Q1 2020 Earnings Call
Thank you for standing by and welcome to the E and F I first quarter earnings call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then T. Rowe Oh, you're Touchtone telephone.
I'd now like to hand, the call over to your speaker for today Mr., Steve Bloomquist, Vice President Investor Relations. Please go ahead sorry.
Good morning, everyone. Thank you for joining us and unifies first quarter fiscal 2020 earnings conference call.
By now you should have received a copy of the earnings release issued earlier. This morning, the press release web cast.
The supplemental slide deck are available under the Investor section of the company's website at Www Dot you identify dot com.
Joining me for today's call her Steve's spinner, our chairman and Chief Executive Officer.
Sean Griffin, our Chief operating officer.
Chris Testa President of unify.
And John Howard, our interim Chief Financial Officer.
Steven John will provide a business update after which we'll take your questions before we begin I'd like to remind everyone that comments made by management. During today's call may contain forward looking statements. These forward looking statements include plans expectations estimates and projections that might involve significant risks.
Certainties.
These risks are discussed in the company's earnings release and FCC filings.
Actual results may differ materially from the results discussed in these forward looking statements.
And lastly, I'd like to point out that during today's call management will refer to certain non-GAAP financial measures definitions and reconciliations to the most comparable GAAP financial measures are included in our press release.
I'll turn the call over to Steve.
Thank you Steve Good morning, everyone and thanks for joining us on today's first quarter call.
These are truly exciting times in the week before Thanksgiving.
You want to fly hit a record day.
In terms of cases and volume.
Moving approximately 5 million cases, representing more than $900 million in sales on a single day and we did it with a high level of service and strong on time delivery performance, despite challenging weather in much of the United States.
In early August we entered the new fiscal year operating an unmatched distribution network that carries the broadest variety of products and services in our industry.
Providing our customers access to more than 250000 skews.
And critical retail services needed to run their operations.
Our new sales structure enables cross selling by creating a singular organization responsible for the entire portfolio.
The cross sell wins to date represent a meaningful portion of total revenue growth and I am really pleased with the progress we're making.
Our business model is providing you went to firewood truly distinct competitive advantages for our customers and our company and with our learnings from the last year and are focused on driving the business forward, we're confident in new enterprise positioning today and for the future.
Net sales totaled $6.2 billion, an increase of $3.2 billion over last year, including an incremental $3.1 billion from conventional.
Which was included for only one week last year.
Legacy you want to find net sales increased 2.8% over last year, the same year over year growth as the prior two quarters.
Led by the supernatural channel where year over year sales increased 8.2%.
The year over year growth in our supernatural channel has moderated relative to prior quarters as weve cycled some of the supernatural initiatives. We've previously discussed most notably the expansion of our wellness category.
We're pleased with sales in our largest channel the supermarket channel, we're quarterly trends, excluding conventional had been improving and have now turn positive driven by both higher volumes with existing customers.
As well as the addition of new customers on the natural side of our business.
Our larger customers continue to outpace the balance of our business that's wholesale sales to our top 25 customers increased 5.4%.
Excluding our largest customer wholesale sales at the next 24 customers increased by 4.1%.
Driven by formats that resonate with their shoppers and I'd also like to note. That's seven of our top eat customers now use you want to fight as both their primary natural unconventional distributor.
Operationally, we made good progress this quarter on several distribution center network projects designed to improve efficiency service and capacity in several key geographies in the first quarter.
We just continue to operations in three distribution centers in the Pacific Northwest and we're close to finalizing the consolidation of five distribution centers into the new distribution center in Centralia, Washington, and or expanded distribution center in Richfield, Washington.
In Northern California, we're consolidating our dedicated wellness distribution center in Auburn, California into our Gilroy, California operation.
Finally further down the west coast in Marino Valley, California, We're heading approximately 1.2 million square feet of multi temperature capacity to position you want to fight for growth in a highly attractive southern California market, where we see strong growth potential for both adding new customers.
Yes, as well as expanding our offering to existing customers during the quarter, we incurred at an estimated $7 million in cost to consolidate these markets investments, we're making in the future, which will make us the best position wholesaler in the growing California market with an incredible.
Array of products fully representing our built out store.
As we've worked through the period of transitioning these warehouses and bringing others online we've seen solid improvement in key operational and service metrics.
Most of these projects include some level of automation that more efficiently handles slower moving SK use.
With significantly higher Throughputs and higher service levels, we can improve the customer experience, while lowering our cost to serve.
We're pleased with how these projects are progressing and the value their completion will bring to unify.
We did incur some higher operating costs this quarter, which I mentioned.
As we ramped up hiring and training for startup and transitioning distribution center costs, we expect will decline going forward.
From a marketing perspective as I stated earlier. This was the first quarter that our combined sales organization was in place and we began to see the promise of cross selling legacy portfolios into our existing customer base, we expect larger wins will come as we leverage longstanding relationship.
And our newly combined product portfolio.
In the quarter, we experienced a significant uptick of professional services into our existing natural base and the seeding of natural organic products into our conventional customers.
As a reminder, that professional services business includes payment processing.
He was driven shelf management and retail store design and construction.
Cross selling consists of effectively mining our data to identify product in category Boyds.
We continue to believe that we have a large opportunity for selling fast moving natural products into conventional and faster moving conventional rescues as appropriate into natural stores.
With a single National Salesforce and added technology to assist our team. We can identify these material wins for unify while providing a much needed point of differentiation for customers.
Consumer preferences have evolved and our assortment is able to meet those changing eating habits, we're partnering with our customers on opportunities. So that they can keep their assortments current relevant and in tune with the market, which is good for them and good for us our suppliers clearly recognize thats.
Ladies and are embracing our efforts to expand distribution of their products.
Well use a similar approach where appropriate as we pursue new business opportunities.
As I noted earlier, our geographic footprint industry, leading product variety and our scale, our competitive differentiators and our team is focused on showing customers a unified offering will benefit their business.
As we moved into fiscal 2020, we're now in a place where we're focusing on creating a sustainable and solution based supply chain platform and talking less about integration.
We are now operating as one unified.
That's how we think about our business, that's how we discuss and develop our plans and strategy.
And that's how we present ourselves to our customers suppliers and other key constituents.
You want to fly is known in the natural space as being an innovative pioneer and we're focused on maintaining that identity well looking to further expand our broader customer base.
There is clearly a lot happening unify and I'm pleased to say that through it all our operating it service metrics are improving.
Fill rates in our wholesale business have improved by about 90 basis points compared to last year's Q1.
Warehouse productivity on time deliveries in inventory days on hand are all better than a year ago.
A sign of the many enhancements we've made to our network.
As we continue to build and refine our future operating model most of our future incremental synergies will come as a result of either moving onto a common systems or further optimizing our distribution center network. These are more long tailed nature compared to much of the cost reductions and synergies we've realized to date.
We continue to be comfortable and expect to achieve the overall synergy targets. We previously communicated.
Working capital continues to be an important element of how we manage the business and our capital structure, we continually evaluate our working capital position and manage our balance sheet towards paying down debt finally.
Let me provide a status report our efforts to divest retail as you saw in our press release last week, we've reached agreement with three buyers to sell 13 shopper stores in the Washington Baltimore market.
We also announced at four additional stores will be closed.
Well continue to market the remaining shopper stores with several potential buyers.
Oh, we're continuing to market the banner in its entirety.
Have given management presentations to interested parties and the process is moving forward.
Let me now turn the call over to John Howard, Our interim Chief Financial Officer. As you know John has served as the interim Chief Financial Officer Since August and it's an update we're finalizing the search process that includes both internal and external candidates and expect to have that complete in the next 30 days John .
Thank you Stephen Good morning, everyone I will cover our first quarter financial performance balance sheet capital structure and fiscal 2020 outlook, let's start with a 13 week first quarter results, where net sales totaled $6.02 billion, including an incremental $3.1 billion from supervalu for its end.
Solution for the entire quarter this year compared to one week and last year's first quarter.
Steve commented on performance by sales channel, So I'll move to gross margin, which as expected was down 157 basis points compared to the same period last year as a result of adding an additional 12 weeks of supervalu to this years first quarter results.
Excluding supervalu gross margin was flat to last year.
We managed freight expenses and inventory acquisition costs and executed well on certain supplier programs to offset margin rate dilution from the impact of the supernatural growth this quarter.
Inflation in the first quarter was 1.6% largely unchanged from the fourth quarter.
First quarter adjusted operating expense as a percent of net sales decreased eight basis points from last year's first quarter as the mix impact of adding supervalu, which operates at a lower expense rate and a strong focus on managing expenses was partially offset by higher depreciation and amortization expense.
Within our Dcs operating expense improved compared to last year, but were slightly higher than anticipated mainly due to costs associated with starting up and decommissioning several DC as Steve mentioned earlier.
We expect our operating expense rate to improve as we move closer to completing these projects and more fully realize the underlying benefits.
First quarter consolidated adjusted EBITDA was $122 million up from last year's $86 million.
As Steve said this was largely in line with our expectations for the quarter and we remain confident about achieving our full year guidance for adjusted EBITDA and adjusted EPS.
Net interest expense in Q1 was $49.5 million and our average borrowing rate for the quarter was approximately 6.1%.
Q1, adjusted earnings per share was 12 cents, which excluded the following items.
First we recorded non cash goodwill and asset impairment charges of $7.99 per share partially the result of our recent market cap.
Discharge eliminate substantially all remaining goodwill.
Second we incurred restructuring acquisition and integration related expenses of 27 cents per share.
Third we took charges of 24 cents per share related to notes receivable deemed uncollectable due to customer store closures.
These notes were originally issued by Supervalu or businesses acquired by Supervalu to finance the purchase of stores by customers, which is no longer part of the consolidated operating business model.
Finally, we had an additional cumulative 12 cents an expense for depreciation and interest on surplus properties legal reserve charge and store closures within disc ops.
Together with the tax treatment on these items and the GAAP tax rate. These total $7.33 per share which went included in our GAAP results would bring GAAP EPS to a loss of $7.21 per share.
Our balance sheet now reflects the impact of adopting lease accounting standard ASV 842, which brings approximately $1 billion of operating lease right of use assets onto our balance sheet with offsets on the liability side, which I previewed during our last call.
It also includes the final fair value allocation of the acquired Supervalu net assets.
Capital expenditures for the quarter totaled $41 million or approximately 68 basis points as a percent of net sales with the largest spending going towards completing the Pacific northwest consolidation, Steve mentioned total outstanding balance sheet debt and capital lease obligations at the end of Q1 net of cash and cash.
Quick ones and excluding operating lease obligations.
Was $3.11 billion, an increase of $118 million compared to our year end net debt balance and consistent with our expectations.
The increase reflects the typical seasonal build in working capital related to servicing our customers during in November and December holiday selling period, which as Steve stated, we expect will largely reverse in the second quarter as working capital returns to more normalized levels.
Our net debt balance has also been reduced by about $45 million for certain previously reported capital leases that are required to be included within operating leases under the new lease accounting standard.
And finally early in the second quarter, we continued de risking our corporate single employer pension plan through a lump sum offer program.
As a result, we reduced the number of plan participants by approximately 30% and our gross obligation by similar rate utilizing $664 million from plan assets.
We improved the funded status of the plan without you enough I, having to make any cash contributions and we lowered the present value a future estimated PBGC premiums and planned administrative costs paid from the plan by about $7 million.
We expect to take a 10 million dollar noncash U.S. GAAP charge in the second quarter as a result of this lump sum program, but we're pleased with the overall outcome.
Turning to our full year outlook for fiscal 2020.
We used to reaffirm the ranges we provided in October for net sales, which is $23.5 billion to $24.3 billion.
Adjusted EBITDA, which is $560 million to $600 million.
And adjusted EPS, which is a $1.22 to $1.76 per share.
We play in profitability in the first quarter to be the lowest over the year, we anticipate a stronger second quarter with a holiday selling season upon us and we expect cost synergies to continue to build and to see improvement in operating expenses as we begin to realize the productivity benefits from our DC projects.
We're also optimistic about sales trends all of which gives us confidence in our full year adjusted EBITDA range.
As a reminder, the adjusted EBITDA and adjusted EPS guidance includes a full year contribution from Cub.
Should we divest that banner prior to year end will provide an update at the appropriate time.
As Steve stated last Friday, we announced the sale of 13 shopper stores and the closure of four additional stores.
Our 8-K filed that same day outlined $32 million to $42 million in charges, we expect to take as a result of these transactions.
The three buyers will not be operating the stores under the shoppers name and we're continuing to market the remaining shopper stores as well as Cub.
We continue to prioritize debt pay down and expect to reduce net outstanding debt by $200 million to $300 million in fiscal 2020 with a combination of cash generated from operations, including working capital improvement.
And asset sales, including the divestiture of both shoppers and Cub.
Included in this total our proceeds from the sale of owned real estate, including detect coma distribution center as well as several other non operating properties that had been sold or expected to be sold this fiscal year.
We regularly evaluate our capital spending plans and expect full year capital spending to come in at approximately 1% of net sales.
Overall, we're pleased with the first quarter and are optimistic for the balance of the year.
With that let me turn the call back to Steve.
Thanks, John .
Overall, we're pleased with the start to fiscal 2020, while fiscal 2019 was a humbling year for us and we clearly did not perform as we expected to we learned a great deal and achieve significant milestones in integrating the unify and supervalu businesses.
We entered fiscal 2020 in a stronger position and are focused on improving our supply chain operations. John provided an overview of margins and operating expense in the quarter and our teams are doing an outstanding job managing both.
We know that to drive future profitability, we need to take advantage and execute upon opportunities to expand margins and lower costs as John said, we offset natural margin dilution in the quarter and believe we have multiple sources available to us to strengthen margins with Workstreams currently in progress.
As we move forward, we have the right strategy in place for unified to capitalize on the shifts in our industry over the near term and the long term we.
We continue to believe that unifies, the best position natural and conventional food wholesaler that has what it takes to sustainably grow the top and bottom lines over the long term in the evolving macro environment and our entire team is focused on executing as.
We continued through the holiday season, and the balance of fiscal 2020.
We remain confident that will achieve the low single digit sales growth guidance, we provided on our last call for fiscal 2021, and beyond which equates to around $500 million to $700 million annually. We foresee this coming from several areas, including cross selling to our existing customer.
Including the build out of relationships historically focused unnatural that are now creating opportunities for conventional contracts.
Adding new customers, who will be attracted to unify unmatched product variety and service offerings, which provide a strong incentive to choose us as their supplier.
Strength in wellness categories, which is on trend with todays focus around better food and healthier lifestyles.
Private brands are what we call brands, plus where we believe we have the best and most comprehensive lineup amongst any of our wholesale peers brands plus is a billion dollar revenue business for us a clear differentiator for unified in an area that we believe we can continue to grow and.
Channel expansion, whereby unify explores all opportunities for growth, including expansion into adjacent customer channels not unlike more traditional supermarkets and natural stores. We believe these related businesses, we get the same benefits and have the same incentive to partner with unify.
In wrapping things up we are optimistic about our future and are only getting started on many the things. We've talked about this morning that will drive our company forward in 2020 and beyond.
With the new year. Our teams are excited they are energized and their focus on creating a better you want to five for our customers shareholders associates and the communities where we operate.
We look forward to updating you on our progress along the way, we'll now take your questions.
As a reminder to ask a question you want me to press Star one on your telephone.
Your your question press the pound key please standby, we compile the Kenny roster.
And your first question comes from the line of Rupesh.
With Oppenheimer.
Good morning, Thanks for taking my question.
I want to follow up on your on your comments by channel I was hoping to get more color in terms of what you're seeing from independent it appears that trend softened this quarter and I was also curious if you look at whether you're supermarket channel independents, where you're seeing more cross selling wins.
Oh gosh, it's Steve.
Checking on the incentive.
Quarter.
Supermarket side, we did have some new business.
That came on during the quarter I think that probably represents a large portion.
The growth in the quarter.
I think independents have been relatively flat I think it looked like they were a little bit down in the quarter.
Yeah.
I think this is the this is the channel that's struggling and this is the place where we were can really help.
Using the professional services that we now have that I talked about in the script the cross selling opportunities.
I'm trying to cross sell and.
The days of just the flat margin at retail.
Over.
They have to be more willing to take.
Fresh products, maybe couple of years ago. They didnt.
They're not going to be competitive.
Actual items.
Throughout every other channel.
And so a lot of time, we're the only wholesaler.
A huge salesforce.
Been trained.
And so I think at some point.
We'll get some positive momentum in the independents, they're a little bit like growth is a little bit like a roller coaster look back over time.
These folks have a lot invested in making their business profitable because.
So.
I have to figure it out.
How can do that.
So I expect that at some point.
Plot.
Okay, and then I guess on it you have got sorry.
You asked about some of the cross selling with this is Chris.
It's really happening across the independence and the supermarket channel. So if you think about the legacy conventional business, which is majority supermarkets. Those are the folks that are now selling our top selling natural items that we've begun to seed in there and on the other side. If you take the natural independence, that's where we're starting to sell.
Me.
Professional services.
Small selection on the conventional items, so it's really happening.
And just from a consolidated perspective. The good news is we now have a really diverse customer base.
So if we get one slightly negative we obviously have one or more that's positive so.
A little bit more immune.
Today from.
In any one particular.
Okay, Great and then then one follow up questions. Your gross margin performance, especially on the unified Godwin I think fairly healthy just given some of the mix headwind.
So just curious if you look for the balance of your what are some of the puts and takes we should do you think you refer it to join up by four.
And then I guess, the supervalu for as well.
So this is John just from from a margin perspective, we are continually looking to drive improvements in that.
From our view as we get deeper into the year, where we're hoping that we'll continue to see that that trend continue that we've seen from Q4 Q1 looking to see that continue throughout the year.
I don't think.
Dramatic sizable uptick as we continue to go through the year finished.
Yes, if you take a look at the components of gross margin.
Doing a lot of work.
Thanks.
Right.
Correct.
And those will continue to serve us well.
Well continue to drive those improvements.
Actually this is Sean if you recall.
Teen earlier.
Yeah.
Some of the negative trends.
Side.
Coming from higher costs so.
I would consider our margin structure stable.
We have reached good stability as we think about what Q2 through Q4 looks like a 20 I think we are today is in the range.
We would expect.
Thank you for all the color.
Okay.
And your next question comes from the line, John Heinbockel with Guggenheim Securities.
So Steve I don't know if you guys track this but if you looked at comparable location drop size.
Change in that.
And tried to adjust for mix right there are different volume customers.
How is that trending.
You know and as you go forward.
What do you think the prognosis is on growth right because that's part of the.
The efficiency equation for you.
Yes, so I don't have that data.
Let me I can tell you that.
As I said in the script. If you look at the top 25 customers I think what you would find is that the average drop in those customers increase.
And.
So it's increasing either because they are taking share from others.
That really interesting data point John is.
When you look at the top customers that are having the greatest yellow grease degree of growth.
Actually by both conventional unnatural from unify.
And so.
Winning in those customers by selling more of the store, whether it be parameter center store hub or wellness store lifestyle brands.
And so.
The average drop kind of runs hand in hand with.
With the overall sales growth because inflation is pretty nominal.
The place, where we can get the greatest upside quickly.
Being successful in the cross selling on the independents.
That's that's who really need to.
The same math would probably apply and that is probably average drop is probably down.
Well.
And if you just remind us if you looked at the profitability of that in turn but not gross but overall profitability of the top 24 take whole foods out versus some sort of your smaller customers.
How does that compare and I guess sort of comes back to yes, you can help the independence.
To some degree but is it was it is is we would it be better to spend more effort on.
Some of the bigger guys that are succeeding in driving a greater share of wallet.
As opposed to try to getting the independence from declining to flat.
Well again.
The economies of scale for wholesale or are the same whether its foodservice.
Retail and yes.
Average drop even.
Even bigger the average drop.
With that or the economies of scale our for us.
Because we can work on less if we're delivering more.
Age old analogy of delivering a full truckload of miles from the DC.
First is working at 40% on $1000 over 800 miles away.
Theres no way that's going to work.
So it's really less about whether its top 25 customer.
It's more about how much free can we deliver to up to a customer locations.
I would also say John that.
We believe that we can accomplish both.
In terms of growing the drop size.
Relationship in revenue top 25 and.
Support.
Speed a natural.
Independence.
And.
In particular on the natural.
And then side.
Notwithstanding the most significant economic metric is drop size.
Distribution business spot as Steve mentioned the service offering.
Puts us in a position where we can.
Play a major role and surrounding the natural retailer.
Services at scale.
To help them handle the back of house and concentrate on their their consumer their customer base. So there are number ways that we commanders and I would just I was just finished here with think about what we're building.
So in the West Coast, let's take Pacific Northwest South to Southern California.
We've now completed the construction two buildings are on our way to completing the construction of two buildings both are over a million square feet.
So on the West Coast, we will have.
250000, skews covering every single category.
Products and services from natural to specialty to protest protein et cetera, et cetera, et cetera et cetera.
No more than maybe 100 miles from the customer.
The only wholesaler to do that.
And we'll be able to put it all in one truck and so when you think about.
What value that brings to an independent.
Specialty.
Supermarket.
That market, it's pretty spectacular.
Okay. Thank you.
And your next question comes from the line of carrying short with Barclays.
Hi, This is Keith Howard on for Karen. Thank you for taking your question.
Thank you for the information about the multiemployer pension liability.
Related to the sale of the 13 shoppers is the.
Pension.
Impacting the sales process and do you expect the actions this quarter to help the sales process.
Shoppers going forward.
Yes, let me try to take a stab at that so.
On the first part of it.
Yes, we're pretty excited about the fact that we've got.
13 so.
As you know, it's pretty heavy left to go through an M&A process, especially when the retail environment is difficult and so we're really pleased with the fact that we've sold 13.
Many of which we will be retaining supply agreements.
So thats terrific.
For that are closing.
I think two we returned to landlords and to the leases expiring, we just didnt renewed.
And so we currently are in the process of marketing the battles stores.
And.
To wait and see how that happens as far as the first question related to the map.
That does add a layer of complexity and does it make it more difficult.
I will tell you that the anticipated cash liability.
It's currently.
And.
Well certainly provide a lot more information about math in our quarterly filing and if there's any specific information that you may want we can certainly handle that.
But.
Does that answer what you're looking for.
Sure, Yes, and then.
Also related to shoppers can you remind us how much.
20 guidance.
Backing.
Related to the sale like in terms of the debt pay down.
Related to the sale.
Right.
So from a debt paydown, we won't discuss that number's attached to it but.
The anticipated.
Net proceeds were baked into the two to 300 million that that we provided at the end of last year.
Okay, and I think you said like a portion of that was going to be funded from cash and then assets.
Is that from other things is.
Yes, exactly is coming from our normal free cash flow that we generate that's coming from some of the asset sales than we have with.
Sites like the coma.
And carbon shoppers et cetera, all of that is baked into that two to 300 million dollar number.
Okay. Thank you.
Your next question comes from the line of Kelly Bania with BMO capital.
Hi, good morning.
For taking my questions.
Yes.
Curious if you could kind of give us a sense.
Total comp growth you called out the 2.8% for.
And if I, but I guess, it's unclear how much of that it sounds like that's significantly impacted by cross selling and.
Do you kind of think about this more as one company.
What is kind of.
Underlying.
Comp growth for the first wholesale.
Well, Hey, Kelly this is Chris.
Because we did not have.
The acquisition Supervalu into Q1 that year over year look is tough to get at right. So we're now one company.
We acquired Supervalu, one week into Q1.
One week left in Q1 last year, so moving forward, we'll be able to provide you a really clean look on year over year.
The 2.8 that you referenced on the natural business.
Some of that comment cross sell absolutely, but a lot of that's coming from as Steve pointed out the growth in our top 25.
There are some retailers with formats out there that are really winning that we're servicing with both conventional unnatural.
And that's that's pretty clean, but look year over year for total wholesale.
It all falls into our guidance for the year on the 23 and half billion 24.3 billion sorry.
That we put out in the we're going to maintain that revenue guidance.
I mean, the last couple of quarters, I think you talked about it being at least on the Supervalu site side.
I think it was negative three six in Q3 and improved relative to that in Q4, you can't give any.
Site into how that is on a year over year basis in Q1.
Well I would I would say.
Sean that sequentially.
We're on par with where we were coming out of Q4 into Q1 to the extent that.
We talked about.
Conventional.
Say that from us sequential basis.
Menus.
Correct.
To be on par like negative low single digits.
Correct.
So I guess, maybe can you just expand on on what what's driving what's driving that because if you have half of your business kind of down negative low single digit and the other half up low single digit isn't that kind of get to flat.
Well, we're we're communicating 2.8% growth.
Overall for reasons that Chris.
So.
The conventional business beginning in Q2.
We'll be disclosed along with natural as our total wholesale.
Okay.
And in terms of the.
Kelly I would give you little bit more color and sure and.
I think this is going to turn and that is.
One of the primary drivers in some of the negative comps historically on the conventional side were associated with.
Previous acquisitions that Supervalu had made prior to you want to find coming on.
And that's where we saw some softness and that was a big driver in the negative number.
So now that we're through those integrations.
And Weve leveled out our service in those markets I.
I think over time, we'll start to see those numbers come back so that was one of the principal drivers.
Negative comps in what was the legacy Supervalu business.
What was there any particular.
Acquisition of those prior acquisitions that what's driving that or was it.
There were several.
It was the acquisition of unified grocers.
Okay.
That's very helpful.
For completely through those integrations and.
We are difficult.
But we're through it services in good shape in those markets.
They are part of our new reorganize strategy and so those numbers are actually we're going to see those numbers come back.
Okay and just also wanted to ask on on the discontinued operations I think it was about 33 million that was added back this quarter and I think that.
I think that's just cub at this point, but I.
I think I asked this question last quarter, but is that the right run rate to think about.
For the full year can you help us understand what you're planning on in that line because it's a significant.
Add back.
Yes. So the 33 it includes both cope and some of the shoppers results that we have in that first quarter.
The shopper speaks well of course drop a little bit with the sales that we announced last week, but it does include both of those.
And so I think the way, we're thinking about that count Kelly and it's a good question.
Is we're in the midst of the cup process right. So we're going to try to be as transparent as we possibly can.
To keep our shareholders on our Investor is obviously the analyst community updated as to the effect of selling come which is obviously the largest portion of our.
Meaning retail banners, it's still premature to provide any guidance there because.
We're still in the process and it's obviously, a very confidential process and so it's it's way too premature for us to try to estimate.
The outcome without.
Giving information into the public per view that we don't need to and so.
Our commitment is that certainly as we get through the cup process and we expect to do that.
During the first quarter 2000.
20.
You'll have clarity that you need.
Okay.
Does that change from last quarter I thought last quarter that shoppers was not going to be included in that line.
No I think the changed their.
Kelly is that what we said was that shoppers is not going to be part of our flight 20 guidance.
On a net PML irrespective of disc ops are continuing ops shoppers.
It's not material to our results.
And we're also expecting as we've proven last week were going to start to unwind. These things as quickly as we can so what we said was the shoppers results was not part of RF why 2000 guidance. We've always reported the shoppers results in disc ops along with Coke.
Okay, maybe we can follow up on that offline and maybe just ask another one Justin.
More about.
The business in terms of the transition to common systems and.
Just maybe an update on has that started maybe walk us through which systems, which which side of business you'll be transitioning systems too.
And how thats going.
Yes so.
You know, we're now a year it.
And we feel really good about where we are fiscal 19 was.
I was a tough one when you go through an integration.
TJ change as because we have.
We've learned a lot.
And Weve I think were emerging as it has a much different than a much better company and so.
Good.
So today.
We're now a company that does 23 and a half 24.3 billion revenue, we've got adjusted EBITDA between 560 and 600 million.
And so.
I think some people are still skeptical and that's okay, but I'm glad you asked the question so.
Number one we've completed the migration onto a singular payroll platform, which is an internal payroll platform.
As an example, we.
23000 associates, we actually got 66000 payroll checks weak. So we haven't big robust payroll services business that we provide to our independents that work has been completed we just migrated to a common.
Benefits package. So all 23000 people are on the same.
Associated benefits package very heavy lift we just migrated onto a common general ledger.
Which is also a pretty heavy lift we've completed the complete reorganization of our supply chain logistics sales.
Finance legal.
One centralized organization.
Four separate and distinct regions, all holding the PML for everything that happens within that geography from conventional to natural to produce to protein general.
Style et cetera, et cetera, et cetera, et cetera, so single throat to choke.
Across every single thing that we do.
And that work has all been completed.
We've also been continuing to do our internal WFM conversions onto our common w. on platform.
And we havent very rigid timeline around the migration.
Onto Oracle financials.
As well as onto a common ERP and that's all going to take place over the next two to three years or so so the next major milestone will be the conversion of.
Networks or specific regions.
To a common.
The platform so that we can significantly enhance the customer experience to common pricing common invoice.
Hello.
Yes, that's helpful. Thank you.
Your next question comes from the line of Marisa Sullivan with B They securities.
Good morning, Thanks for taking the question.
To date.
Yes, a quick clarifying question on the gross margins in the legacy unify business I think last quarter, you called out how excluding supervalu. They were actually up slightly can you comment on how they performed in Q1.
Yes, I think coming back to John's point earlier on the on the on a similar question on growth rates I think what we're seeing is that that stability I think we're seeing the the sequential stability and those margins as we as we get deeper into the integration.
So as we look through that must be something unusual pops out in the trending or anything like that from a year over year sequential basis. I don't think we'll start thinking about that natural unconventional view on it will start thinking about more the the regional view the combined wholesale view et cetera.
Gosh on gross margin specifically correct okay.
Yes, and then becomes very very difficult to carve those out as we continue to do want to improve the cross selling.
Got you, but but I mean, you backed out the natural business.
Sales I guess, maybe viewing it from a natural perspective for natural.
Hi, good margins up and that's another one I think thats because of the quarter over quarter. This is the last quarter, where the comparisons were against basically all natural.
Okay.
And I guess, just changing gears just on the retail divestitures, if you aren't going to.
Able to find a buyer for some of the shoppers banners would you anticipate closing the remaining banners. This year, how should we think about.
That and then like similarly for Cub.
It sounds like cure.
Going forward on that and expect an update on on a sale did you say Q2.
Yes.
We probably have a.
More information towards the end of the first calendar quarter.
Certainly by March.
We think we know we'll know where we stand on Cup.
As far as the shoppers.
Going to take our time and.
We're going to do at thoughtfully and economically.
As we possibly can we're not going to.
Make a decision to give source of wages for the sake of giving them away.
We've got a shoppers team in place that can run them.
Extremely well.
We obviously have good access to inventory.
So we're going to continue to be careful and thoughtful as to how we can we market. The rest of those stores ultimately we want to be out to retail if it takes a little bit longer so be it.
Gotcha, Okay, and then just if I could sneak one last one and just to help us kind of contextualize Im sorry, if you've already mentioned or disclose this but.
Talk a lot about the top 25 customers can you just help quantify what percentage of your overall sales was top 25 customers.
Right.
It's up 54% approximately.
Gotcha, Okay, and then can you speak to trends that you're seeing in.
The bottom half maybe I don't know if you're seeing if you want to think about kind of.
Net sales growth is.
New customers.
New lines in the store closings that can you talk a little bit about what are some of that drags on the on the sounds good for that lower.
Half of the business.
Hey, Mark. So this is Chris I mean, it's it I wouldn't say that Theres a trend I think in similar to past years Theres formats that are really winning and driving and there is other formats that are struggling in this competitive environments.
I can't point to any one single channel or region to say well. This one is doing well in this one is doing bad I think.
You know there theres plenty that we're growing Wes and because they have a good proposition to consumers that it's resonating and then there's others that are that are struggling to adapt to a world in 2020. So.
Look where elsewhere to help both.
But I can't point any one single trend below that below the bottom 25.
Okay. Thanks for taking the questions.
Your next question comes from the line of Edward Kelly with Wells Fargo.
Yeah, Hey, guys Anthony on for Ed. Thanks for taking my question.
So just wanted to quickly touch on food price inflation that 1.6, you gave in your opening remarks looks like it was pretty steady.
This is what you guys are seeing last quarter in most of last year can you just help us understand how you're thinking about.
Trends for the remainder of the year and the key drivers there and then on the back of that can you just comment on how an acceleration in protein inflation, given sort of everything that's going on assets would impact business.
Yes, so inflation, we're assuming that it's going to be fairly static static we'd love to get a little bit more inflation, because as you know in our business, we get the benefit of for higher input costs.
Which don't have to do any extra work to get the extra margins. So we would appreciate it a little bit if we had more inflation. We would appreciate is a little bit FP economy was a little softer because it would draw a lot more people back into the supermarkets as opposed to go into the restaurants, but.
That's our time will come.
As far as protein inflation the same rule generally apply so if we get inflation across.
Protein.
As long as inflation that doesn't prevent the consumers from buying it.
Moderate inflation works in our favor for the same reason.
Yes, plus environment, we pass it through particularly.
In perishable food.
We pass it through pretty quickly.
Understood. That's helpful. Thanks, guys.
Your next question comes from the line of Eric Larson with Buckingham Research.
Yeah. Good morning, everyone. Thanks for taking my question happy holidays to you all as well.
Steve.
Yes.
As you've talked a little bit about this morning, but I I guess I'm just I'm curious on full clarification. The headwind some headwinds you faced last year kind of the on known headwinds with Supervalu Pacific Northwest, Obviously your acquisition in Florida in Pennsylvania.
And it.
If I'm reading you correctly I think you you said all those issues are now behind you and they are.
No longer a drag is that was that show in the first quarter is immediate is that how we should really be thinking about.
Both those major issues that you had to tackle last year.
Yes, thanks for asking that Eric it's amazing the work that our team did.
To get into the Dcs on the West Coast Pacific Northwest, Florida.
And Harrisburg, Pennsylvania was beyond heroic.
Not only have they turned the corner in terms of.
The cost mitigation.
But.
We're providing an unbelievable level of service in those distribution centers, so absolutely yes.
Those challenges are behind us now again.
It's been team that invest for the long term.
Not for the quarter to quarter and.
For example, in the Pacific Northwest in Southern California.
We're getting ready in those markets to unleash.
A truly differentiated close to the consumer.
1.2 million square foot facility in each one of the with automation.
To go to market in the most cost effective service oriented.
With more skews than anybody else.
And so in that in the coming this quarter, we invested somewhere around 7 million Bucks worth of duplicative costs training headcount just to get Ray.
But service overall is really good we had a great holiday expect to have a great Christmas and.
So all of that is behind us.
To finish that Steve.
This is Sean and the Pacific Northwest.
Really one distribution center.
It is left to transition to get to our two DC.
Total, which is centralia and richfield.
So we're very close and we expect the Portland transition will occur in Q3.
Getting in Q3 and.
Included in Q4.
Okay, and you still have one DC to sell in the northwest tried that to call.
Yes, Thats correct, it's actually.
It's pretty much sold we're just waiting to close under.
Got it got it okay. So just a couple really quick questions I know, we're getting close on time here. So a meaningful step down in interest expense this quarter from your run rate and in the final nine months of last year.
And I think if I look at your reconciliation of EBITDA it looks like.
Probably expecting interest expense to be below 200 million for the year am I reading that correctly.
You are reading that correctly, that's correct and we're continuing to reduce that debt load as we Dan.
So what was that a function of the debt load or a function of of getting a better intrastate I mean, if it's a meaningful stepped on its just like 10 million a quarter.
It's a combination of both.
We are managing that interest as we can the rate as much as we can within the environment and we pay down debt. We hit the got a nice debt Paydown last last year, we're looking at the same this year.
Got it Okay, then finally year.
Are you still is your adjusted.
Tax rate for your first quarter, which I believe came in at 29% as that is that a rate we should be using for the remainder of the year.
It is that thats, great thats the benefit of that approach as it calculates that rate once for the year and it removes some of the normal us GAAP fluctuations that occur and the accounting world.
So now you can rely on that for the year unless something unusual a dramatic happens within the business model itself, which were not expecting we maintain that adjusted tax rate for the year.
Got it and then one final question.
Focused on cash.
You said Capex is targeted this year at about 1% of sales is data is that how high is that the number we should look for as an ongoing rate as well or.
Is there some capital efficiency improvements can that number drop let's say in F. 20, 122, because you may have some upfront capex spending here that that goes away how should we look at that.
Yes, so historically, Eric we guided to just around 1% of revenue.
In this quarter was significantly less than that.
We haven't given out guidance.
Looking 20, 120 to 23, but I would say that.
Number south of 1% is probably a good number to use.
Okay. Thanks.
And your last question comes from Korea at Jefferies.
Chris Mandeville. Good morning, So Steve can I, just ask you with respect to that reference of seven of a top accounts now using unify for both primary and conventional and network.
Is that some new business wins or is that a function of the merger itself and then I think if I recall correctly you were talking about the potential to win some new business early this year on the last quarterly call. So was that the new supermarket business. One this quarter that you referenced the or could there be something more meaningful out there.
So yes, we did have some pretty significant wins that we did start in the quarter.
Our pipeline is extremely robust.
We're not ready to announce anything it obviously.
Well, we typically don't announce.
Because now that were.
24 billion.
After the a pretty big win for us to announce it.
But like I said the pipeline is really good really strong.
When you think about the top customers, who use both you want to fight for natural unconventional.
It's both it they came out of the merger.
Where we were selling both parties and there's been some wins, where we had the natural and now we have the convention or we had to conventional and now we have natural just because the economy of scales work. It's one relationship and it's just easier for the retailer and we're going to that trend is going to continue.
Okay and then.
Given last night news of our whole selecting our electing to take some of its own distribution in house that they're buying I think three d. fees from CNS and then they plan to to build out a couple frozen facilities have you had any conversations with them to suggest that might extend into the natural organic offering.
Or I mean, you consider that a risk and is there any ability to frame up the size of their sales contribution do you guys.
Yes so.
Let me answer it this way it's a really good thing for US we have a long long relationship with a hold actually we just took on some additional business with them.
We have big supermarket relationships and in almost every one of them. They all have captive options.
And so where do you want to fight does really really well for supermarket chains, who have kept options is we provide.
Slower moving inventory, we provide a differentiated inventory we provide the inventory that's really hard to procure and move around the country because they sell it and small quantities and we can aggregating really effectively and so.
We work really well with with.
Conventional supermarkets, who have their own captive.
We also have the category expertise.
That they just don't have we know the skews that move by geography.
Lot of cases.
These big conventional retailers use our service model.
So that is we can more efficiently.
Our service teams to actually placed the order rotate the shelf.
I do the planet grabs moved the freight in and out.
And we can do that much more efficiently and effectively then.
For market caps and so.
I wasn't surprise, we weren't surprised when it gets a good move.
For their own supply chain.
But I think generally it's really good news for us just evidenced by the fact that we do so well with so many supermarkets that have kept in Pcs those captive Dcs are generally predicated on.
The fast moving items.
Okay I appreciate that if I could fit in just one last question.
Stocks down over 10% I guess, given the delta in the results versus the street and now you referenced that the numbers are actually in line with your expectations.
As much as we can all appreciate that you guys are long term thinkers why not offer some element of quarterly guidance just to help manage external expectations I guess im just trying to understand what's the downside wins, just so challenging to understand what's going on internally from an external perspective.
Yes, it's a good question, but again, we don't think in terms of the business in quarter to quarter, we know that we've taken on a big project.
Putting two businesses together that combine do 23, and a half to 24.3 billion.
That can this year will create 560 to 600 million of adjusted EBITDA.
Big deal.
And it's not something that can be measured quarter to quarter.
It's hard enough doing a year to year, we don't think about it in terms of year to year, we think about it in terms of what we're trying to create which has never been done before by the way.
Over the next three years.
And we have a network of 57 distribution centers, we closed three.
We've got a network of 23000 associates.
We've done an ungodly amount of heavy lifting.
And we feel like we're on the right path and all quarterly guidance, we do.
Is a move us to make decisions that were not in the best interest of the business long term and I don't think Thats a good thing for us to do so we're really excited about where we are.
We understand that the market is skeptical.
The management team feels great about what we've accomplished and where we're going.
Our synergies are on track.
Our customers love, what we're trying to do I think our suppliers level, we're trying to do and we're just going to have to prove.
Okay. Thanks, Steven happy holidays.
Thanks.
Okay.
I want to thank everybody for joining us today.
We've got a great company.
We've got a great plan, we're creating a truly differentiated wholesaler, providing services products logistics distribution services across the United States and Canada.
All while continuing to be the employer of choice.
And our commitment to sustainability philanthropy continues.
We're very proud of our team.
And we're very proud of what we've accomplished.
Thank you for credit for participating today and have a great holiday.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.