Q4 2020 United Natural Foods Inc Earnings Call
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Now I'd like to hand, the conference over to your Speaker today seems like Steve One quick Vice President Investor Relations. Thank you.
Thank you.
Please go ahead Sir.
Good morning, everyone. Thank you for joining us on unifies fourth quarter fiscal 2020 earnings conference call by now you.
By now you should have received a copy of the earnings release issued yesterday afternoon. The press release web cast and a supplemental slide deck are available under the investors section of the company's website at Www Dot unified Dotcom joining me for today's call are Steve spinner, our chairman and Chief executive off.
Yes, Sir John Howard, our Chief Financial Officer, Chris Testa, President of unify and Eric Dorn, Our Chief operating Officer, Steve, Chris and 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 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.
Note 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 with that I'll now turn the call over to Steve.
Thank you Steve Good morning, everyone and thanks for joining us on our yearend call.
As you saw in addition to reporting our fourth quarter and fiscal year results.
We also announced the succession plan for Martin rewards to you all.
I'll speak more about that shortly but first I will just.
Well discuss our fiscal 2020 rule.
We finished the fiscal year early last month and it truly was a monumental year for you Wanna fight in many respects.
Our financial results in the fourth quarter and for the year produced record sales and adjusted EBITDA.
Driven initially by the strength of our integration work and consumer demand driven by coded as well if you want to fight execution success.
Fourth quarter sales grew 8%, while adjusted EBITDA grew 28%, resulting in a 50 basis point expansion in our adjusted EBITDA margin.
This strong margin performance is a testament to the efficiency of our network and our ability to generate operating leverage as we increase our top line.
For the full year, we generated $284 million of free cash flow and reduce our net debt outstanding by nearly $390 million exceeding our full year debt reduction expectation.
Our net debt to adjusted EBITDA leverage ratio finished the year at four times about a full turn lower than at the end of last year now this.
Now these results wouldn't have been possible.
The people and culture are unified.
And I want to thank all you want to find associates for their outstanding focus and execution. During what has been unprecedented times for our company and for our country.
The passion and caring of our people and our company have been clearly demonstrated in recent months.
During the early days of coding, we proactively took action to manage the spike in demand from customers and consumers, while prioritizing the health and wellbeing of our associates as evidenced by our early response with heightened safety sanitation protocol.
And flexibility to our attendance and productivity policies.
I'm, so proud of our culture.
Our response to communities a need social injustice diversity and inclusion puts you want to find the leading edge of continuing to do what's right.
We have a strong diversified customer base from which we can grow sales we have.
We have an unmatched distribution center network that we've shown can handle demand capacity and performance at scale.
With one new business from a variety of customers, including those who self distribute to their stores, but recognize the value we can bring to their operations.
We believe will win more business going forward.
For example, we have successfully hired several new leaders to further enable long term success, including a new chief supply chain officer.
A new CIO.
And a new Chief marketing officer all.
All of which positions us well for the future.
There is power in our scale.
Right in our partnerships and people and we have.
And we have never been better positioned for future growth.
We have delivered on our promise to transform the world of food throughout North America, and build considerable momentum towards building, a better future with better food.
Let me now turn the call over to Chris to provide more context on our business performance, Chris Thanks, Steve and good morning, everyone. It's my pleasure to join today's call to talk about key trends in our business as well as the drivers that differentiate unify and give us confidence for long term growth.
Also provide brief comments on operations and our retail results.
As you saw in yesterday's press release, we changed our sales channel reporting John will get into the details and rationale behind these changes that now focus on the size of the customer rather than the nature of the products purchased but I'll comment on the performance of each channel in the quarter.
Fourth quarter sales to change our largest channel accounting for about 40% of sales totaled $2.7 billion, an increase of 6.9% over last year on a comparable 13 week basis.
Our fourth quarter chains growth rate includes a 270 basis point headwind from three customer bankruptcies that occurred in the second quarter fiscal 20 without that headwind sales growth of chain customers would have been nearly 10%.
Fourth quarter sales to independent retailers, our next largest channel totaled $1.8 billion accounting for about 26% of sales in the quarter.
Independent retailer sales grew levin, 0.4% compared to last year independence have benefited greatly during the past seven months driven by a population migration from cities the suburbs and a growing consumer desire to shop, and smaller footprint stores and support local businesses.
Our third largest channel at 17% of sales in the fourth quarter is supernatural and represents sales to our largest customer.
Fourth quarter sales in this channel were $1.1 billion, 3.6% greater than last year the growth in this quarter versus prior quarters is due in part to the impact of categories that have been adversely impacted by co that such as bulk ingredients used for prepared foods, we expect our year over year sales to this.
Customer to improve as we move through fiscal 2021.
Sales within our other channel, which represents roughly 8% of our total revenue were slightly more than $500 million down 2.1% from last year strong growth in E. Commerce sales the fastest growing part of our business were offset by anticipated declines in military and foodservice related to Cove. It.
Finally, retail sales amounted to $640 million, which represents an identical or same store sales increase of over 21%.
This reflects strong retail and E com sales, particularly a cub, who aggressively marketed as home delivery and click and collect services both of which led to year over year E commerce sales growth rate and the triple digits the retail.
The retail team has done a great job protecting the safety of our 6000, plus retail associates and our customers well, making sure the stores are running as efficiently as possible.
We are pleased with the performance from the retail operations and all the team does for its customers and its communities looking across all these channels. Our top 100 wholesale customers grew sales by more than 12%.
Our top 100 customers represent over 70% of our wholesale revenue with an average annual purchases of at least $30 million. These customers are winning with unify.
Part of our sales growth with the top 100 customers. This quarter came from our cross selling efforts, which we've talked about in previous calls and fear.
In fiscal 20, we realized over $250 million of cross selling revenue, which.
Which meaningfully exceeded our goal.
Customers have expressed a desire to expand their offerings and we believe we have an unmatched selection of products and services to help them do so let me.
Let me elaborate on the opportunities.
Earlier this year, we added 1500, 3500 top selling natural and organics skews into our conventional distribution centers to help customers expand their offerings with on trend products.
Also professional services Division made almost 1000, new cross selling wins into unifies natural customer base. As a reminder, our professional services group offers turnkey retail and back of the house solutions to help our customers run their businesses more efficiently.
Finally, we're also using our diverse portfolio to help retailers keep their shelves full by replacing long term out of stock items with alternative items that have plenty of inventory.
And the good news is we're only getting started.
As cross selling gains in fiscal 20, whether some of many small wins, where we introduced new items or services that align with store offerings with consumer trends.
Moving forward, we see greater growth opportunity within our existing customer base and displacing other wholesalers or supplementing captive distribution with unifies unique ability to build out the store wholesale distribution remains fragmented, which means despite unified scale, we have tremendous opportunity to grow through cross selling and expand.
Penetration just with our existing customers remember freedom of food choice matters to our customers and their end consumers and over the past seven months, our wholesale business prove the incredible power of scale, we've built and the transformational service, we provide to our partners and now.
Another area of differentiation is E commerce, where coal that has led to an unprecedented spike in demand for online grocery purchases.
It is estimated that U.S. grocery purchases have hit E. Com adoption rates that were not expected to be achieved in three years and just three months and unify has multiple ways to capitalize on these trends.
First we have several large dot com providers as customers and their sales grow our sales grow we.
We also have b to b businesses, unify easy options and on a screen that sell grocery wellness items direct to alternative channels, such as bakeries are fitness studios that enjoy the flexibility of the program and our direct to door delivery finally.
Finally, we have a well established and growing turnkey program that allows traditional brick and mortar retailers to offer E commerce buying solutions to their shoppers on a very similar platform used by our retail banners coven shoppers.
This includes website and phone app offerings as well as leveraging our two year relationship with leading ecommerce providers to receive preferred pricing for product selection and ore delivery.
As a proof of the success, we're experiencing since the beginning of co that we've added 300 storefronts to our E commerce platform as many of our customers have asked us to help them with offering additional purchase options to their shoppers looking forward. We will continue to leverage these business models. In addition to expanding our E.
Ecom revenue opportunities private brands represents another big opportunity for us leading into co bid our private brands portfolio of over 5000 skews across 20 brands generated over $2 billion of retail sales, which place our private brands group at revenue levels equal to about the top 50 food and Bev.
Average companies.
In the fourth quarter, our brands plus portfolio grew over 17% and we believe they're sustainable trends that are going to continue to fuel growth, including an economic downturn, where consumers are looking for value and quality and the emerging consumer behavior of brand swapping.
According to Mckinsey, 36% of consumers tried a different brand since coded and 73% plan to continue this behavior.
Our brands plus portfolio benefited from higher service level, the national brands, which helped us capture consumers. We love these trends because they create loyalty for our customer stores and they drive better margins for both unify as well as our retailers we have an experienced team leading our brands business and we're planning on driving incremental.
Until future growth through product innovation, and increasing penetration of our base business.
In addition to looking at incremental sales opportunities with our customers. We're also aggressively pursuing new business, we use sophisticated CRM technology to track over 1000 sales opportunities ranging in size and channel tight from smaller independents to medium and large chains are down.
Our diverse customer base and our unique ability to sell multiple channels is an incredible asset that we're just beginning to leverage switch.
Switching gears to operations, we've now completed the Pacific Northwest consolidation of five distribution centers into two Dcs in Ridgefield, Washington, and Centralia, Washington.
We will be adding automation to our ridgefield location by the end of the fiscal year and we have begun introducing automation in our new state of the art Riverside facility in Southern California.
Automation will be used primarily for each pic technology, which will help us provide higher throughputs better accuracy and more efficiently service, the southern California and surrounding market that we believe has a great growth potential for unified.
Our continued focus on managing cost balance against the safety of our associates helped lower wholesale operating costs as a percentage of sales by nearly 35 basis points in the fourth quarter compared to last year and we are.
And we're optimistic we can realize the leverage of scale to continue to lower opex rate.
Going forward, we'll be placing a heavy emphasis on standardizing processes and using higher level data analytics to drive decision, making and generate these incremental operating efficiencies. This.
This is the next logical step and the transition we've previously spoken about moving from integration to optimization and applies on both the revenue and the expense sides of the business.
As Steve stated the last two quarters have proven that we can leverage higher sales into expanded operating margins, even with headwinds from coated related costs.
And finally before I turn it over to John I want to comment on our annual National Expo that we originally planned to host in person last month, but instead made into a virtual selling show. This is.
This is an event that historically drew thousands of customers and suppliers. It combined educational sessions with an unmatched buying show and networking capabilities.
We were amazed with the participation levels at our virtual event this year and over $400 million in sales recorded at the show a total that surpassed last years in person event as retailers wanting to take advantage of favorable buying opportunities and secure inventory for the holiday season I want to.
I want to thank our suppliers and customers for such a great response, we truly appreciate the trust you place on US hopefully we can all get together in person next year, but until that time again, many thanks from all of us at unify with that.
With that I will turn the call over to John Thank you.
Thank you Chris.
On today's call I'll cover our fourth quarter financial performance balance sheet capital structure and outlook for fiscal 2021 before.
Before I do that let me address two of the accounting and reporting changes reflected in our fourth quarter and full year financial statements found in yesterday's press release.
As we discussed on our last call we moved our retail operations into continuing operations as a result, the retail sales gross profit and operating expenses from our retail operations will now be part of our statement of operations or PNM.
Previously these retail items were included within a single line entitled income from discontinued operations net of tax.
There is no change to adjusted EBITDA as a result.
We'll begin depreciating, the fixed assets of retail, which will add an incremental expense to our GAAP and adjusted earnings, which I will elaborate on more in a moment.
We've also changed our sales channel reporting to better reflect the underlying nature of our customer base.
Our new channel breakdown reflects the continued move away from natural and conventional towards one unified and present sales based on customer size defined by store count rather than the predominant major products carried meaning natural versus conventional customers, who typically operated more than 10 stores.
Are now presented in our chains sale channel and those with fewer than that are presented as independent retailers.
The definition of our supernatural channel has not changed with whole foods remaining the only customer currently included in this channel.
The definition of our other channel remains substantially unchanged as well this.
This is explained in more detail in footnote one of our press release.
Lastly, as a reminder, we previously reported wholesale sales to code under the assumption that banner would be sold with a supply agreement.
Now that we are presenting koby retail sales those wholesale sales to come are now eliminated.
We've added counting backdrop, let's move to the strong results, we delivered in the fourth quarter.
Net sales for the 13 week fourth quarter totaled $6.8 billion. This represents an 8% increase over last year's fourth quarter on a comparable 13 week basis.
You will recall last year's fourth quarter had an additional week as part of our 53 week fiscal 2019 and that we contributed approximately $475 million in sales to the quarter and fiscal year.
Fourth quarter gross margin rate was approximately 41 basis points higher than last years fourth quarter.
The largest driver was our retail operations, where sales grew at a greater rate than wholesale and were lower levels of promotional spending drove a higher retail gross margin rate.
These factors contributed 29 basis points to the consolidated gross margin rate.
The remaining increase came from wholesale driven by favorable inbound freight expense and a lower year over year LIFO charge as inflation rates came in lower than we had anticipated.
These items were partially offset by decreased levels of vendor funding and slotting income fourth quarter operating expense rate decreased 20 basis points compared to last year's fourth quarter, our lower operating expense rate was driven by the benefits of our synergy and integration efforts as well as strong leverage on the fixed portions of our op.
Operating and administrative costs.
It is important to note that Q4 included $31 million or 45 basis points of Cove. It related expenses to more both the health welfare and safety of our associates are stay.
Our strong sales increases higher gross margin rate and focused expense management translated into very strong profit performance.
Fourth quarter, adjusted EBITDA was $198 million, an increase of 28% versus last year's fourth quarter on a 13 week comparable basis similar.
Similar to Q3, we expanded adjusted EBITDA margin rate clearly demonstrated our ability to handle higher volumes and efficient we leverage those sales into higher EBITDA margins fourth quarter net interest expense was $46 million a decline of $9 million from last year on a comparable 13 week basis.
Driven by lower average debt balances and interest rates.
The effective borrowing rate for the fourth quarter was approximately 6.6% down 20 basis points from last year's fourth quarter, primarily attributable to lower LIBOR rates compared to last year Q.
Q4, GAAP EPS was 89 cents per share, which included net charges of 17 cents per share as broken out in our press release.
Fourth quarter, adjusted EPS was $1.60 per share a 205% increase from last year's fourth quarter adjusted EPS when excluding the additional week last year.
Let me go back to the retail depreciation comment I made earlier and which you'll recall I previewed on our last call due to its impact being included in the updated fiscal 2020 guidance. We gave in June.
Without getting too technical when a business is placed in discontinued operations the assets related to that business are classified as assets held for sale and depreciation on those assets is stopped if that business is later moved from discontinued operations back into continuing operations like we're doing with the majority of.
Our retail business the accounting rules require the company to calculate the depreciation of the assets going back to the date that the assets were originally categorized as held for sale and record a charge for our retail business that means that we must calculate depreciation going back to the end of Q1.
Fiscal 2019 and include in this quarter's GAAP results the entire depreciation for those seven subsequent quarters.
This amounts to $50 million or approximately 71 cents per share when spread across the two fiscal years.
This quarter's adjusted EPS includes just the seven cents of depreciation that relates to the fourth quarter of fiscal 2020.
We're applying the same approach to calculating our full year EPS why 20, adjusted EPS, which now includes 31 cents per share of charge for retail depreciation.
The remaining 40 cents of retail depreciation is included in the full year fiscal 2019 results, which have been recast to reflect this change.
Lastly, with retail being reported within continuing operations. We are now reporting it as a separate segment to assist investors. We have included historical quarterly segment information for fiscal 2019 and fiscal 2020 as part of the supplemental slides posted to our web site.
The presentation of adjusted EBITDA for retail includes the rent expense that was previously reported within continuing operations as well as an allocation of administrative overhead costs.
Turning to the balance sheet, we finished the year on a much improved financial position with total outstanding net debt of $2.6 billion and total liquidity of nearly $1.3 billion.
A combination of strong free cash flows and asset sale proceeds partially offset by an increase in finance lease obligations led to a $390 million reduction in our net debt level versus the end of fiscal 2019.
Our lower net debt balance and strong Q4 operating performance drove our leverage down to four times, which as Steve stated is about a full turn less than where we ended fiscal 2019 over.
Overall, we're very pleased with our performance. This year, we significantly beat our initial full year guidance, we reduced net outstanding debt by more than we originally anticipated through stronger free cash flow, while still retaining valuable assets and we plan to sell in the future and we're entering the new fiscal year and is significantly stronger financial.
And with favorable operating momentum.
Turning to our outlook for fiscal 2021.
As we all know today's operating environment is changing faster than at any time in recent history and presented challenges to making financial projections.
However, we are providing our outlook for fiscal 2021 based on a set of key assumptions as follows.
First our sales guidance assumes food at home consumption remained elevated and continues to outpace food purchases away from home, particularly in the winter months when outdoor dining becomes less of an option in many parts of the country.
We believe this will be the case through this fiscal year, which lines up with recent CDC reports that suggest a widespread vaccine is not likely to be available until next summer a scenario that obviously could change at the same time, we are expecting to continue to incur some kobin related costs, including continued safe.
And sanitation protocols.
As we've talked about before lower promotional spending at retail and fewer new item introductions will both adversely impact us this year.
We're also not anticipating another stock upsurge like the unprecedented buying frenzy experienced in March.
And finally, we're planning to make various operational and commercial investments that will be a continuation of our network integration and optimization work as well as incurring modestly higher employee benefit costs with all of that taken into consideration for fiscal 2021, we expect full year net sales to be in the range.
$27 billion to $27.8 billion, which represents a nearly $900 million increase over fiscal 2020 or about 3.3% at the midpoint.
As you'd expect we anticipate that the first two quarters will show higher year over year growth rates.
While we expect continued demand and strong results in the back half of the fiscal year, it's important to keep in mind that year over year comparisons will moderate as we lap the pantry ability and that occurred at the outset of covert during March and April 2020.
And while we still expect elevated demand in the third quarter sales in that quarter are expected to be lower than the third quarter of fiscal 2020 due to the unprecedented stock Upsurges Cove and began to spread.
We're expecting adjusted EBITDA for fiscal 2021 to be in the range of 692 $730 million, an increase of 5.5% at the midpoint and a growth rate well above the rate of the sales increase.
Adjusted EPS is expected to be in the range of $3.05 to $3.55 per share an increase of 21% at the midpoint.
This reflects our expectations for increase in adjusted EBITDA lower interest expense tied to lower debt levels and an adjusted effective tax rate of approximately 27%.
We expect to reduce net outstanding debt by a minimum of $300 million, primarily through free cash flow cap.
Capital expenditures are expected to be in the range of $200 million to $250 million, whereas.
We're assuming minimal asset sale proceeds beyond the monetization of the $40 million note receivable related to fiscal 2020 sales of the Tacoma distribution Center.
We expect our net leverage to be less than 3.4 times by the end of the fiscal year.
In summary, we're all very pleased with our fiscal 2020 results and excited for what we believe will be an even stronger year in fiscal 2021.
With that let me turn the call back to Steve Thanks, John.
As you heard we will build our business in fiscal 2021 and beyond.
Wholesale services bran protein fresh and so much more weeks.
We expect another year of strong growth, which we expect will incrementally expand our EBITDA margin.
We plan to further de leverage the balance sheet through continued focus on generating free cash managing capex and monetizing assets, where it makes sense.
We also remain firmly committed to being good stewards of our plant our communities and our people over.
Over the past year, we've taken several steps to advance environmental social and governance practices, yes, GE in our businesses, including the publication of our first SaaS be disclosure, which measures unify sustainability efforts against the series of industry specific standards.
To completing a materiality assessment to prioritize initiatives and.
And three establishing board level oversight of our programs as well as an internal executive committee to provide strategic review and accountability on ESG topics are.
Our SG program is aligned to three pillars, better for our world better for communities and better for our people.
As it relates to our world, we continue to focus on reducing our environmental impact.
Conserving natural resources and promoting sustainability across our value chain and in our operations in early 2020 unified joined the climate collaborative solidifying commitments to energy efficiency food waste reduction and sustainable transportation.
As for our communities, we believe that healthy food and food variety matter and we play a vital role in delivering safe quality and nutritious food options to more tables across North America, we are.
We are also working to increase access to better food, particularly for people in low income and rural communities or in vulnerable situations.
You want to find foundation provides grants to non profit organizations working to build better food systems and to nurture everyday health.
As for our people the same.
The safety and well being of our associates is our top priority.
We are focused on fostering a culture of caring throughout organization continuously striving towards safety in our workplace, where zero injuries and accident is possible we have.
We have pledged to promote equality celebrate diversity dismantle systemic racism and support racial justice.
Activating change from the inside of unify and then.
And then out through listening learning and accountability.
We will do this by increasing diversity in leadership roles.
Addressing food insecurity through financial in kind and volunteer support and.
And by leading change across our industry and in the food system. All of these practices are integral to our business strategy and we believe they deliver significant value to our stakeholders, including our shareholders our associates customers suppliers and communities.
Finally, let me spend a moment talking about my decision to retire as CEO.
As many of you know.
I've had the privilege to lead this great company for the past 12 years when I.
When I joined unify annual sales were around $3 billion.
Working with some great leaders, some amazing retail customers, we've grown the business to nearly $27 billion in sales this past year.
Through it all we've adhere to a set of principles that have defined my life and my career.
Doing the right thing.
Treating people fairly and with dignity, helping one another and winning together as a team I could.
I couldn't be happier with our leadership team old and new and the strong governance and operating disciplines in place.
I have complete confidence that you want to fly will continue to grow to innovate and lead our industry into the future.
And our future has never been brighter as.
As we near completion of you want to fight integration activities and move our attention to expansion of our services technology E Commerce perimeter and services businesses 20.
2020 demonstrated to me that all the work done during the last several years around building a holistic wholesale business was the right strategic decision.
Within a year feels like the right time to turn the reins over to the next generation of leadership.
I am excited to remain involved in our continued journey.
As executive Chairman and will work to ensure a smooth transition when my successor is named ill.
Ill also remain involved in the search for talented new board members, who share a passion for this business and it will contribute their talents to support our growing 27 billion dollar business.
The future of unify has never been stronger.
As we think about the next decade I'm confident that unify will continue to lead by remaining true to its culture, while advancing investments in supply chain services technology, and a commitment to bring value to its customers every single day.
With that I, Thank you and we'll prepare to take your questions.
At this time I would like to remind everyone in order to ask a question.
Star then the number one on your telephone keypad.
Your first question comes from Bill Kirk of MKM Partners. Your line is open.
Hey, Thank you for taking the question.
I wanted to talk a little bit about that.
Coming holiday season, and what you are seeing maybe in terms of actions by by retail customers are you seeing anything from them in terms of increasing inventory days that they're willing to hold or pull for pulling forward. Some of their some of their holiday spending or is holiday assortment.
Hey, Bill this is Chris good morning.
So the retailers.
Our.
They've got limited space. So they they would probably like to increase their inventory, but there are limited in what they can do I can tell you from our perspective, two major things that are happening. One we began talking about the holidays early in the summer and began to build up on those holiday like items Brock Cranberry sauce pump.
Good spice and so forth.
Because we think it's going to be a big holiday season, with a lot of small gathering first birthday gatherings.
From a retailer perspective, the one behavior that we're seeing is.
At our recent show there was a huge interest from our retailers to secure inventory ahead of time in other words commit to the inventory to be delivered to make sure their stock their shelves were stopped and then.
And then finally for any of those products that are are still long term out of stocks and we all know what they are we.
We've been finding alternative supply for our retailers to make sure. The shelves are full for the holiday season.
Okay, Great and then I guess related what it what are you seeing in terms of.
Freight lanes or freight availability.
For this holiday season.
Phil This is Eric.
We are seeing increased.
Requests for freight lanes, we obviously have a great deal of strength in that and we are leveraging our size.
We need so at this time, we do not see an issue with that but we're watching it very carefully yes.
Yes, remember bill that the vast majority of that fleet, we own and operate and for the product that we move cross country or by rail we do have contract carriers. We've contracted volume so that that's not a problem that we're going to face.
Awesome. Thank you I'll hop back in the queue.
Your next question comes from Karen short with Barclays. Your line is open.
Hi, Matt.
Congratulations Steve Calkins, you for a long time, I know well get a few more quarters in there.
Hi, congratulations.
So im sorry to start the business how many thanks, Michael related so I'd have to start with one housekeeping question.
I guess first question I had with respect to retail EBITDA are you.
Our U.S burdening that EBITDA margin. So when I look at the margin you burning out with distribution cost, meaning allocating for distribution cost to retail or color as a seller and a buyer looking at your EBITDA margins would they need to hit that wed.
Additional distribution, assuming you didnt attainment distribution.
Yes, so thats a true EBITDA number so if we were to look to sell that business today that would be the EBITDA that would be something that we would sell it from the other comment I would make about retail just to remind everybody that we do have.
Some very valuable retail real estate in other words corporately owned stores that.
It was right we'll also sell.
The sale of the downturn.
Okay. So it doesn't it that you are burning.
And the second question is in terms of modeling can you.
Can you give a color on what.
Comp where for retail and for Q 19.
John do you have that offhand I don't.
Q4 of 19 for you Gary when you ask the question you're talking.
Sale indexed index, what now we just got to get a sense of what the two year comp right, because obviously, 21% at various times, but I'm trying to get that from a two year basis.
They could be it.
Come from Knight, we don't for 19 would be 18 data post acquisition, we don't have the 18 data.
Okay and.
And switching gears to the top line.
Obviously, you gave us where you are attending.
And that does that.
Laura chain comment, but you gave us where you're trending on the top line and now at that 11% number any thoughts from deceleration maybe can you talk in terms of where you recorded in the quarter. So I guess the first question is where do you see that deceleration most.
Prominently and then where are you trending in the quarter to date on topline.
Well, let me take the first cut it and then I will turn it over to Chris So again in our chain number.
We still have some of those couple of those bank customers in there that we don't we're not getting the revenue from.
We are also seeing some retailers that are negatively impacted by coated in other words those retailers that are heavily focused on bolt prepared foods.
Those categories that are just not selling.
Obviously foodservice and military are still fairly negative, even though foodservice has come back a bit.
There's certainly no inflation in the numbers, there's no promo.
And we don't expect to see that.
So I think those are the primary drivers.
In that 8% number Chris.
No Steve I mean look the general market dynamics as well you know if you look at the quarter in its entirety from from May through July.
And if you look at retail comps.
Reported out there there's definitely been a seller.
Celleration across the entire industry, but what I would look to as our top 100.
Look at our top 100, which is over 70% of our customers there was 12%.
So I think you can use that as your your comparable to what is happening at retail after you factor in retail inflation.
And the difference between retail and wholesale that.
One thing I would add Karen is that the interesting thing that we learned as a result of the dramatic increase as a result of Cove it.
It is that our view a building capacity it's different today.
Than it was perhaps six months ago, we have more capacity than we thought and so that was one of the great takeaways.
So as a result of that we think that and we're very optimistic that our business that we thought would be constrained in many markets where now actively addressing.
In other words, we're working hard to put protein and produce a lot of other categories into these buildings that we thought were at capacity, which really aren't.
Okay. That's helpful and sorry, just color on the topline in the quarter today.
John you want to handle that one.
Yeah, I think what we're not providing any information beyond the annual guidance at this point Karen I think we as we said in our in our script in our opening comments.
We're continuing to expect the elevated demand through 521.
It's it's unprecedented we're in uncharted territory would as it relates to the pandemic, but we do believe that the 21 guidance is sustainable.
But as far as what we've seen so far in the first four to six weeks, we're not going to provide commentary on that right now.
I would just add when I.
Being mature.
Okay, great. Thanks.
Your next question comes from Rupesh Parikh open time.
Your line is open.
Good morning, Thanks for taking my question and you can also congrats on your future retirement.
Thanks for that.
So I guess I guess to start out John you gave some color I think at a high level insurance in terms of some of the EBITDA margin drivers. If you can maybe maybe flush out we think are the key positive negative dollar and as we look out.
For the balance of the year and it sounds like at least based on your guidance you guys are expecting some very modest EBITDA margin expansion.
Yes, I think when we think about the 521, we certainly have some tailwinds really.
Related to be.
Mandates in that we laid from the integration as we continue to go through.
The productivity and benefit from the synergy work that's already been done we're going to continue to see those tailwinds.
And certainly be elevated demand will provide that the continued tailwind.
But at the same time, we've got some headwinds going year over year as well.
So we've got that as we've talked about in previous quarters.
We'll have the continued lower promotional spend and slotting fees that that would normally benefit us, but theyve substantially disappeared in this environment.
We're also seeing if you look through our disc ops that have been reported.
We benefited in F y 20.
By certain shopper stores that provided EBITDA throughout the year, but have since been sold or shutdown.
Thats, a 10 to 15 million dollar headwind for us going into July 21 anyway.
We've got an additional headwind related to the the life insurance proceeds that we talked about earlier and up 20.
To the tune of about $8 million. So we've got.
Certainly some tailwinds going in but we've got some of those headwinds as well from an operational.
Promotional spend slotting dollars disc ops.
But we still believe we.
With all the work that we've done leading up to this point, we still believe very firmly on the.
The guidance range that we provided.
They were cash I would just add that keep in mind that 20, even though it's behind US was an incredible year.
Excuse me with a lot of adversity.
And obviously you see that in the results were not again, we're not going to have a repeat of what happened in March and April we don't think so it is possible as the restaurants start to close for the winter people start going back inside it is possible that we will see some search but we still live.
In a pretty volatile environment, whether it's because of cove in election, whether additional cost associated with all those things.
So we live in a pretty volatile.
There's also no inflation there is no promo spend that John mentioned earlier, we're growing EBITDA faster than our revenue.
And as I said earlier, we feel like that we actually have more capacity than we thought and so we provided guidance because it was important for us to provide guidance its guidance that we believe it but it does take into consideration all the things I just mentioned.
Okay, Great and then I guess, just going to Capex bank. So.
Thank you under $250 million for this year just given your commentary just about you know that you guys have more capacity maybe than what you guys thought previously is there is there an opportunity is I guess to reduce our capex spending number overtime or just any thoughts there.
Well, our our Capex right.
I'm sorry go ahead.
Yes, so our capex is that through $250 million, it's still it's about 80 bips of revenue for us some of.
Some of that is.
Some work that was targeted enough why 20 that we thought we were going to be able to do but we did have as you might imagine with the the elevated demand. Some of those projects were delayed and we are going to be implementing those enough. What 21, we are still working through some of the additional synergies as we go after that last page of the the initiative that will.
Doing up like 21 to 22, so I think as we think about capex longer term.
I think in that 80.
80, Bip range of revenue 90, Bip is probably reasonable.
Then as we get on the other side of the the last data the synergy work I think we'll see it normalize a little bit below them.
And automation is really important to us rupesh as evidenced by the couple of pretty significant projects that we had going on during over that or.
Going to be completed in the not too distant future.
Services business techno.
Technology.
That's where we're going to see that.
Really the primary spend of Capex over the next couple of years.
Great. Thank you.
Your next question comes from Scott Mushkin of our five capital your line is open.
Hey, guys. Thanks for thanks for taking my questions I have a couple of them. So so I just wanted to look back a little bit on the chains.
Growth rate, which I know, we talked about last quarter. It does seem like it's underperforming the industry a little bit even if you take into account the 270 basis point drag.
And so I was wondering what you guys think is may be driving that I mean, it's obviously a good number but I just wanted to think what you think maybe is driving that looks like a little bit underperformance.
Hey, Scott this is Chris.
Yes, let me walk you, we've got a diverse customer base right.
I think looking at again I would point to that the top 100 working.
Which includes chains pride predominantly as well as some of our our in the co ops.
That 12%.
Really reflective of what you're seeing at retail minus.
The inflation that retail enjoys the wholesale hasn't had.
But again you look at change that Tempur said.
With.
If you included the 270 bits of the bankruptcies, its actually a pretty pretty strong number and within that we got some chains that are growing 80.
18, 20, 25% summer 60, 70% and these again all in our top 50 or 100 customers. So.
I think we feel really good about the chains growth and if you combine our change in Indy combined you're looking at a number of around 9% and then you.
And then you add in the bankruptcies and you get to over 10%. So I think what you're seeing in our larger customers is indicative to what you're seeing.
Wrapping up the retail at large.
Thanks, Chris.
Just to follow up on that and then it gets my my other question is do you think you guys are seeing losses or customers or you're not seeing any losses.
No we're not seeing any loss.
So then my questions about the future our number one.
Margin improvement in the distribution business you guys tend to operate at a pretty low margin. The supervalu did too, but I do believe there's lots of kind of low hanging fruit there.
Any any thought processes on how 21 will will look on getting some improvement there and then it's a 22 and then also like no one's talked about it but the replacement process for Steve and by the way Steve Congratulations.
Thank you Scott.
So why don't I start with the replacement process.
So we have gone out and hired one of the leading firms.
To conduct the search.
That has that process has begun.
We have serious internal candidates we have.
External candidates that were well can consider.
Culture experience are.
Incredibly important to me and to the board.
The good news is that.
You know I want this to be a very very smooth.
Process, and we have a year in which to do it.
Which I think is more than enough time, and I certainly plan on staying on as executive Chairman.
To continue through the transition and for as long as the company needs me to do it so I can't think of a better.
Circumstance our scenario.
Which to pass the torch to the net.
To the next leader and I feel really good about it.
I think for me personally.
2020 numbers and what I expect to happen in 2021 really proved out the acquisition of conventional.
We went out on a level little bit to do it I think investors initially didn't like it as evidenced by the stock price but.
It was right it was a 100% right.
And you saw that in our numbers, we were able to leverage.
The top line into the bottom line, we're going to continue to do that and that goes right into your second year.
First question, which is on margin improvement I think all the work that we're doing in technology and integration and singular systems and net.
The mission are all going to have the net effect of improving our operating margins, reducing our expenses and improving our operating margins.
Yes, Steve I, just want to add to that is that.
Yes, three big opportunities, we have in the margin expansion is cross selling and selling more more.
More product to the existing customer base and we think there is a tremendous opportunity there as well as our brands and services business, which are both margin accretive to the typical wholesale margin. So just some other areas that we are aggressively pursuing to help us.
To help with that margin expansion.
And our pipeline is incredible I mean, our pipeline has never been stronger than it is today and I think a lot of those opportunities came as a result of.
Cove, It and certainly in the cases of the captives that relied heavily on unify.
To help them get product to the stores a lot of that we think will grow.
New customers and expanding relationships with existing customers.
Especially in light of new capacity.
You know I'm more optimistic than I've ever been about pipeline for growth.
Thanks, guys. Appreciate it appreciate the answers.
Your next question comes from Jim Solera of Northcoast Research. Your line is open.
Hey, guys congrats on the quarter.
Two questions I wanted to dig in on on the cross selling opportunity. So it was a 250 million can you guys break down how much of that is more the technology E commerce professionals.
How much.
Traditional products.
Yes, Jim This is Chris sure.
The vast majority of but.
Good on a truck.
Yes, Sir.
Services businesses a lot.
Mall wins from a revenue standpoint, although very high margins, but the vast majority of the 250 came from cross selling products either.
Either natural products into the conventional system or vice versa.
Okay, Yes, I would also.
I'd also add that.
Back to a comment that Chris made earlier on our brands business I mean, we now have brands that are.
Over 2 billion at retail and these are all brands that we own that many of the retailers view as their own private label and that obviously is quite margin accretive to us as well.
Yeah can you guys actually get a little more granular both on the kind of the margin profile for some of them additional services.
The private label just relative to the.
Additional distribution margin.
Yes, I think Thats a.
Thats a competitive edge.
Edge for us. So we are not going to disclose what the margins are on our brands or services, but rest assured there considerably greater than the margins that we earn on our wholesale distribution.
And then if I could just sneak in one more question.
You guys talked about the.
300, or so online storefronts that you added.
Just kind of generally what do you think the opportunity is.
Obviously, we've seen a lot of people.
Seeing that online.
You guys touched on the online shopping has really taken off three years in less than two years time.
We got to just the overall opportunity.
Just the customer bases and I guess.
Hello.
Yeah. Good question I mean E.
E Com.
Was roughly 3% of total grocery sales going into cold bid and now it's estimated to be up around eight or 9%. So certainly having an E. Com solution is going to be critical for us going forward.
In the most Keith we enjoy E com sales because a lot of those click and collect and delivered to homes are happening through the registers that we currently serve in other words their retail customers that our wholesale customers of ours.
Did that have an E com solution.
So those 300.
Storefronts that we've added since Tobin.
Those are typically the the independent retailers that are looking to get more competitive and adapt to consumers' needs I think thats one of the way that we'll capture E com.
But that's in addition to servicing some very large E com delivery company customers.
And so in addition to having our own E com platform through on a screen and lead the options. So we're also Jim looking at additional ways to capture E com because it's here, it's here to stay and work.
And we're going to continue to find ways to participate in it.
Thanks, guys.
Your next question comes from Edward Kelly of Wells.
Fargo. Your line is open.
And Steve Congrats as well.
Thank you I wanted to I wanted to ask you about the about guidance for next year, we just talk a bit more about the cadence of sales and EBITDA I mean, obviously, the first half will look different than the back half and just any additional color you can provide on what you're assuming in the back half as you lap as you lap to cope with demand.
Yeah, absolutely. So I think I think you touched on the key point, there Ed which is.
We lap the Q2, Q3, and Q4 and that demand that we saw that surge that happened in March and April which is our Q3.
That will be a difficult comp for us and while we're still anticipating be elevated demand throughout at by 21 is food at home stays high it's going to be a tough comp.
Quarter, a year over year for that for that Q3. So as we think about it we are expecting that first half will be a a.
A higher growth rate and even though demand will stay at that elevated level that in Q3 will temper down somewhat in Q4, we'll we'll come back up so as we think about that full year, that's sort of what we're thinking.
And it's I mean from a from a sales perspective, I don't want to lose sight of the fact that.
As we think about F Y 21, and we're anticipating that the growth that we have in our guidance.
We did see a Q3 and Q4 year over year growth of 1.2 billion and we're still growing on top of that with Aflac 21. So we're we're still seeing that elevated demand, we're still going to benefit from that and feel very good about that group.
Hey, one other thing Ed.
Is when you think about volatility yes.
Still not up a fair amount of volatility associated with fill rate.
And.
While fill rate has sequentially improved.
And we're now seeing fill rate on the natural side I thinks like 600 basis points or so better.
Then the fill rate on the conventional side and so our expectation is that fill rate will continue to improve generally we may see it decline around the holidays.
But that's still a moving target.
Okay, and then I wanted to just take us.
Taking a step back and I know, you're not going to give any guidance for flight 22, but you know this is when hopefully life is.
Life is more normal again.
It's probably the year that we should think about sort of valuing the company.
What if anything I guess, you know has transpired within sales and margins over this period do you think is sustainable like how would you encourage us to sort of think about the new normal for this business.
As we look past this depends.
Well I would start by saying, we're returning to normal takes quite a few current headwinds and turns them into tailwinds right. So.
Promo spend advertising new product introductions fill rate those are all things that are pretty significant headwind for us that will turn into a tailwind.
As we continue to complete the integration work and that is the migration onto a singular technology platform.
That turns from a headwind to a tailwind all things we expect to happen.
Capacity.
Certainly by 2022, we expect a considerably.
Uh huh.
Additional amount of customer wins through cross selling as well as new contracts.
So even though the rest.
The restaurant industry will will we gain volume I think we'll still be in a great position.
To take advantage of all those things that are currently headwinds that will then be tailwinds led by what I, what I said.
The only thing I'll add to that it was in the interim we are making permanent reductions in our in our debt.
Benefiting from that free cash flow, we are reducing that debt.
You know as we Didnt have wide 20 as were forecasting and guidance you went up like 21, we are continuing to go after that debt.
Remember that by 22 are in the 22 were selling cars.
And you can do the math of what you expect to see.
So four plus another.
Probably close to 200 million on real estate.
And so that in itself.
Will help continue to reduce.
Loaded.
Great. Thank you.
Today's final question comes from Kelly Bania of BMO capital markets. Your line is open.
Hi, Good morning. This is Steve to put him on for Kelly I'm just to start would you be able to provide us with what you've achieved for synergies in 2020 and what your expectation is for 2021 and if there is any change just sort of your longer term targets and then sort of related to that on a scale one to 10, how would you rate.
Your integration in terms of the level of completeness and what should we should expect.
See going forward and what you need to do.
Sure as it relates to synergies, we'll we'll provide a little more color at the Q1 call, but as it relates to synergies we have outperformed the hunt.
Outperformed the $185 million target that we put out there both in dollars and in the speed in which we thought it would take to get there and we're going to provide a lot more information on that as we get to our Q1 call and get into that 21.
And what was the second part your question Steve.
Just in terms of the integration sort of on a scale of one to 10. If you can where you sort of would would rank where you've gotten too so far and where you have to go any key sort of areas less to sort of integrate.
Yes, the tough to rank on a one to 10 I think what we have laid out there that we expected to achieve I would say we're at a 10, but we are still as evidenced by the the scale value the leveraging value we're seeing through our piano.
With the the elevated demand through F Y point, a lot of that value was coming as a result of all the synergy work that went into place leading up to it.
As we think about what's left the last big component. There is a thousand things that need to happen before and to get there, but the last big pieces that standardization of our a DC that Steve mentioned, a little bit earlier.
That's one that we're expecting to kick off towards the end of F 21, and 22 as the the final.
Stage of that synergy work.
Let me just add that the the cultural integration is complete the.
The completion of all of our.
SGN a sales legal finance et cetera has all been completed.
Processes have been completed the biggest single thing that remains is primarily from a technology platform and that process has started we expect that again to happen throughout fiscal 2002.
The vast majority of the work.
Yes, John.
Okay that that's very helpful and sorry, just to clarify you you've said you'd achieved greater than.
Greater than your expected target of synergies already which is great should we be continuing to think about additional synergies in future years on top of that or have you just achieved what you expected even faster than than you thought.
No I think theres still value to be had out there for synergies I think we're also continuing to look at optimization and productivity initiatives that will allow us to expand the value that we could achieve not just from synergies, but just into a broader productivity and initiative.
And we'll have we'll talk a little bit more of this in and.
In Q1, and we'll also we are currently working on a scheduling an analyst day sometime towards the middle of F Y 21 for us.
Okay. Thank you and then just we'll go through that in great detail.
Got it Okay and then just one very quick follow up to what Karin asked earlier on the retail side. Even if you don't have specific numbers for any quarter would you be able to give us a sense of where comp sales were trending pre cobot.
Just a general range would be really helpful for modeling purposes.
I think the way I would think about that would be would it was trending cub.
Cub as a market leader for us here in the Minneapolis market at the way I would think about is.
Pre cove it I think it would be considered trending at or slightly above what the market would have been doing.
And especially given that you'd be market.
Sandy It has here in the Minneapolis Saint Paul.
Then as koby it hit.
As many books sell the value in their retail business.
I think we'll be able to capitalize perhaps a little bit more because they were the market leader and trusted.
Retail store.
Store and I think they also.
Through some of the civil unrest situations and we've talked about this on some of our non deal road shows, but they did a great job managing through some of the civil unrest in downtown Minneapolis Pro.
Providing.
Access to food when some of the obviously some of the stores were in total disruption in disarray. They provided access to food too many folks that that needed. It we provided buses to other stores in order to provide access to food and that helps build those relationships and give us the edge on the growth.
I would just add that not only were our index is up over 20%, but our market share also increased significantly as well.
Okay. That's very helpful. Thank you guys very much for the color.
Hey, Chris and we appreciate your help on today's call that concludes management comments in Q and I will be in my office. If anybody has any follow up questions. Later today, we'll have a nice day everybody. Thank you.
Ladies and gentlemen, thank you for your participation you may now disconnect.
Okay.
Okay.
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