This is the menu you would previously find in the Welcome Window's Quick Setup menu, but with some additional enhancements.
In addition to selecting nRF Connect SDK Toolchain packages, you can now select a specific installation of the Zephyr SDK. If the extension is able to find the required tools in your PATH environment, you can use these as well.
A recent improvement in the way Toolchain Packages are distributed allows the Toolchain Manager to reuse the same toolchain bundle with different version numbers. This previously interfered with VS Code's toolchain identification scheme, but this has now been fixed.