 million, inclusive of all cash and cash equivalents. Turning to our full year guidance for 2023. Based on the current trends in the business, we are providing our full year guidance as follows: we estimate that net sales for the full year of 2023 will be in the range of $3.25 billion to $3.35 billion, gross profit to be between $774 million and $797 million and adjusted EBITDA to be between $199 million and $207 million. Regarding our updated guidance, please make note of the following for modeling purposes. We currently expect interest expense for the remaining two quarters of 2023 to be approximately $12.5 million per quarter on average. Similarly, we expect depreciation and amortization to average approximately $15 million per quarter over the same period. Our full year estimated diluted share count is approximately 45.7 million shares. For reporting purposes, we currently expect our senior unsecured convertible notes to be dilutive for the full year and accordingly, those shares that could be issued upon conversion of the notes are included in the fully diluted share count. Thank you. And at this point, we will open it up to questions.

The first question we have comes from Alex Slagle from Jefferies. Please go ahead.

I wanted to ask on the guidance and the cadence of margins this year and with the second quarter back to normal seasonality and EBITDA margin sort of falling right into that range. As I look ahead to the 3Q and think about the typical 5%, 6% EBITDA margin we've seen in the past suggests a pretty big 4Q to get to the guide. So perhaps just some thoughts on that? And I guess also with the Middle East having a different seasonality than the U.S. business, just if that plays any part into the mix?

Thank you for the question, Alex. Yes, I believe the two significant acquisitions we made during the quarter, along with the seasonality of Chefs' Middle East, will have a notable effect on the third quarter. Firstly, the second quarter results were in line with our expectations, as we had projected growth in the low 6% range and fell short by about 20 to 30 basis points. We discussed several factors in June that slightly affected our margins, but overall it was a very strong quarter. Looking ahead, I anticipate the third quarter will operate more normally, but those three acquisitions will enhance our performance compared to previous quarters.

Okay. That makes sense. And you noted the June activity was a little different and impacted by that smoke and the heat waves in some of the regions. Outside of that, did you see any signs of incremental pullback in demand or a change in trade down dynamics?

No, I believe we had a very strong quarter with 8% year-over-year organic sales and volume growth, along with moderate inflation. The main impact came from a sudden decline in certain protein categories in June, which slightly affected our margin. We also dealt with overhead expenses that, when compared to last year's operating leverage, led to a noticeable difference in the percentage of revenue allocated to operating expenses. These factors combined to slightly affect the EBITDA margin in the quarter, mainly due to the events in June.

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

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

It was an unusual quarter for protein sales. The number of animals coming through the system indicates that there aren't enough cattle available. As a result, prices are expected to stay high and may continue to rise over the next few years. We've discussed this trend in previous calls. Recently, there was an unexpected shift in the market that affected some of our protein margins, surprising everyone, including us. This situation led to some margin compression. However, as Jim mentioned, our performance was largely in line with expectations. We had a solid quarter with strong organic sales, successful placements, and customer growth. It was a strange quarter, especially coming into July with extreme heatwaves that caused some business disruptions due to smoke from Canada affecting outdoor dining. Our team did a great job capturing as much business as possible. Overall, our customers are seeing increased spending, and there has been a notable rise in travel, particularly overseas, which saw reports of up to 200% increases in travel. Many affluent customers are traveling again after being restricted due to COVID. Considering all these factors, it was a decent quarter, despite some challenges in the protein market.

Andy, I want to emphasize that it’s important to view the quarter in the context of the first half of the year, combining Q1 and Q2 compared to last year, as well as considering our full year guidance. We did not set the guidance based on achieving the same profitability as last year. Last year's second quarter experienced an exceptional combination of high demand, significant price increases, and excellent operating leverage. Therefore, the quarter performed within the range we anticipated. When considering the first half of the year, we saw 14% year-over-year organic growth for the first six months and 25% year-over-year adjusted EBITDA growth, which aligns closely with what our full year guidance suggests. The discrepancies in comparison have likely led to some confusion as we moved into the first half of the year.

Okay. That's really helpful. I'm going to use a tortured analogy or metaphor, but has the smoke cleared on the beef market in the outdoor cafes?

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

It seems that the unexpected situation in the beef market is what contributed to your performance being slightly below your budget. Is that a more accurate explanation compared to the impact of demand disruptions caused by the weather? I'm just trying to understand.

Yes, I would say that's true. We expected our adjusted EBITDA margin to be about 20 to 30 basis points better than what we delivered, which amounted to a couple of million dollars. The consensus models had us close to 7%, based on last year's performance, but we didn't anticipate achieving that within the context of our full year guidance.

That's completely understandable considering how strong last year's second quarter was. I would like to ask a follow-up question related to what Alex was inquiring about regarding the guidance for the second half. Sales are performing well, even with the disruptions in June compared to my expectations. I'm more concerned about the margins. Should I assume that to achieve your guidance, there will be a certain balance? I realize you want me to view it in halves, but in a more immediate sense, will the gross margin improve a bit more because of the hiccup in the second quarter, or will it be more of a balance between gross margin and cost structure?

Yes, it's going to be a balance, Andy. We don't provide guidance by quarter, but I previously mentioned changes in seasonality due to our three large acquisitions. Typically, our third quarter would show a slightly lower adjusted EBITDA margin compared to the second quarter. Since we undershot a bit in the second quarter, we expect the cadence to be more normal. For the fourth quarter, we anticipate a stronger performance, assuming demand remains stable, which is consistent with the trends of most food distributors. The guidance reflects what we expect for the second half, and that hasn't changed.

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

I wanted to start by asking about the hospitality business. I understand this segment was one of the last to recover after COVID. What are you observing there? Are the hotels and customers you serve now equipped with the labor necessary to reopen and provide enhanced service? I'm trying to gauge the pace at which this industry has bounced back.

I believe it's on the mend, but it's not fully recovered. The situation varies by region and specific cities, such as Las Vegas. Currently, feedback from our customers suggests that after last year's unusually busy period when everything reopened, we are seeing a return to normalcy, although there seems to be excessive travel overseas affecting their clientele. For instance, Miami Beach was one of the few places open in the last few years, attracting many visitors, but this year, it appears that people are choosing to travel abroad instead. This shift is allowing them to rebuild their labor force, but they are still facing challenges. Certain customers report they do not have enough staffing to meet full demand. Additionally, we've noticed a trend where they are maintaining higher prices. Although Napa Valley typically sees less tourism from Monday to Thursday, weekends still draw significant crowds. They are keeping prices elevated to protect their profits, and there are sufficient customers willing to pay these high rates. From my perspective, particularly in the high-end market, the rates for midweek stays in Napa Valley are quite steep, and the area is less busy than it was last year. Overall, it seems that spending is becoming more dispersed; some areas are exceeding expectations by 20%, while others are falling short by 10%. From our airport customers, we hear that outbound travel is thriving, but inbound travel has not yet returned to pre-pandemic levels.

Great. And then just on the 2- to 3-year targets that you guys laid out here on the adjusted EBITDA, can you maybe talk about some of the factors that would determine whether you come in at the low end or the high end of that EBITDA margin target? If you make more acquisitions, do you expect it'll be closer to the low end? If you mean less, you'll be at the high end? Just trying to understand some of the factors that will drive us either closer to the 6.25% or the 7%.

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

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

I wonder if we could talk a little bit about expenses for the quarter, just how that came in relative to your plan. I think guidance would suggest that the back half expense dollars need to come down and just curious what buckets that would be in. Maybe just help us think through that line item for the next several quarters?

There are a few points to address. In Q1, we generated a significant amount of operating leverage compared to the previous year, leading to strong performance in that quarter. However, the situation was different in Q2 due to the comparisons, which contributed to the year-over-year differences in operating leverage. We completed two major acquisitions of produce companies, one at the end of Q1 and the other at the beginning of Q2, and these acquisitions typically come with higher operating expenses. This accounted for about 20 to 30 basis points of the difference. Additionally, we brought a large facility online in Florida, which is now a factor in our operating expenses. This highlights the overhead burden we are currently managing, which we aim to fully leverage. We anticipate creating 30% to 60% capacity that we will organically grow into over the next few years. In response to Peter's question, this will significantly contribute to reaching our target of 6.25% to 7% in the coming years. These are the main factors to consider, and we expect expenses to decrease in the second half of the year.

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

You have to understand that it's all the acquisitions we completed since the second quarter or since the third quarter of last year. So we did Chefs' Middle East, which is a multi-hundred million dollar company. We didn't have last quarter the three big acquisitions; Chefs' Middle East, Hardie's, Greenleaf; and then we did a couple of smaller acquisitions over that time. We did the Mike Hudson acquisition out on the West Coast, which is a fold-in to our business. We did the produce fold-in last December into our Sid Wainer business in New England and we did the small fold-in in Canada. So there have been some smaller acquisitions that contributed to that as well in terms of the year-over-year contribution.

Yes. But really the organic growth is really driving the top line, Kelly.

I guess maybe just I'll ask another way. So of the announced acquisitions that we've had kind of releases on, has anything changed with respect to your organic adjusted EBITDA outlook for the year?

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

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

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

Okay. Helpful. And maybe just ask a longer-term question just about the new capacity that you're adding, maybe just help us have a little more color on what you're seeing out there in terms of cost and locations and are you finding exactly what you need there or help us just kind of think about how the landscape maybe has changed for some of the costs of these new facilities?

These buildings have been in the works for some time, even before COVID. The Richmond, California building, which isn’t operational yet, had its cost negotiated before COVID. Similarly, the building in L.A. was also negotiated pre-COVID. The new buildings coming online in Florida were arranged before COVID too. The warehousing market is strong, although I should note that it has become quite expensive lately. We're seeing some signs of softness, especially with Amazon subleasing many buildings, which I refer to as the Amazon effect. This trend led to a doubling of warehousing prices near urban areas. The buildings were expensive, but we locked in rates for renting them beforehand. The construction costs increased during COVID, but we're beginning to see some stabilization as supply chains improve. Currently, we have the L.A. and Florida facilities operational, Richmond is set to open next year, and the South Jersey facility is partially open as we complete the work on it. We are excited about adding capacity to drive organic growth and explore new opportunities for integration.

The next question comes from Todd Brooks from The Benchmark Company. Please go ahead.

Just a couple of quick questions here. One is a follow-up on the last line of questioning. Chris, if you look at the Florida facility or maybe the Southern California facility since it's a little more time that that's been up and running, how fast are those facilities opening up what you had sized as meaningful revenue opportunities to grow in those markets? I'm just trying to get a sense if these new facilities come on, how quick is the revenue unlock from the ability to service more customers?

Well, I mean the revenue is unlocked so they're growing faster than most of our other businesses because they were very constrained on the size of their building. So I would say they're living up to our expectation, growing at a very quick pace and really it's the opportunity to do very accretive fold-ins. I've said that I think for the past 10 years if I could do an accretive fold-in every day, I would because they're really low risk because most of what we're taking is the sales team and the increased sales and we're able to really get rid of a lot of the fixed overhead, right? They're old facilities, a lot of routes we're able to synergize by combining routes and that's the way we make money, right? The more dollars on a truck that can go out every day, the more GP dollars that fall to the bottom line. So my expectation is really L.A. will double over the next four, five years. Florida might triple to quadruple. So I think that that's a great expectation and that's a great ROI on building out those buildings.

And if you look at your M&A pipeline of opportunities, Chris, how does that mix out as far as shots on goal for fold-ins in these type of markets versus either new platforms in different verticals or maybe new market entry? Are there a decent amount of bolt-ons that you're always working on or are there more just with generational changes and some of these firms coming out of COVID and just being ready to sell and move on?

As we expect, I mean last year was extraordinarily busy because of all the buildup of COVID of businesses that we had negotiated on. So I think that was a little too frothy. Right now I think we're being more surgical, Todd. Organic growth is our top priority. We have invested in a lot of talent. Gearing up for the Florida building, we've added I would say 20-plus new sales reps to get ready to hit the streets. So we made a really big investment in trying to build up the team to grow organically, which we know is the most profitable growth and there's always bolt-on opportunities and we're always negotiating them. It really comes down to price and I think being patient is prudent at this point. New markets, I mean we're always looking to finish our map, right? We're not in the Carolinas, in Georgia, we're not in Colorado. I think those are secondary as far as the importance. I mean if there's something great, we've always been opportunistic. But really driving more business into Texas facilities right now, driving more business into Florida and L.A. and wherever we have capacity is at the top of the list because that really is where the biggest flow-through for EBITDA will be and that's what we're trying to do right now.

Yes, I think the inflation outlook entering this year was kind of plus or minus 5% when you were contemplating the initial revenue guidance. We're two quarters in, we saw continued inflation across both verticals in the second quarter. I guess any surprises about where we've tracked year-to-date from an inflationary standpoint and anything you can share with us on outlook for inflation, deflation that you're thinking about in the second half of the year? Yes, I think it's kind of played out pretty similar to our expectations. I mean obviously we've said earlier on multiple calls before this that we expected the base effect to drive most of the disinflation in '23 just given the extreme inflation that we saw throughout '22 and you've seen that kind of play out. We reported moderate kind of 3.5% inflation. That was primarily offset by the impact of product mix in the quarter. I mean looking forward I would expect that you're starting to see some deflation in some of the larger commodities that kind of went crazy in 2022 and so I would expect that the disinflation trend would continue. So more moderate year-over-year inflation, but sequential kind of slight deflationary to flattish. Sequentially from Q1 to Q2, we saw low single-digit deflation in specialty prices and we saw low kind of single-digit inflation sequentially in center-of-the-plate prices in aggregate. We did have the sharp decline in a couple of weeks in June, but it didn't cause the overall quarter to be sequentially deflationary because April and May were kind of more normal kind of strong months. So that's kind of the way it's been playing out and we would expect that it's going to continue to play out that way.

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

Just a couple of quick ones for me. First of all on the acquired businesses, was there anything that you guys have been surprised with particularly on the margin side from any of these kind of more major acquisitions that you've made over the past few quarters that really came to light in the second quarter?

No, not really. I would say that the two big produce companies that we added, we talked about on the Q1 call that they were slightly dilutive for the full year because they came in at an average EBITDA margin that was slightly lower than our average. But in terms of we did two large acquisitions a few months ago, we haven't really seen anything from a margin perspective surprise us. And our Middle East acquisition, which we've had for almost nine months now, has performed really well and just in line with expectations.

I mean the only real big surprise was how the protein markets behaved. I mean that caught the whole industry really by surprise where the sound is there's not enough great cattle and the market is tight and prices obviously are high and then all of a sudden you had a blip where you had a dip in pricing and everybody has four or five weeks of inventory and now you have a margin blip. So I think that's the only thing really that caught us by surprise that kind of hurt our expectations. I mean we track pretty close to what we expected the quarter to be and really the only big surprise was that blip in the protein margins that kind of caught everybody by surprise.

Got you. That's helpful. And Chris, you just kind of touched on what I wanted to ask next around protein. I mean for a long time these kind of short-term spikes in protein categories has come up from time to time and not a big surprise and, frankly, not much you can do about it. I'm wondering the degree to which you perceive the effect of this to have been contained within the second quarter or if you think this is going to bleed into the third quarter results?

I mean if I was that good, I'd be in Bermuda just playing the commodity markets to be honest with you. It's so hard. I mean optimistically, it should turn. I mean it should turn around and prices should go up and we exceed on our expectations of margin. I mean historically, at a certain point it does turn and the margin goes for you. It's like you're sitting at the table, eventually the cards start to come your way. So we've learned, being in this business now for quite a while, to be patient. The business is strong. I mean the most important thing from my seat is are we gaining customers? The answer is yes. Are we gaining placements? The answer is yes. Do we continue to win when we're fighting for new business and new openings? The answer is yes. So when I see our team performing, at that point I know we're going to get rewarded and obviously we know that there are some bumps in the road sometimes. So overall I think the team did a great job. And the protein market, it could be very surprising sometimes when you speak to the packers. So overall I think prices have to go back up because there's just not enough animals. Right now it seems like the animals that the farmers own are very expensive to bring to maturity and they want to get paid for them and packers are waiting for prices to go back up before they start to kill more animals than they're killing right now waiting for prices to go back up in the street. So it's kind of a cat and mouse game.

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

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

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