Q3 2020 United Natural Foods Inc Earnings Call
Hi, and welcome to the he went up by third quarter fiscal 2020 earnings call.
As time, all participants are in the listen only mode. After the speakers presentation. Toby question answer session to ask a question. During this session you'll need to press star one on your telephone if you acquire any further assistance. Please press star zero and I'd like to hand, a conference over to Mr., Steve Lundquist, Vice President Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us on unifies third quarter fiscal 2020, <unk> earnings conference call I.
I know you should've received a copy of the earnings release issued earlier this morning.
Press release webcast in a supplemental slide deck are available under the Investor section the company's website at www dot unified Dot com under the events town.
Joining me for today's call or Steve Spinner, our chairman and Chief Executive Officer, John Howard, Our Chief Financial Officer, Chris Test, a president of you identify and Eric Doron, our Chief operating officer.
Stephen John will provide a business update after which we'll take your questions.
Before we begin I'd like to remind everyone to 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 and uncertainties.
These risks are discussed in the Companys 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 will now turn the call over to Steve. Thank you Steve Good morning, everyone.
There's a lot to talk about this morning.
You want to fight quarterly results, how we're continuing to navigate the Kobe 19 pandemic.
And the strategy and plans were preparing for a new fiscal year.
But before we do that let me say this.
We stand probably with the black community in solidarity to address the system.
Demick racism in America, and the most important work vending these injustices once and for.
We believe block lives matter.
As you know over the past several weeks we've seen firsthand.
There are sort of George floors murder in one of our largest markets and home to one of our corporate headquarters Minneapolis and in the aftermath and protests that occurred and other major U.S. cities.
Loss of life any life is upsetting.
When its preventable.
It's even more difficult to accept.
Unfortunately, this entire event again spotlights the harsh reality racial injustice.
Specifically toward block American men and women.
Actuate feet in equity in our country.
And you want to five we expect diversity and inclusion to be at the core of our DNA.
In the people we employ.
How we conduct our business and then or a central role supporting grocery retailers everywhere.
We expected to be at the core so we would be misguided to tell you. We're doing this perfectly today.
We can and must and will do more.
These systemic problems of humanity will not go away until we confront them head on.
That starts with speaking up listening acknowledging and the empathy to understand.
And right now, we're listening learning and holding ongoing conversations with our associates to provide them with the chance to be heard.
Share ideas or concerns and an opportunity to offer honest feedback and suggestions. We've held several of these community conversations with associates over the last week and will be holding more in the coming days and weeks.
Feedback from these sessions will help inform many of the actions we take.
At the core of our efforts.
I will be our value of doing the right thing, which on the surface is really simple.
Treat others the way they want to be treated with respect decency and fairness.
Well, we know it's not that simple.
As such you want to five we'll be investing more resources into our diversity efforts well placed greater focus on and generate new initiatives to support our education training hiring promoting recruiting and retention efforts.
Well look to a long support within or associations and support coalition opportunities wherever we can to help drive meaningful change.
We're forming action teams to ensure we don't lose sight of the school.
Eliminate racism and foster greater opportunities for Black men and women have you want to fight and be in America.
We're creating specific measurement metrics for each of these efforts.
Hold ourselves accountable.
We will also work harder to get to know each other better.
This will be at the core of what we do.
We're going to do our part.
We will make change happen.
And our pledge is to continue evolving and foster an inclusive culture or the quality to create a better unify from the inside out.
And to demonstrate how we can all do better not to talk but through action.
Before we discuss our third quarter results.
I wanted to first to offer my sincere thoughts and prayers to all of those affected by the cobot 19, pandemic and my gratitude and appreciation to our nation's health care professionals.
First responders essential workers, including all the incredible you want to fire associates, who worked on amazing work during these unprecedented times.
Their safety and well being has been and will always be at the forefront of everything we do.
I'm. So proud that you want to five was one of the first companies to adopt a two dollar per hour temporary state of emergency bonus for our direct labor associates.
That we provided tremendous flexibility towards attendance policies and productivity expectations. During the most impacted times of the outbreak and that the safety in sanitation measures. We've taken in our distribution centers and retail stores have kept our associates safe.
In addition to supporting our associates you want to fight has now donated more than 6 million pounds equal to an estimated 150 truckloads of food and essential items to food banks across the country.
And we've committed over $1 million to philanthropic organizations, helping those impacted by the pandemic. In addition to the funds previously committed through the unify foundation.
The information about the foundation can be found that you want to five foundation data work.
Covert night team has changed everyone's life.
And radically altered where and how food is purchased and consume.
At the time of our last earning calls in March more than 50% of dollar spent on food went toward consumption outside the home.
Including full unlimited service restaurants hotels recreational tractions in schools and colleges.
Fast forward three months in the landscape is dramatically different.
As we all know there has been a significant shift towards food consumed at home.
Well some estimates, placing the potential shift this calendar year at approximately $100 billion.
As you know we pre release third quarter results on May 12, and issues a complete financial statement earlier today, which were substantially unchanged from last month.
Our third quarter results reflect the demand shift I spoke to.
In March midway through the quarter, we saw a significant jump in demand as consumers began loading their pantries without size purchases of items such as toward the paper Sanitizers pasta and canned soup.
Well, our third quarter results did benefit from this pantry loading net sales continue to increase at a double digit pace over the remaining weeks after third quarter and this trend has continued into the early stages of the fourth quarter as well.
Through the first four weeks of the quarter wholesale net sales were up roughly 11% compared to the same period last year.
These results demonstrate the power of our business model and our success building out the store.
We experienced strong double digit growth throughout our portfolio and are on track for over $175 million in cross selling revenue. This year as our customers continue to recognize the benefits of consolidating purchases with unify and our industry leading 250000.
I am asking you count.
Today, we provide real value.
So were industry, leading capabilities across all categories, including produce protein general merchandise health and beauty services and so much more all with the benefit of scale.
Another point that differentiates unify contributed to our strong sales growth was the performance of our brands plus business, where sales were up 26% for the quarter compared to last year.
During recessionary periods consumers are more likely to turn to private brands to stretch their food dollars and we believed that our selection of conventional and better for you products, which represent more than a 2 billion dollar business on its own at retail is unmatched in the.
The industry.
This is supported by Nielsen data that shows March and April growth rates for unifies private brands has been consistently higher growth rates than other retailer owned private brand programs across the us.
We've seen great success, with our essential everyday wild harvest and feel day brands, where our growth rates and many key categories have been double or triple that of the category total with examples including soup frozen vegetables and household paper products.
Overall, the progress we've made on our build out the store strategy and our initial cross selling success has fundamentally changed the relationship we have with many of our customers who more than ever.
Look to unify scale and variety to help them best meet the needs of their shoppers.
Our 12% sales growth in the third quarter includes the impact of headwinds from lower inbound fill rates have suppliers across multiple product categories were unable to meet the significant increase in demand in the quarter.
And while we do expect fill rates to gradually improve as we move through the fourth quarter, we do not expect them to returned to pre cobot levels until fiscal 2021.
Our unmatched size scale and geographic footprint.
Let us to support the strong increase in sales with our existing infrastructure driving fixed operating and administrative cost leverage to increase our adjusted EBITDA margin from continuing operations by nearly 25 basis points.
Our $222 million in adjusted EBITDA included approximately $25 million encoded 19 related costs for safety protocols procedures additional third party labor support to handle the increased volumes as well as pandemic related incentive.
Payments to frontline associates.
Our synergy and integration initiatives also contributed to our strong results this quarter you.
Unify is also investing in a variety of ways for anticipated future growth.
We're midstream and updating our ordering technology and customer portal, which will make it easier for our customers to interface with us for promotions ordering billing and other aspects of our relationship.
We've also seen a dramatic uptick in customer inquiries for our turnkey ecommerce solution for brick and mortar stores likely driven by data that suggests more than 40% of recent online grocery users were first time shoppers.
Our offerings Leverages the historical ecommerce platform investments, we've made that can have a customer up and running with a variety of web and mobile device offerings in a relatively short time.
Which is attractive for those customers looking to now providing online offering to their consumers. We believe our investments to date have positioned us to deliver continued growth in the ecommerce space.
We're also continuing to invest in optimizing our distribution center network, including automation where appropriate.
Next let me talk about our retail banners carbon shoppers.
Last month, given the state of the M&A markets, I said will likely be running some shopper stores for an additional period of time and that same thinking applies to cut.
As an interim step we're in the process of separating Cubs from you identify which means code will operate more as a freestanding entity.
Today with its own dedicated resources once the separation is complete.
Historically, we've supported Cub was shared resources that include associates splitting their time between Cub in other parts of the business.
This should accelerate the diligence period and allow for a more streamlined process when we market. These banners for sale.
We've also decided to take a pause on the sale leaseback of codes owned properties.
To maximize the value of the banner, including its owned real estate. We've pushed these potential transactions 24, or so months into the future as a result, beginning in the fourth quarter will move carbon certain shopper stores into continuing operations, which John will discuss shortly.
As I mentioned earlier sale to date in our fourth quarter remains strong and we believe people will continue to eat more at home than they did six months ago for several reasons, which should drive favorable trends for unified first beyond the question of our restaurants open and Omi allowed to eat out is the question.
Do I feel comfortable doing so.
We believe there is and will continue to be a degree of hesitation from eating at traditional sit down restaurants, a recent survey by Piper Sandler found roughly two thirds of respondents plan to Cook Morris home post coated with an average at more than four additional meals per week.
Second we expect we could see a recession lasts for 12 to 24 months and unify has historically done well during recessionary periods.
Our brands plus business should continue to perform well given the lower price point and differentiated value of these products third many businesses have now just extended work from home plans meeting many of US we'll continue to eat more meals prepare and our own kitchens as we work where we sleep.
And finally.
Our customers, both new and old have responded to our new business model, combining natural unconventional with new opportunities and the strongest pipeline we've had in years.
We are one company, providing retailers with the most sophisticated services the broadest product offering and an unmatched network of distribution centers.
Let me summarize the importance of our third quarter results and updated outlook for fiscal 2020 and provide some thoughts on fiscal 2021.
Sales in the third quarter grew to $6.7 billion up 12% versus the prior year. Adjusted EBITDA was 222 million up 32% versus last year's third quarter.
Adjusted EPS was $1.40 up 130% or 79 cents versus last year's third quarter based on the trends. We believe the momentum will continue at fiscal 2021 will be better across these key metrics.
We've also pay down over $300 million of net debt and closed the quarter with $1.2 billion of liquidity.
We are continuing to review our fiscal 2020, when budgets and look forward to providing more detail in September.
Our 25000 associates, and especially those working on that front lines are incredible.
Since Cobiz first appeared we've remained open we protected our teams we paid our frontline associates incentives with more flexible programs and we've hired over 3000, new team members. This work has been and continues to be truly remarkable.
[music].
We expect to finish the year with a strong fourth quarter as reflected in our raised guidance for adjusted EBITDA as well as adjusted EPS.
With that let me turn the call over to John.
Thank you Stephen Good morning, everyone I will cover our third quarter financial performance balance sheet capital structure and updated outlook for fiscal 2020.
Let's start with sales for the 13 week third quarter, which totaled approximately $6.7 billion up nearly 12% versus last year, driven by Kobin 19 domain cross selling revenue and strong private brand performance.
Sales into supermarket channel, which represents nearly two thirds of our volume increased by 15%.
On the covert related demand. We believe this increase reflects shifting consumer preferences towards value and this time of crisis as well as an acknowledgment of the relevant importance in trust the local grocer.
Our supermarket channel results include sales to customers with captive distribution facilities that have been pressured by the uptick in volume, reflecting the value unify brings to a broad range of customers.
Supernatural sales were up over 16% continuing its strong recent trends and expanded by cobot 19.
Independent sales, representing 10% of total net sales were down about 3%, including a 900 basis point headwind from the customer bankruptcies, we discussed last quarter.
The growth in this channel adjusted for the bankruptcies was impressive given the pantry loading and value seeking behavior that we believe favored the conventional supermarket.
Finally, our other channel was down 3% included in this terminal is the strong growth from our two largest ecommerce customers, which was more than offset by declines in our foodservice sales and military sales.
Third quarter gross margin of 12.85% declined approximately 37 basis point from last year's gross margin rate.
The decline was driven by product mix shift towards lower margin products as well as a decrease in vendor funding as manufacturers became less promotional which was partially offset by lower levels of shrink compared to last year.
Cost inflation in the third quarter was approximately 1% down slightly from last quarter.
Third quarter operating expense was $774 million or 11.61% of net sales compared to $738 million or 12.37% of sales last year. The 76 basis point decline was driven by strong expense leverage on the fixed and semi.
Fixed portions of our operating and administrative costs as well as the benefits of our synergy and integration efforts.
Third quarter operating expense includes roughly $20 million in cobot 19 related expenses, including another $5 million in discontinued operations. We spent a total of $25 million in the third quarter and Kobin 19 related expenses to promote the health welfare and safety of our associates.
Our double digit growth in net sales combined with improved leverage and operating expenses translated into strong profit performance.
Third quarter consolidated adjusted EBITDA was $222 million, an increase of 32% versus last year.
Our third quarter sales includes $58 million of adjusted EBITDA from our retail banners and increase of $24 million compared to last year's third quarter.
Our adjusted EBITDA margin rate from continuing operations increased 23 basis points versus last year.
Third quarter net interest expense was $47 million a decline of $8 million from last year, driven by lower average debt balances and interest rates compared to last year.
The effective borrowing rate for the third quarter was approximately 6.4%.
Up slightly from the second quarter as a result of lower ABL balance unified least expensive debt instrument.
Q3, GAAP EPS was $1.60 per share which included the following items.
First we incurred restructuring acquisition and integration related expenses of 19 cents per share.
Second we took another 19 cents per share charge for store closure costs and charges within our discontinued operations.
And third we had three cents per share in expenses related to exiting certain sites in our surplus property portfolio.
More than offsetting these expense items was a 61 cents per share benefit on the tax line that included the impact of the cares Act and to a lesser degree the tax consequence of the three items I just mentioned the GAAP tax benefit from the cares Act resulted from our ability to now carry net operating losses back too.
Tax years with statutory rates higher than the current rate.
In total these adjustments net to a 20 cents reduction to our GAAP EPS, bringing adjusted EPS to $1.40 per share.
This is a 79 cents or 130% increase from last year's third quarter adjusted EPS of 61 cents.
Given the significant increase in volume running through our distribution centers and are focused on the health and safety of our associates and strong operating performance in light of unprecedented increase in demand.
We had a lighter than normal quarter in terms of capital expenditures, which totaled $34 million or approximately 50 basis points as a percent of net sales.
We're pleased with the strong net debt reduction we achieved this quarter total outstanding debt and finance lease obligations at the end of Q3 net of cash and cash equivalents was $2.66 billion the lowest quarter end amount since the acquisition and a decrease of $302 million compared.
To the end of Q2.
The primary drivers of our debt reduction were strong cash flows from a reduction in working capital and increased earnings partially offset by a $94 million increase in our long term finance lease obligations from the addition of a finance lease for our second distribution center in Marino Valley.
The Moreno Valley Finance lease addition is part of a strategy, we're working on to lower our long term occupancy cost for this facility.
We ended the third quarter with a total liquidity of approximately $1.21 billion, which is the some of the unused capacity under our $2.1 billion revolving ABL facility, plus cash and cash equivalents.
Overall, we're pleased with our third quarter results and look for another strong quarter as we finished the year.
Turning to our full year outlook for fiscal 2020, we withdrew our prior guidance and our made 12 pre release given the strength of our year to date financial performance.
The new guidance, we issued today represent our current thinking on how we expect the year to finish recognizing that these remain highly uncertain times.
Our updated guidance also reflects changes to how we'll be reporting results for cold and certain shoppers stores that will be moved from discontinued operations to continuing operations as a result of our plan to delay and divesting these assets as Steve discussed.
These reporting changes will be reflected when we report fourth quarter and full year results. Later this year, let me briefly walk through these changes before getting to our guidance.
First discontinued operations did not go away rather the results reported in discontinued operations will only be for stores that had previously been disposed of for which we currently expect will be disposed of in the near future.
What moves to continuing operations is the entire Cub banner as well as those shoppers stores that will run for up to 24 months.
Second how we reported net sales will change since we acquired Supervalu and its retail operations. We've only included the wholesale sales to Cub as part of net sales.
This was because our intention has always been to sell come with a supply agreement in the fourth quarter, we will recast prior periods, whereby the wholesale sales to club and certain shoppers will be eliminated and on a consolidated basis. We will now report the retail sales from these stores.
Estimated impact of this change will increase total annual sales for fiscal 2020 by approximately $1.2 billion.
Third our statement of operations for PNM will be restated to include the gross profit and operating expenses of Cove and certain shopper stores in continuing operations.
Both of which were previously included in the income from discontinued operations net of tax line.
Continuing operations will also include annual depreciation and amortization expense for retail assets, which were not previously being depreciated given their held for sale status.
For modeling purposes. This will increase fiscal 2020 annual depreciation and amortization expense by approximately $23 million for retail assets, which were not previously being depreciated.
This will not impact consolidated adjusted EBITDA, but we'll reduce adjusted earnings per share by approximately 30 cents for the full year fiscal 2020 results.
Our GAAP results will also include an additional $25 million of depreciation and amortization expense related to fiscal 2019, which equates to a total of 70 cents per share.
The balance sheet will change as well with most short and long term assets and liabilities of discontinued operations moving out of those four lines and into the appropriate lines on the balance sheet.
For example, the land building in equipment associated with our club stores will move out of long term assets of discontinued operations and into property and equipment met.
Including the estimated $1.2 billion increase in net sales from moving retail into continuing operations. We now expect fiscal 2020 full year sales to be in the range of $26.4 billion to $26.6 billion at the midpoint. This reflects an implied fourth quarter.
Wholesale sales growth rate of about 9% over last year on a comparable 13 week basis, when excluding the 451 million dollar benefit of last year's additional week from the 53 week fiscal year.
We expect full year adjusted EBITDA to be in the range of $655 million to $670 million at the midpoint. This would be approximately a 22% growth rate over last year's fourth quarter on a comparable 13 week basis.
This adjusted EBITDA translates into an adjusted EPS range of $2.30 to $2.50, which includes the estimated 30 cents per share of additional retail depreciation expense for fiscal 2020.
Finally, both our press release and slide 13 from our supplemental slides. So this guidance as well as what the implied guidance would be on what I'll call. Our prior basis with all retail in discontinued operations.
Our capital spending has clearly slowed as a result of coded 19 as a result, we now expect to spend less on Capex spending 90 basis points of net sales I guided to last quarter.
This is the result of both lower spending in this environment and stronger sales.
We're currently expecting to spend about $190 million for the full year.
We don't believe this lower spend level has or will negatively impact our operating performance.
Our Q3 year to date debt reduction totaled $333 million an amount that did not include the majority of proceeds from the asset sales included in our prior guidance.
We closed on the sale of our Tacoma distribution center early in the fourth quarter and expect to receive cash proceeds in the first half of fiscal 2021.
We're pleased with the cash being generated by come and happy to have the flexibility to sell Cubs owned real estate at a more advantageous time.
We made great progress on reducing leverage in the quarter as the face value of net debt relative to trailing 12 month EBITDA fell to approximately 4.3 times nearly a full turn less than the 5.2 times at the end of the second quarter.
With that let me turn the call back to Steve Thanks, Sean.
As I close my prepared remarks, and to reiterate what John and I said.
We're looking to finished this fiscal year strong.
As reflected in our updated guidance I spoke earlier about the reasons. We believe sales will remain elevated for many months the foremost being the recession will likely heading toward and the heightened unemployment rates across the country.
This will be reflected in the strong fiscal 2021 for unify which will show incremental growth over a very strong 2020.
We continue to believe that unify it's the best position food wholesaler in North America.
While cobot 19 pandemic has presented operational challenges and has also provided a platform for us to demonstrate our true potential.
Unify has not changed but the customer perspective of us has.
Kobe 19 has provided a platform for us to showcase the value of our people our scale in our product diversity.
Our customer conversations have drastically shifted from justifying the acquisition to displaying and capitalizing on the benefits of it.
Our strategy is adapting to realize the full potential of the current opportunities and to further physician unified for success beyond this period of incredible demand.
We're more optimistic toward our future than ever before.
And look forward to updating you on our progress and accomplishments.
We'll now take your questions.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question press. The pound keep your first question comes from Scott Mushkin with our five capital. Please go ahead.
Hey, guys. Thanks, so much for taking my question.
Steve Scoping to talk a little bit more about long term margins and just get a feel for where you guys think that can go overtime and how you get there.
You're talking about operating margin Scott.
Operating margins EBITDA margins.
Yes, I mean I think.
We are doing a lot of work finishing up.
The acquisition of Supervalu, we're still well on target to go beyond.
Synergies we.
Had had originally articulated.
And as we look into the out years, we think that Theres also more work to do about towards expense reduction network optimization.
And.
Continued.
Kind of activity that would just make us more efficient in the warehouse.
I think.
Obviously, we're going to have a really good year this year.
Some of that supported by Covance.
But I think about the current year.
I think that it really proved out the acquisition of Supervalu, which you know.
I think we had a rough time with it in the beginning for a lot of reasons, not least of which being the investor community.
But covert any accelerated volume certainly proved out the fact that.
Retailers want.
Bye.
Team produce general merchandise conventional natural and everything else from one source of supply.
They also from an independent perspective want services.
And for those who follow had fallen supervalu.
Supervalu had a pretty nice Buildouts services building business and we're moving now to make it even bigger I think we've used. The example of payroll as an example, we cut over 60000 payroll checks week. We have 20 25000 associates. So we're doing payroll for a lot of independence.
We're also doing a lot more than that whether its plan a gram data E commerce, and obviously the service businesses much higher margin than wholesale and so over time, we'll put a lot more resources towards the growth of the services business. So.
I think it would be unfair for me to comment about where the margins go.
Well certainly provide more color on that as we close out.
What has been really volatile year, yes, good way.
Okay.
Thank you for that my follow up question is more short term, obviously revenues were really strong.
But they didn't seem to be just slightly shy of what some of the other people in the industry are seen.
I was wondering if you can you maybe shed some light on that and maybe what's driving that does that.
Changes as we move over the next few quarters.
Yes, I mean, the only thing Thats that we obviously have talked about as we did have a pretty significant series of bankruptcies.
Just before cobot hit.
And so my guess is if you adjust those bankruptcies back into the numbers we are.
Right, where the industry is seeing the growth what I will say is.
You know.
We've talked for a marketable job.
Seeing that revenue growth fall to the bottom line and that's just as a result of.
Integration synergy.
And a lot of discipline. Despite having spent 25 million on doing the right thing with our teams and keeping them safe and paying incentives and so and so forth.
Thanks, I really appreciate.
Okay.
Next question comes from Edward Kelly with Wells Fargo.
Yeah, Hi, good morning.
Steve I was curious if you could.
Provide a bit more color on on what you're seeing so far and the quarter.
Current quarter, and what it saying about sustainability of.
Food at home demand.
As states reopen specifically I'm kind of interested in color that you may have on states that have opened three earlier.
What your trends are looking like there.
Yes, I mean I can talk generally I think we said in the script that the first couple of weeks for the fourth quarter of.
Continued to show growth at around 11%.
You know.
We believe we certainly believe that.
The amount of deals that are eating at home versus away from all are going to continue in them.
Pretty significant way I think most people are still going to be reluctant.
To sit in a restaurant for an extended period of time.
That's part one part two is cohort is not over.
There are many states that have.
Very high rates of infection.
And as long as that continues.
And we have every reason to believe it's going to continue until there is a vaccine.
Yes, there's going to be just pressure to continue to eat more meals at home.
The second part of it is we're clearly in a recession, we certainly feel that way.
And.
No history has proven.
Many times over that during a recession.
Our business tends to do very well.
People are much more careful about where they spend.
There are dollarss and that just means more meals at home versus away from home So I.
I think we made a general statement that said.
We expect that demand to continue.
And we expect 2021.
The better than 2020.
And we'll provide more clarity on where we see 2021.
September as we finalized the budgets.
And just a follow up I'm curious on the on the cross selling and the ability to drive additional.
Additional sales obviously this period, probably creates more dialogue between you and your customers.
Could you just provide a bit more color on how you're capitalizing on that how those to $175 million compare to what you've seen in.
In prior quarters just.
Just curious generally about about the traction on cross selling thanks.
Hey, Ed This is Chris test I'll take that question.
Yes, I mean look if you look at 175, Thats a run rate for the year.
Our Q3 accelerated because we did a couple of things one.
We put 1500 3500.
Natural fast moving natural skews into the conventional system, which means all those customers that want to natural products.
Order him through their existing system their existing promos their existing invoice their existing truck and so forth. So.
We did that right before coded.
Obviously coded accelerated that penetration.
What is the head on the cross selling is sort of the next level.
We take in cross docking and moving it to actually replacing.
Captive distribution, replacing conventional or natural distribution with our partners that are using our competitors are again captive.
So we expect that run rate to continue accelerate through the balance of the year in 21.
And one thing that we learned throughout all of this is.
We typically we tend to be pretty hard on on ourselves, but we actually we actually know distribution and we do it really well.
And.
When you throw a little volatility into the system.
You got a lot of people coming to you want to fight for help.
And.
Whether it be for natural or conventional or general merchandise or certainly provision protein and we did provide a lot of help and we'll continue to provide a lot to help to the even the largest retailers.
Who relied heavily on off and continue to rely heavily heavily on us for products throughout the system and we just would not and not have been able to do that had we not done the supervalu acquisition.
And just one last one for you on on the integration can you just talk about how cobot has impacted that the timing of the integration and synergy capture if at all.
Sure Ed this is Eric toward.
Our integration, we did pause slightly to handle the surge in volume.
But we have re energize those efforts we have learned how to do it in our virtual environment to maintain the safety of our associates and we are full steam ahead right now so we anticipate no big implications from co bid and we're moving it forward.
Great. Thanks, guys.
Next question comes from John Heinbockel with Guggenheim.
Hey, Steve two questions. If you if you look at double digit top line growth how much of that is coming from.
Average drop size increasing.
Right is that is that the bulk of it and then secondly, if you look at the growth that you think you're going to continue to see where are you with capacity.
Particularly tighten some places.
And if you are how do you know how do you will appreciate that.
Yes, So let me answer the second one first.
So again, one of the beauties of acquiring Supervalu was it gave us capacity.
In a lot of distribution centers around the country.
And so generally speaking one pretty good shape.
From a capacity perspective, and the amazing thing that covert did for us.
Kevin straight that we could actually do more.
Do you see that we ever thought possible and while keeping everybody safe with really rigid.
Protocols.
And so I would say generally we're in really good shape from a capacity perspective.
And a lot of that has been driven by the addition of the Supervalu distribution centers in the core markets.
And we've been moving business around in order to make that work.
As far as the drop side as you might imagine you know our world distribution the bigger the drop size. The more you are putting on a truck.
The more efficient everything becomes and that's certainly was the case and continues to be the case.
As you can move out the truck should wait out the trucks trucks are traveling left distance.
And that Thats, great color as far as how much.
Of the growth was associated with Justin increasing drop size I'm not sure we've ever considered that question, but it's a good one.
And then you just your comment 2021 being better than 2020 is is that sort of absolute better.
Or do you is that even remotely possible that the growth rates could be similar or better.
If we stay in a recession as you suspect.
Yes, so I look I understand the question.
We can't go there yet because we just haven't finished.
The complexity of the 2021 budgets and everybody is in the same both trying to figure out.
What 2021 is going to look like once you adjust for the covert effect.
But what we do know is we see SGN, a we see costs, we see productivity.
So we know that on an absolute basis, when comparing 21 to 20.
The numbers will be better to what degree.
Well I don't know yet, but I think it's important to call out that we're not going to see a number and 21, that's less than the number in 20 and blame it on Covance that is not going to be the case for you want to find 2021.
Okay. Thank you.
Next question comes from Karen short with Barclays.
Hey, Thanks for taking my question.
Steve I wanted to see actually if you could give.
Actual cadence of growth topline growth.
In the quarter, and then I ask in the context of the 11%.
The first for weeks.
Order because I know there's a disconnect on top line for you versus topline exceed retail just because.
It's kind of in that high four range versus the inflation that you called out in the 1% range.
But I guess not too.
Diminish what you've accomplished but.
In the first for weeks does seem lower than when I would've expected and then the topline range for the full quarter seems a little lower than when I would've expected.
Well, let me answer to the the first one let's keep in mind that.
First of all quick $25 billion business, so 11, or 12% growth is a staggering number staggering.
And so.
The second thing that I would call out is one of the things Thats just really painful right now is fill rate.
Our supplier fill rate is very low on both natural in conventional.
And you know.
That's that's just a terrible loss sale for us and for the retailer.
And.
The the fill rate if certainly the lowest that I've ever experienced by foreseen.
Bye.
Thousand plus basis points.
Now I think we're going to see improvement because the manufacturers line with us and there are aligned with the consumers everybody wants it to get better.
And we're going to make it better the other thing that's.
Making the topline artificially.
Less is that the largest manufacturers have discontinued on a temporary basis.
Thousands of items to focus solely on producing the ones that consumers need than most.
And so that will also start to come back.
As.
The overall growth rate stabilizing manufacturers can get back to some stayed up normalcy odd what will also come is the retailers are kind of demand promotional allowances to put those products back on the shelf, which will also have a benefit to us. So I think it's a lot.
Long way of saying that.
Fill rate is the number one driver too.
Sales right now.
If you add back the two bankruptcies that we had just before cove. It I mean, that's 900 basis points by itself. So.
We're right there in terms of overall growth actually the 900 basis points is not quite the math doesn't work quite that.
Based on that segment right correct correct.
But.
More importantly to me is that the growth certainly continues and look at what we've accomplished on the bottom line, which again you know what was a lot of work it didn't come easy.
As far as the cadence of growth.
I think we've talked about this before basically we saw the growth happen first.
In.
Actual so I think that was right around.
Mid March.
Some with John or Chris can probably correct me there but.
And then about.
Three weeks later, we saw it start to ramp up on the conventional side and then it's been strong ever since conventional natural has come off a little bit conventional has stayed high.
Chris or John anything else, you want to add there.
No that's about right Steve It started natural in the coast.
And then by mid March it was across all Dcs all customers.
Hi, double digit growth.
Okay.
And then I guess.
Just going back to Ed's question about what you're seeing in terms, the country and locations or states there reopening.
And our further along in the reopening process is there anything to point to in terms of differences in topline in those markets versus the ones that are still kind of behind on that.
I don't think so John Chris.
Yes, I mean, it's a great question Karen it's in were really early on in the period here.
And there's so many fluctuations we had a lot of store, we had 150 curfews in place and spent the last couple of weeks in certain cities. So trying to factor in the impact of that stores closed in early.
So it's really dynamic it's hard to walk you talked to look at the month.
May and really draw any conclusions about the impact of states reopening I will tell you that in general the demands in May.
Was fairly equal to that in April as Steve said in our ability to turn that demand into sales really the biggest headwind right. There is supplier fill rates, but in general the rod demand has remained consistent.
Through the month.
Yeah, and that's that's a good point over the last.
I guess, it's just over a week, maybe a little more than a week.
We've had a lot of stores closed we've had to reroute delivery times.
Because of the protest stuff going on.
Right. Okay, and then just wondering to switch gears I know, it's been all hands on deck for.
Reasons, but any update on supernatural contacts.
Obviously, there you may have been distracted on that front, but any color you can provide in terms of those conversations.
Yeah, I mean, I'll take that one I mean listen everybody's got a remember this is the contract that goes out to 2025 Thats five years from now we don't have another contract that has five years' worth of life number one number two.
I have no doubt that the contract will get done.
Obviously, we've taken a break they've taken a break we've had to put our attention elsewhere and usually we start talking about the contract extension.
For five years before.
The termination and that is going to proceed normally.
Okay. Thanks, I'll get back again.
Next question comes from Rupesh Parikh with Oppenheimer.
Good morning, Thanks for taking my questions. So just going back to your Q4 implied topline growth. So trying to right. Now I think you mentioned are running plus 11% for the quarter, but your guidance implies moderation.
That just conservative conservatism at this point in terms, how you guys just think about Q4.
Yes, no I would I wouldn't call. It Conservativeness I think what it ties into the topics that Stephen Chris If I have mentioned, which is via the fill rate assumptions and our ability to get those back to a normalized.
Level. The demand are staying highs is trying to get the the full rate backup where it needs to be.
Okay. So has the fill rate has it had to deteriorate has it gotten worse, if already or maybe you can help us understand what's happening with storage.
It's stayed roughly the same it we just had a certainly in Q3, we had a wonderful success translating all that into sales with a with the fill rate the way. It was it in its as you might have man I imagine what the demand out there.
For the suppliers, it's a it's tapered off a little bit it's staying relatively flat and we've seen it actually picked back up in the past a week or so so we're hoping that continues.
Okay, Great and then one more quick follow up just you just on the independent channels. So you guys called out a 900 basis might impact related to the bankruptcy.
It's not the right way to think about the headwind until we lap the bankruptcies.
I think roughly it is it'll vary a little bit with some seasonality, but the but roughly until we get the into into the lapse in the Q2 next year I think thats the right way to think about it.
Okay, great. Thank you.
Next question comes from Chuck Cerankosky with Northcoast research.
Hi, guys Jim on for truck first of all congrats on the great quarter, one of the touch on margin, both topline and EBIT margin.
I had mentioned you see the vendors pull back on some of the promotional spend do you see that returning it whether over the next I will say like six to nine months as some of the restriction starts to ease up and maybe some of the food away from home trends normalized do you think the vendor dollars will be back in the channel and then.
Similarly on the EBIT margin I know you guys have invested a lot in.
Employee wages and procuring PB in the sanitation cost do you see any opportunity to leverage that kind of moving through the fourth quarter into the beginning of 2021, where maybe volume still stay elevated but you have a chance to pull back on some of that spending.
Yes, so I'll start out one Jim so the vendor dollars will certainly return.
As there's the ability for the vendors to actually produce the product.
And get it delivered out into the marketplace.
There will be a time when the retailers are going to demand promotional activity.
A replay anagram most products and get those products promoted whether it be through end caps or buy one get when free but.
It's just the way the industry works and it's likely that that promotional spending will return and that'll be a nice had nice tailwind for us.
From a from a perspective of wages, we had 25 million of costs that we happily spent.
In the quarter that will begin to dissipate as the incentives go back to normal has the productivity returns.
And you know we're in the process of doing that right now so you'll definitely see that.
Happened throughout the next couple of quarters and will only do that when we know our people are safe.
When we can make sure that we have to building staffed appropriately.
And that's what we'll make the decision we certainly believe that were there today, we're watching the.
Break of cold it very carefully.
But.
Absolutely believe that moving into the fourth quarter.
The latter part of the fourth quarter and into next year those costs will dissipate.
Okay, and as a follow up to that I know you had mentioned earlier.
You might have come some concerns about.
But a resurgence of co bid or some some of the states that have reopened having kind of elevated levels.
Do you guys have built in.
Kind of a snap back for the wages to go back to where they are right now with the bonus pay or is there any way that we should look at that or will you just keep them, where they are out right now and then only backed them off when you're certain that there isn't going to be any sort of resurgence.
No there's no automatic snapped back.
We expect like I said earlier.
When we feel that it's safe and that we have an adequate amount of people on the buildings.
Than throughout the distribution centers, we will remove the incentive and put back on the productivity standards.
As far as whether we get a spike in the DC, which we will.
I.
I don't know that that would be enough to trick or.
Incentives generally across the country.
But we'll have to wait and see how it goes I think the way we're thinking about it Jim is.
We're going to take off the incentives and the.
Productivity Stan.
Activity.
Standards.
When we feel the times right when it safe and there's enough people in the buildings and we're pretty close to that point now a lot of retailers and wholesalers have already removed. We just we just haven't done yet.
Okay perfect things like August.
Final question comes from Kelly Bania with BMO capital.
Hi, good morning. Thanks.
Taking my question.
Just wanted to talk a little bit more about retail Ed.
The decision to to delay that.
Just can you give us some more color on on what you're thinking is and why what you're seeing in the M&A market that thinks it makes you think it's going to be delayed so long.
Yes, Kelly I'll take that one I mean, as you might imagine the M&A environment for retail is just poor.
Not a lot of transactions.
Happening, especially of really healthy companies.
At multiples that I would say.
Shareholder and you want to five would be comfortable with it.
And so that's number one number two is when you look at the results of our retail banners. Our teams have just done spectacular work, they're an important part of the communities the communities rely on them.
And so they're just they're doing really well and so we don't want to own retail forever, we've said that publicly.
But we just don't feel like in the best interest of our shareholders. It's just not the right time to do it we'll wait until their stability in the market.
And there is demand for really healthy retailers.
And in the case of club was number one market share.
Now, it's not the right time to disturb the communities.
And everything that's going on with.
The retailing food.
So I guess in that vein can you understand us help us or help us understand how how healthy.
Those businesses are you're talking about 1.2 billion in retail sell them not exactly sure how much.
Shoppers, how many stores are staying.
Selling for shoppers into.
Discontinued ops versus continuing ops, what kind of same store sales those businesses, we're trending at how they are now.
Yes.
How can we think about what the health of the business Yeah. So John John will give you some color in the second.
We have a couple of shopper stores, a handful of stores that have yet to be sold the but they will be sold.
We're just finishing up some.
Some of the work to do so the rest of though will be kept.
And the operated.
Up underneath costs have come largely provide the infrastructure.
And.
To give you some clarity we're in the process of separating retail entirely from unify right now it's complicated as you know and.
We think it's probably going to take us better part of.
I'd say nine to 12 months to fully separate the two companies.
I think we can give you some color John you want it to want to take a swag at it.
Yes, Gary I'll tell you how I think about it if you a if you just looked at that combined retail business of Cub into shopper stores that were going to move to continuing ops.
They do roughly 2 billion a year of.
Of sales the might to be a little bit more this year with some of the code activity, but they do roughly 2 billion a year.
The reason the 1.2 is called out is because there are some of the intercompany sales from our warehouses to those retail stores that we have to eliminate so that met increase will be roughly 1.2 give or take.
And then the thinking about the earnings I think if you just looked at a sort of a normalized view of a 5%.
EBITDA margin I think that will give you. These they get in the ballpark of how we think about the earnings for that company and the other thing just to build on Steve's comment as we think about the you know carving out code, making a standalone over the next nine to 12 months were also proactively looking for.
MEP solutions, so that we can make that change even more marketable when we get to the that stage.
And I guess this the last businesses. This is helpful. But the last on this do you anticipate investing in these stores over the next.
24 months.
Yes, so we certainly have a cadence of store renovations.
That we will continue to do we're also investing in technology to update their technology platform.
To give them better access to data among other things. So there is some nominal spending that's going to take place.
In retail certainly over the next two years until we sell it.
Thank you.
Sure and I think Thats the end of the color. So I wanted to thank everybody for participating Kevin you follow up calls I will be in my office today with that we will look like you with our fourth quarter.
This concludes today's have a great day.
Thank you ever.
This concludes today's conference call you may now disconnect.
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