Earnings Call Transcript - CHEF Q1 2024

Operator, Operator

Greetings, and welcome to The Chefs' Warehouse First Quarter 2024 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 proceed.

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

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and Jim Leddy, our CFO. By now, you should have access to our first quarter 2024 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 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 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 the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Christopher Pappas, Founder, Chairman and CEO

Thank you, Alex, and thank you all for joining our first quarter 2024 earnings call. First quarter 2024 business activity displayed typical seasonal cadence as revenue trends coming out of January increased steadily in February and March. Our business units, international and domestic, delivered strong new customer and placement growth during the first quarter, and aggregate price inflation continued to trend in the low-single-digit range. I would like to thank all our Chefs' Warehouse teams, from sales and operations to all the supporting functions, for delivering a great start to 2024. As we head into the second quarter and the rest of the year, I would also like to recognize our customer and supplier partners for their support and confidence in our people, the diversity and quality of products, and our high-touch, flexible distribution platform. A few highlights from the first quarter include: 8.8% organic growth in net sales; specialty sales were up 7% organically over the prior year, which was driven by unique customer growth of approximately 10.1%; placement growth of 12%; and specialty case growth of 4.6%. Organic pounds in center-of-the-plate were approximately 6.2% higher than the prior year's first quarter. Gross profit margins increased approximately 37 basis points. Gross margin in the specialty category was unchanged as compared to the first quarter of 2023, while gross margin in the center-of-the-plate category increased 19 basis points year-over-year. Excluding the impact of Hardie's, specialty gross profit margins increased approximately 58 basis points versus the prior year quarter. Jim will provide more detail on gross profit and margins in a few minutes. As we move into the next phase of our growth, focused on harvesting the investments we have made over the past few years, our teams are engaged in continual operational improvement processes across our domestic and international markets. These work streams include implementing technology-driven product selection and loading processes in our distribution centers, enhancements to our customer-facing digital platform, as well as our continued consolidation of operation and routes in key markets. A few highlights are: during the quarter, we completed the consolidation of our Foley Fish seafood facility located in Boston into our new Bedford, Massachusetts operation. This move reduces overhead expenses and facilitates improved cross-sell opportunities with our specialty produce and Allen Brothers distribution platform in New England. In Northern California, our project to consolidate multiple protein processing and distribution operations into our new Richmond facility continues to progress. We anticipate initiating operations during the second quarter, with the phased-in consolidation during the second half of 2024 and the first quarter of 2025. We expect to see the majority of operational and distribution efficiencies emerge starting in 2025. In Texas, the integration of Hardie's in our specialty operations continues to move forward. In addition to driving cross-sell opportunities and initiating improvements in operational efficiency, our teams are making progress on capacity optimization in Houston. We expect this will facilitate growth in specialty produce and protein cross-sell to customers in the Greater Houston market, as well as reduced internal transfer costs going forward. These projects, while not all inclusive, are aimed at providing our teams with a continuous and ever-evolving platform for growth and operational efficiency within the unique business model that Chefs' Warehouse provides to the thousands of artisan suppliers we represent and customers we serve. We are focused on continued organic growth and building on our brand as the premier marketer and distributor of specialty ingredients, produce, and value-add proteins in the region we operate. 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?

James Leddy, CFO

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 29, 2024 increased approximately 21.5% to $874.5 million from $719.6 million in the first quarter of 2023. The growth in net sales was the result of an increase in organic sales of approximately 8.8%, as well as the contribution of sales from acquisitions, which added approximately 12.7% to sales growth for the quarter. Net inflation was 2.7% in the first quarter, consisting of 1.2% inflation in our specialty category and inflation of 4.6% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 23.4% to $209.4 million for the first quarter of 2024 versus $169.7 million for the first quarter of 2023. Gross profit margins increased approximately 37 basis points to 23.9%. And our procurement, sales, pricing, and operations teams delivered strong gross profit dollar growth across categories during the quarter. Selling, general, and administrative expenses increased approximately 21.9% to $190.3 million for the first quarter of 2024 from $156.1 million for the first quarter of 2023. The increase was primarily driven by the higher depreciation and amortization driven by acquisitions and facility investments, and costs associated with compensation, including benefits, facility costs, and distribution costs to support sales growth in the current quarter. Adjusted operating expenses increased 23.6% versus the prior year first quarter. And as a percentage of net sales, adjusted operating expenses were 19.3% for the first quarter of 2024 compared to 19.1% for the first quarter of 2023. Operating income for the first quarter of 2024 was $16 million compared to $11.9 million for the first quarter of 2023. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general, and administrative expenses versus the prior year quarter. Income tax expense was $0.8 million for the first quarter of 2024 compared to a $0.5 million expense for the first quarter of 2023. Our GAAP net income was $1.9 million, or $0.05 per diluted share for the first quarter of 2024, compared to net income of $1.4 million, or $0.04 per diluted share for the first quarter of 2023. On a non-GAAP basis, we had adjusted EBITDA of $40.2 million for the first quarter of 2024 compared to $32.8 million for the prior year first quarter. Adjusted net income was $5.9 million or $0.15 per diluted share for the first quarter of 2024, compared to $4.6 million or $0.12 per diluted share for the prior year first quarter. Turning to the balance sheet and an update on our liquidity. At the end of the first quarter, we had total liquidity of $204 million, comprised of $42 million in cash and $162 million of availability under our ABL facility. During the first quarter, we executed the following transactions as part of our progress towards achieving our year-end 2025 capital allocation goals of 2.5 to 3x net debt leverage and repurchasing $25 million to $100 million equivalent outstanding shares. As of March 29, 2024, we repurchased $5 million of our outstanding common shares, resulting in a reduction of approximately 135,000 shares outstanding, and we repaid $6.7 million on the outstanding balance of our term loan. In addition, during the first quarter, we repriced our $270 million term loan maturing in 2029, reducing the coupon from SOFR adjusted for a credit spread plus a fixed spread of 4.75% to SOFR plus a fixed spread of 4%, lowering interest costs by 85 to 90 basis points, depending on the SOFR term selected. As of March 29, 2024, total net debt was approximately $662 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 3.3x as compared to approximately 3.4x as of the fourth quarter of 2023. Turning to our full-year guidance for 2024. Based on the current trends in the business, we are providing our full-year financial guidance as follows. We estimate that net sales for the full year of 2024 will be in the range of $3.64 billion to $3.785 billion, gross profit to be between $867 million and $902 million, and adjusted EBITDA to be between $207 million and $219 million. Please note that for the second and third quarters of 2024, we expect both the convertible notes maturing in December of this year and those maturing in 2028 to be dilutive for reporting purposes, and therefore, we expect the fully diluted share count to be approximately 45.9 million shares for those reporting periods. For the fourth quarter and the full year of 2024, we expect the remaining convertible notes maturing in 2028 to be dilutive and therefore, we expect the fully diluted share count to be approximately 45 million shares for the fourth quarter and the full-year reporting periods. Thank you. And at this point, we will open up to questions.

Operator, Operator

Our first question comes from Alex Slagle with Jefferies.

Alexander Slagle, Analyst

Really strong gross profit. I mean, the best first quarter gross margin, I think, we've seen in like 5 years on an apples-to-apples basis and extends on the momentum you reported in the 4Q. So just kind of curious if you could dig into some of the drivers behind that and maybe what's changed and to the degree some of that's sustainable as we look ahead.

James Leddy, CFO

Yes. Thanks for the question, Alex. I'll start, and I'll let Chris jump in. But, yes, I mean, ever since coming out of the summer 2023, we really focused on gross profit dollar growth and gross profit margin as things normalized coming out of that kind of unusual summer. I think the combination of our growth in digital, providing our sales reps with more tools, more data, and still maintaining that strong sales relationship has really helped us improve margins year-over-year and just continue the momentum that we had at the end of last year.

Alexander Slagle, Analyst

Okay. Yes. Regarding operational expenses, I understand there were expectations of facing ongoing cost challenges, particularly in the first half of the year. I'm curious if this aligns with your expectations based on our report or if there are any other factors to consider, especially in light of what you've observed in the first quarter. Despite the increased operational expenses, our EBITDA margin seems to be the highest we've seen in a first quarter for quite some time.

James Leddy, CFO

Yes. I mean, to your point, OpEx came in where we expected. It's a little bit higher year-over-year, but we expected that, and we built that into the guidance. And that's really mainly driven by all of the facility investments that we made in the last year or two. The main one impacting the first half of this year is we don't lap the Florida rent until the summer. We moved in, in the summer of last year. And then some of our other facility investments, like expansion in Seattle and expansion in the Philly and Southern New Jersey market, we won't lap those rent increases until the back half of the year as well. So that's driving the year-over-year, but operating expenses were right in line with what we expected. And our ops teams did a great job during the first quarter, continuing what they did in the fourth quarter.

Christopher Pappas, Founder, Chairman and CEO

Yes, I think, Alex, just to add to what Jim said. Looking back at the last few years, we've consistently mentioned that we're investing in facilities, systems, and people. We are continually expanding our business development and sales teams. We believe our approach to the market is quite distinct compared to many competitors since we primarily focus on one sector, and we aim to be the best at it. While the economy may experience fluctuations, our objective remains to be the preferred partner for most independent and high-end restaurants, and we believe this will lead to positive outcomes for us. Ultimately, we are all influenced by the economic situation. However, our customers might be somewhat insulated, as higher-end consumers generally have more disposable income, which may shield our clientele from current trends affecting other sectors, like quick-service restaurants, where a slight price increase can deter customers. We don't have a crystal ball, but we feel the quarter turned out as we expected, and we obviously hope this trend continues.

Operator, Operator

Our next question comes from Mark Carden with UBS.

Mark Carden, Analyst

So to kind of jump on that last point a little bit. You talked about your customers being a little more insulated economically. Are you guys seeing any changes at all in the competitive backdrop with respect to pricing for distributors? Do you think any segments of your customer set are facing any pressures to lower their menu prices? Or is it just different for you guys overall?

Christopher Pappas, Founder, Chairman and CEO

Yes. I am not sure if I have ever witnessed restaurants reducing prices. It may be possible to see longer happy hours or promotions during weekdays, but it really depends on the region in question. The coastal areas tend to differ from the central parts of the country. We were all worried about the significant inflation over the past four to five years and its potential impact on customer traffic. However, most of our independent restaurateurs are skilled operators who will identify opportunities to provide value for customers who are more sensitive to price changes. Based on discussions with our clients leading up to the call, expectations play a crucial role. In the past couple of years, as we emerged from COVID, there was a noticeable increase in spending among customers who previously may not have dined out regularly, particularly in high-end restaurants like steakhouses. It's impressive to see how many more steakhouses exist today compared to four or five years ago among our clients. We anticipated this growth would start to level off. They have experienced significant growth, and we are returning to a more typical rhythm, similar to what we observed in 2018 and 2019, where certain establishments were achieving 300 seating turns a night and recently saw that rise to 500 turns. No one enjoys seeing a decline in those numbers, but a more normalized flow is preferable. A pace like this for the next 20 years would be acceptable to us. I am uncertain if we will revert to the conditions we observed immediately following COVID. Naturally, the situation during COVID was extremely challenging when all our clients had to close. We are returning to a more stable pace, accompanied by both success stories and challenges. There is a substantial number of new openings, as was expected due to delays from COVID. Consequently, we are witnessing a more balanced market. Customers now have more options available in various neighborhoods and cities, which many of our clients are starting to notice, as competition has increased compared to four or five years ago. We are benefiting from this by attracting more customers. Even though some of our long-standing clients may report a slight downturn, we are seeing growth by filling more seats in similar areas, resulting in additional volume. Therefore, we are optimistic that equilibrium will be achieved. Our responsibility is to present the most appealing offers to encourage customers to partner with us and capture a larger share of their purchasing.

Mark Carden, Analyst

Got it. That's helpful context. And then how is your Middle East business holding up amid some of the continued turmoil in the region? Has it remained largely immune outside of some sourcing adjustments? Or has it gotten any more challenging?

Christopher Pappas, Founder, Chairman and CEO

I believe the main challenge was that the business was performing exceptionally well coming out of the fourth quarter. When we decided to enter that market, we did extensive research, expecting it to become an increasingly popular destination for European and global travelers, along with significant investment from the Middle East, and the business has continued to perform well. The only significant setback we faced was the big storm. Recently, there were heavy downpours that flooded the streets, causing us to lose a few days of business. Additionally, there were some difficulties with product shipments in the Red Sea that posed a challenge, but the management team there is outstanding. They continue to execute effectively, and we're excited about the new construction we've been undertaking to increase capacity to meet the ongoing demand.

Operator, Operator

Our next question comes from Peter Saleh with BTIG.

Peter Saleh, Analyst

Congrats on a great start to the year. I didn't want to ask about the complexion of growth for this year. Your organic growth is a little over 8% here or closer to 9%. I think that's well above like your long-term algorithm, the 4% to 6% organic growth. So can you just help us out a little bit, how do we think about this year? How sustainable is that organic growth rate? And how do we think about organic versus acquisition benefit for the balance of this year?

James Leddy, CFO

Thanks for the question, Pete. In terms of acquired growth, the bulk of it has happened this past quarter. So the two big acquisitions we did last year were Hardie's and Greenleaf from a top line perspective. We bought Hardie's right at the end of the first quarter, and we bought Greenleaf in the middle of the second quarter. So it's really heavily weighted. You see our acquired wrap was 12.7% this quarter, and that will decline significantly. In terms of organic, the mid- to the high point of our guidance implies about kind of in the 6%, maybe 7% organic range for the full year. So it will decline a little bit from the 8%. Now some of that will depend on price and what inflation does, but I think we're comfortable with the guidance right now, and it kind of implies our long-term growth algorithm from an organic perspective.

Peter Saleh, Analyst

Great. And then can you just comment a little bit on the protein market and what you're seeing currently? I think last year around this time, maybe spring and into the summer, there was some volatility that happened. What are you seeing currently? What are the expectations, I guess, at least in the medium to near term?

Christopher Pappas, Founder, Chairman and CEO

Yes, if we were truly adept at predicting commodity markets, we would probably have a trading operation in Bermuda. It's interesting, Peter, because while one might expect it to be predictable, there are always underlying factors that can create confusion in the market. The market behavior is influenced by retail demand. If retail demand slows down, particularly for our products, which are higher-tier choices and a lot of prime items, we do see price decreases. Year-over-year, we experienced some inflation compared to the first quarter of last year. However, we don't take significant positions in the market. We have learned that the potential for profit is limited unless prices fall to a level where we feel secure taking a larger stake. Therefore, we adapt to the market conditions. If customers want us to take a position for them, we can do that, but we strive to avoid the major risk of being incorrect.

James Leddy, CFO

I'll just add that while we experienced some year-over-year inflation, protein market prices in Q1 behaved in line with historical trends. Specifically, starting from the holiday season in Q4, prices typically decline in Q1. Traditionally, you would expect to see them begin to rise again as we approach the summer barbecue season, but that is yet to be seen.

Operator, Operator

The next question comes from Andrew Wolf with CL King.

Andrew Paul Wolf, Analyst

I want to ask also sort of on the organic sales being so much stronger than your competitors and really most of the sector, the restaurants included. How much would you sort of say this is your core customer base is being more well positioned, less sensitive to inflation in their consumer behavior versus just taking share of the business either through better selling or better products and selection, or just more people going up and down the street?

Christopher Pappas, Founder, Chairman and CEO

Yes. Andy, I think a lot is with taking share. I don't want to sound like Rodney Dangerfield; we get no respect being the smaller of all the public companies in the space. But we've invested a lot, people that really understand our business and follow our story. We're not a new business. We're getting close to our 40th anniversary. We know the industry really well. And we've made big bets. We’ve invested in facilities, we’re investing in technology, and we've made tremendous investments in talent. And no one's completely immune to economic cycles, but we made the investments to continue to grow and continue to protect our turf. Our turf is really upscale casual to fine dining, and to be the best at it. And I think, I hate to have a Cassandra’s crystal ball prediction, but doing this now for almost 40 years, I've seen a lot of the cycles. Yes, we do have a piece of our customer portfolio that they are down. They are seeing negative comps. And we kind of expected that. We kind of expected that we’ll continue to go out and they do have a lot of choices, and we go after a huge number of new customers every year to maintain that diversity of super high-end, high-end, upscale casual, and emerging concepts. So we went into produce, I call it our plant-based hedge. We like the business. We bought Hardie's last year to get into Texas, a great company where Chefs' is sizing it. Like we said, we’re going to add more and more products and give their sales teams more opportunities, and we call it more at bats with customers with all the Chefs' products, our over 50,000 items that make us who we are that come from thousands of artisan producers. So I think we expect to continue to grow and outgrow most of the industry. And obviously, there will be some headwinds along the way, but we believe our investments were the right investments, and we expect to be rewarded.

Andrew Paul Wolf, Analyst

I appreciate that. Can I ask another question? It's not really a follow-up. You haven't mentioned labor productivity, or at least I didn't hear it, but in the past quarters, it seemed like you felt positive about it. Can you provide an update on your thoughts regarding hiring, training, turnover, and labor productivity? Additionally, I believe you mentioned plans to invest in automated picking. Although that's a longer-term consideration, how does it fit into your long-term cost structure?

Christopher Pappas, Founder, Chairman and CEO

Yes. It all revolves around people, process, and product. Our employees are our most valuable asset, and we are committed to making our workplace a great environment. This task is always challenging, and while COVID introduced unprecedented difficulties, I believe we are becoming more productive. The team, particularly in the new areas we've invested in, will continue to improve as we enhance our training efforts. It's essential because many individuals entering the industry may not have originally aimed for a career in food service. Unlike professions such as accounting or medicine, our field often attracts people from different backgrounds. We employ many former chefs and hire extensively from within the industry, but for many roles, we are training individuals new to the sector. It's crucial to create an appealing work atmosphere to retain these employees, as it can take years for them to master their roles. Despite the technology we implement, we remain fundamentally a people-driven business. It's a constant challenge, but it's what we excel at, and we are increasingly productive.

James Leddy, CFO

Andy, I’ll just add that when we talk about our 5-year plan and getting operating leverage gradually increasing as we go through the next two to five years, a big part of that is the impact on rationalizing labor and labor costs through consolidating facilities like we're doing in Northern California, we're doing in Florida now. We're doing in Texas, New England, consolidating routes as part of those facility consolidations. And then the tech-related process improvements are really focused on error reduction and a lot on inventory management. And so I think our operating teams and our procurement teams are doing a great job of starting that. Hopefully, we get more benefit from it down the road as well.

Operator, Operator

The next question comes from Kelly Bania with BMO Capital.

Kelly Bania, Analyst

Jim, we're starting to touch on this a little bit, but just was curious if you can update us on the pace and the cost of those facility expansions, whether it be Northern California or some of the others that you have going on. Are those coming timewise and expense-wise on plan and any changes to that outlook for this year?

James Leddy, CFO

There are no significant updates to the outlook. We have some front-loaded capital expenditures in the first half of the year as we complete our construction in Northern California, and we anticipate beginning the gradual consolidation of four different facilities in a few weeks. As previously mentioned, we expect most of the cost savings and efficiencies to materialize in 2025, since we'll be focusing on a careful phased consolidation throughout the rest of this year, managing logistics and servicing customers during this transition. We have mostly completed the consolidation in Florida. Regarding operating expenses, as stated earlier, the main impact year-over-year will be in the first half of the year due to the increased rents incurred last year. We expect improvements in year-over-year comparisons, provided that our top line and gross profit meet our guidance and plan. Essentially, we expect to realize the majority of the benefits starting in the latter part of this year and continuing into 2025 and 2026, which will position us well for generating operating leverage in the next couple of years.

Kelly Bania, Analyst

Great. Can you also just touch a little bit more on the seasonality trends that you're seeing? It sounds like the spring has really trended as expected or maybe a little bit better, but there's always a lot of moving parts in the spring. So just help us understand what you're seeing so far? And any real divergences among geographies that might be of note?

James Leddy, CFO

Well, I think the only thing we would mention is with the early Easter, there was a little bit of noise around the last week of March and the first week of April, but nothing that we would necessarily call out. The rest of April started to build back to where we expected or very close to where we expected. I don't think we see anything going into the summer. Hopefully, we don't have the kind of volatility or significant international travel impact that we had last summer, but obviously, we can't predict that right now. So I wouldn't say there's anything that we would call out right now seasonally other than, as we talked about earlier, there's always concerns about the macroeconomic environment that we're hearing a lot about.

Kelly Bania, Analyst

Okay. That's helpful. And just another one on this SKU count. Obviously, there's been a lot of acquisitions and expansions into new categories, but the SKUs are up to 70,000, I believe, now. What's the right number over time? How do you make sure to balance that selection with the complexity of having more and more SKUs? Just any thoughts on that?

Christopher Pappas, Founder, Chairman and CEO

Yes, the SKU count can be a bit misleading, much like the 80-20 rule, where 80% of the business comes from 20% of the SKUs. We operate a just-in-time process tailored to our independent customer base, which creates significant demand for accommodating the creativity expected by restaurant operators. I believe we excel in this area, thanks to our long-standing experience. As we grow and expand into new territories and categories, the number of SKUs is likely to increase. We are focused on ensuring that we can meet demand while maintaining discipline to avoid waste. The rise in SKU count is primarily due to our expansion across various categories. While we strive to offer the necessary range of products without too much duplication, I would advise against being overly concerned about the growing number of SKUs.

Operator, Operator

The next question comes from Ben Klieve with Lake Street Capital.

Benjamin Klieve, Analyst

A couple of quick ones for me. First of all, Jim, I appreciate your comment that CapEx this year is going to be front-loaded, Q1 as a percentage of sales of 2%. But I'm hoping you can elaborate on this a bit in some way, full-year CapEx expectations, perhaps your expectation for the range of CapEx as a percentage of revenue. Just kind of some sense of how this line item is going to play out for the balance of the year?

James Leddy, CFO

Thank you, Ben. I believe we will be around 1%, possibly 1.1% or 1.2%, or maybe slightly lower. Most of our capital expenditures this year are focused on two major projects: completing the Richmond, California facility, which is significant, and our expansion in the Middle East for Chefs. The majority of the work on that project will occur in the first half of the year, with some finishing up in the latter half. Additionally, we will have our usual technology investments and maintenance costs. As those two projects conclude towards the end of the third quarter, we anticipate that the second half of the year will show lower expenditures compared to the first half. We’ve guided a CapEx range of $35 million to $45 million, and I expect we will remain within that range. If we do, we should be close to our goal of approximately 1% of revenue for the year.

Benjamin Klieve, Analyst

Great. So there’s kind of a steep decline here throughout the year. That's perfect. And then last one for me, a product-specific question regarding cocoa just going parabolic this year. I know it's not a huge element of your business, but I'm just curious how effectively you guys have been able to navigate this. If this has been any issue in the first quarter or so far here in the second quarter?

Christopher Pappas, Founder, Chairman and CEO

Yes, it's an important topic. The situation in the cocoa market is quite concerning. It's surprising that the demand for chocolate and chocolate desserts remains very strong. We provide a wide variety of choices for our customers, offering many different types of chocolates. I monitor this closely each week, and while there were concerns that people might stop eating chocolate, that hasn’t occurred. There might be some brand switching, but our customers still enjoy making desserts, and the demand continues to be robust.

Operator, Operator

The next question comes from Todd Brooks with Benchmark Capital.

Todd Brooks, Analyst

First question, Chris, you mentioned speaking with several of your customers before the call. I'm curious about the upcoming celebratory season with Mother's Day, Father's Day, and graduations approaching. We also move into a strong period for events during the summer. What feedback are you getting from your customers regarding these market segments and your business?

Christopher Pappas, Founder, Chairman and CEO

Yes. I think that part is unchanged; I’m hearing that events were booked, events are happening. Obviously, we're coming out of nothing happening in COVID. So we kind of expected that. Vegas sounds very strong. Again, the EU sounds very strong. I think there are lots of weddings, lots of christenings, bar mitzvahs, and graduations. So I think the catering side is pretty strong. We don’t hear anything that would cause us to think any different at this point.

Todd Brooks, Analyst

Great. For my second question, I realize we don't want to make too many predictions about inflation. However, based on what I'm hearing from restaurant companies, it seems that inflation may have stabilized a bit more than they anticipated as we entered the year. Jim, you mentioned a 2.7% inflation rate for the first quarter. How are you approaching the inflationary environment as you look ahead to Q2 and the second half of this year?

Christopher Pappas, Founder, Chairman and CEO

Are you saying deflationary environment?

Todd Brooks, Analyst

Inflation.

Christopher Pappas, Founder, Chairman and CEO

Yes. The increase in protein costs from last year resulted in a difference of over one percentage point. Our fresh specialty business contributed about 1.5 percentage points of inflation, which we have observed to be moderating. The primary concern is the labor factor, and I don't anticipate a decrease in labor costs; they seem to be firmly integrated into everyone’s forecasts predicting continued high labor costs. We had some concerns about potential deflation for a time, which is why I inquired whether you were asking about deflation or inflation. However, we haven’t identified any significant factors that would lead us to expect drastic changes in the costs of goods, whether related to deflation or inflation, at this stage.

Todd Brooks, Analyst

Okay. Great. And one final question. The center-of-the-plate pound was very strong in the quarter, increasing by about 6%. Can you provide some insight into that? Are you observing a shift back to beef with the stabilization you experienced, or are other proteins contributing to this growth? Any details you could share would be helpful.

Christopher Pappas, Founder, Chairman and CEO

Yes. We continue to see strong demand across all categories. I initially thought that the rise of gluten-free diets would lead to a decline in pasta sales, but we are actually selling a lot of pasta. We are also selling many vegetables, but our steak sales are particularly high, and we believe we offer the best hamburger available. Chicken sales are also very strong. Overall, we haven't noticed any significant changes in the demand trends we've experienced over the last few years. The demand appears to be quite varied, with a wide range of menu options that people enjoy. We recently discussed whether menus would start to shrink, as many neighborhood restaurants serve the same customers repeatedly. To keep customers returning, these restaurants need to be creative and offer appealing choices. While there are established favorites, customers often appreciate variety. I believe independent restaurants are thriving in this environment, as they continually innovate and keep their offerings interesting for patrons. This trend seems likely to continue.

Operator, Operator

Thank you. At this time, I would like to turn the call back to management for closing comments.

Christopher Pappas, Founder, Chairman and CEO

Well, we thank everybody for joining our call today. Chefs' Warehouse's team is hard at work, and I believe their success is well-earned, and we're hoping for a great next quarter, and we look forward to everyone joining our call again. Thank you very much.

Operator, Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.