Q1 2021 United Natural Foods Inc Earnings Call
Welcome to the you on I five fourth quarter fiscal Twentytwenty earnings Conference call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session. I ask a question during the session you'll need to press star one on your telephone keypad. If your priority further assistance. Please press star zero.
First hand, the conference over to your speaker today Mr., Steve good price.
Vice President Investor Relations. Thank you. Please go ahead.
Good morning, everyone. Thank you for joining us on unifies first quarter fiscal 2021 earnings conference call.
By now you should have received a copy of the earnings release issued this morning.
The press release web cast and a supplemental slide deck are available under the investors section of the company's website at Www Dot you identified dot com under the events tab joining.
Joining me for today's call are Steve spinner, our chairman and Chief Executive Officer, John Howard, Our Chief Financial Officer.
Chris Testa, President of unify and Eric Dorn, our Chief operating Officer, Steve.
Steve Chris and John will provide a business update after which we will take your questions before.
Before we begin I'd like to remind everyone that comments made by management during today's call may contain forward looking statements. These.
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 SEC filings actual results may differ materially from the results discussed in these forward looking statements.
And lastly, I'd like to point out that during today's call management will refer to certain non-GAAP financial measures definitions and reconciliations to the most comparable GAAP financial measures are included in our press release.
I'll now turn the call over to Steve. Thanks, Steve Good morning, everyone and thank you for joining us on our fiscal 2021 first quarter earnings call.
As you saw in this mornings press release, we delivered another quarter of strong financial results first quarter sales grew 6% and first quarter adjusted EBITDA grew 31%, resulting in a 45 basis point expansion in adjusted EBITDA margin.
With the strength Weve shown during the last three quarters the tremendous confidence.
We have in our company and our strong commitment to increasing shareholder value, it's clear to us that the best days for you want to fly lie ahead.
As we continue to build and optimize our DC network.
Standard brands win new business.
And migrate our business towards customer solutions and.
And expand our fastest growing segment E commerce.
We believe the momentum from fiscal 2020, well continue.
As we gross sales and adjusted EBITDA in fiscal 2021 above and beyond our results from 2020, which were partially driven by Cove. It.
As a result of COVID-19, many Americans have been working from home as you know for the past eight months and doing so quite effectively this paradigm shift means more and more meals will continue to be eaten at home with products that have come through you want a price distribution network.
This trend will continue for the next several years as companies offer strategies evolve.
Do you want to fly our requirements for administrative and support offices will continue to shrink over the next several years as we increase productivity and associate work flexibility with work from home.
We've had and will continue to have great success in monetizing our dark real estate.
These factors support our belief that food at home consumption.
Well remain structurally higher and provide a strong tailwind to our business.
The strategic steps, we're taking are providing benefits to day and more importantly, they are positioning us for continued success in a post cold environment working.
We're consolidating distribution centers reshaping, our footprint and investing in automation to drive operating savings.
We're completing long term labor contracts that provide stability and lay the groundwork for future efficiencies.
And we're winning new business and focusing on future on higher margin private brands E Commerce and retail solutions businesses.
All key drivers that help our customers win.
Congress has demonstrated how important the local community markets are.
And you want to fly is uniquely positioned to provide the unparalleled selection brands and solutions that will generate sustainable when when growth for customers and do you want to fly.
Be addressable market for you want to fly is significant.
Chris will share some specific insights during his commentary.
Our new long term contract with key food signed in October reflects the critical importance of scale as well as the ease of doing business with you Wanna fight.
Key food is a cooperative of more than 300 stores with a large from market share in New York and the surrounding area and we believe their decision to partner with you Wanna fight is a clear and I think ambiguous endorsement of our business model and what only you wonder if I can do for them.
Their primary grocery wholesaler will be supplying their stores with branded and private label conventional and natural products across a wide range of categories.
We expect our sales to key food to total approximately $10 billion over 10 years or roughly $1 billion annually.
To serve key foods northeast stores will open a new highly productive distribution center in Allentown, Pennsylvania next fall.
This facility will also serve as our enabler to significantly expand our conventional presence in the important New York City Metro market.
You want to fly is well prepared to grow in this market with general merchandise it in an automated Carlisle, Pennsylvania DC.
Large scale natural DC in York, Pennsylvania, large scale conventional and fresh DC in Harrisburg, Pennsylvania, and now our new DC in Allentown.
As to our largest customer we began the process to address our supply contract, which as a reminder runs through October of 2025.
Since the pandemic broke we've both been focused on operating our respective businesses and meeting the needs of our customers efforts that will intensify during and through the holidays will heighten our focus on the contract renewal as we move into calendar 2021, and expect we'll be able to announce a formal.
Extension of our partnership early next calendar year.
Finally.
We're launching the next round of productivity and efficiency work streams shift.
Shifting from integration activities to a series of transformational initiatives that will position unify for future sales growth and margin expansion.
We began evaluation of this next phase of initiatives, which were calling value path a year ago.
Value path is a holistic approach to driving more value throughout our business, including across key elements of pricing procurement.
Operations and administrative functions.
We believe these initiatives will drive an additional $70 million to $100 million by the end of fiscal 2023 and contribute to future bottomline growth margin expansion and generate meaningfully incremental free cash flow.
Let me now turn the call over to Chris to provide more context on our business performance Chris.
Thanks, Steve and good morning, everyone want.
On today's call I'll provide a bit more context for our fiscal 2021 first quarter performance and discuss the key trends in our business I will also highlight drivers that differentiate unify and give us confidence in our long term growth.
As you saw in this mornings press release total sales for the quarter increased 6% or $375 million compared to last year's first quarter to put this growth into perspective consider the three month period ended October thirtyth syndicated foods sales as reported by Nielsen increased 8.9%.
This syndicated sales growth includes roughly 300 basis points difference between retail and wholesale inflation the.
The syndicated data also excludes the foodservice channel, which represents a nearly 100 basis point headwind to unified total company first quarter sales growth.
Considering the impacts of retail inflation and those channels negatively impacted by Covance. We believe our 6% sales growth is outperforming the market and driving share growth for you in a five.
Sales to our top 100 customers, representing nearly 70% of total net sales were up approximately 10.5%. We believe our strong sales performance is being driven in large part by our long term strategies. We have discussed during previous calls as well as favorable consumer trends in specific channels now.
Mainly cross selling efforts yielded an additional 60 million in incremental sales from the quarter.
As we discussed previous cross selling efforts consisted largely of many small wins with new item introductions.
Fiscal 21, we're beginning to realise larger wins as customers begin to aggregate more purchases with you and if I.
We continue to believe the increasing share of wallet with our current customer base of nearly 15000 is unique and very large growth opportunity for you and if I.
This includes selling more natural product to conventional operators and vice versa.
Expanding professional services and increasing the penetration of private brands and fresh categories. We estimate unify has a 140 billion dollar addressable market, including 38 billion from incremental revenue from cross selling to our existing customer base.
The second driver of the Q1 results as new business during the past 10 months the grocery supply chain was stressed and unified displayed consistent performance through our safety protocols aggressive hiring and leveraging our scale to procure high demand products.
This performance was recognized by the marketplace and as loud, our new business pipeline to expand including the contract with key food that Steve spoke about earlier.
In Q1, we began shipping to some of these recently acquired customers and we plan to continue to convert pipeline opportunities to new business wins to drive unified growth higher than the comparable industry growth. Another driver of our Q1 growth was a favorable channel trends. We continue to experience supernatural sales were up 9.3 price.
Sent over last year's first quarter, representing a 570 basis point sequential improvement from the fourth quarter of fiscal 2000. This.
This performance is largely being driven by center store grocery items that are over compensating for some of the declines from adversely impacted categories like bulk and prepared foods.
The fastest growing portion of our business is E commerce, an area of accelerating importance to the success of our customers are E. Commerce sales were up 93% in the quarter, including nearly 300% sales growth to the largest E. Commerce player who has also grown into a top 25 customer for unified.
It is estimated that E. Commerce now represents 9% of total gross repurchases and unify is positioned to take advantage of this trend in several ways, including partnering with E commerce operators.
Selling an online platform to our brick and mortar customers and through our own E commerce businesses under the unify easy options and honest screen platforms, which sell grocery wellness items on a direct b to b basis.
In addition to these growth areas unify as receiving secondary E com growth from our brick and mortar customers that are using E commerce solutions to sell groceries that they purchased from unify.
To put this in perspective Cub has averaged over 30000 ecommerce orders per week, which has led to an E com sales increase of 200%.
Although we do not recognize these transactions in our ecommerce reporting its an example, how unifies benefiting from this growing consumer behavior first quarter sales to change were up 5%, while sales to independent increased 7.4% the strength of our customers. In these channels reflects many of the same volume driving initiatives, we discussed previously and address.
Moving to the desire for consumers to shop, local and patronize stores with smaller footprints that are close to their homes. This is especially true in the independent channel, where we grew sales with 45 of our top 50 customers in this channel, including 30 that grew sales at double digit rate.
In addition to favorable revenue growth, we are experiencing across our core business. We continue to expand our professional services in private brands businesses as well growth.
Gross from these business units is expected to contribute to margin rate expansion for unify as we focused resources to driving these strategic initiatives.
Also both offer solutions that help customers increased sales improved their gross margins and lower operating costs and these businesses are unique to unify which strengthens our long term partnership with these customers.
Our strong topline results also extend to our retail business, where first quarter identical store sales increased nearly 16%.
In addition to the E commerce growth I already mentioned, the merchandising and operational changes we put in place over the past year continued to improve product mix and favorably drive results at both the Cub and shoppers banners.
On the operation side, we continue to move forward with our strategy to maximize our network and consolidate where opportunities exist to better service, our customers and deliver operating efficiencies.
We have previously discussed our consolidation efforts in the Pacific Northwest, where we expect the cost savings from that project to be realized as we move through fiscal 2021 and Ford.
Our next consolidating our Santa Fe Springs, and Vernon distribution centers into existing Dcs in southern California, and both the Pacific Northwest and southwest projects, we're modernizing our facilities by deploying automation, which has already proven to dramatically increase throughput levels improve our capability or track labor and.
Lower operating costs.
As we work through the investments we've made in these consolidation projects, we've absorbed about $20 million of higher operating cost in Q1, as a result of coated related challenges and new DC productivity growth.
The good news is we believe these incremental costs will diminish over the balance of fiscal 2021.
To put these changes in perspective when these large scale optimization projects are complete we will have consolidated from operating 10 distribution centers to six in these two areas.
By eliminating a net four dcs from the network, we've removed meaningful fixed costs associated with these extra buildings in the process, we generated approximately $125 million in cash proceeds while creating a footprint that requires less investment in working capital and we can realize lower net operating cash.
Benches, we.
We'd expect to achieve these type of benefits to varying degrees as we analyze and review the balance of our network.
Lastly, as Steve touched on since the end of fiscal 2020, we finalized new labor contracts at seven distribution centers covering more than 1200 associates. We're pleased with the long term stability and flexibility. These agreements provide and we will continue to pursue the modernization of our labor agreements across the enterprise as we negotiate the renewed.
All of these contracts.
When we consider the strength and diversity of our growing customer portfolio. The large addressable market opportunity in front of us unifies unmatched product and service offerings and scale and the relentless focus of our people to find solutions that benefit our customers. We're confident we'll continue to increase market share and to Echo Steve's comments, we from it.
I believe our best days are ahead of us.
With that I'll turn the call over to John.
Thank you, Chris and good morning, everyone on today's call I'll cover our first quarter financial performance balance sheet capital structure and outlook for fiscal 2021.
As Steven Chris said, we're very pleased with our strong performance from the first quarter in which sales totaled $6.7 billion. Adjusted EBITDA was $159 million and adjusted EPS came to 51 cents per share as a reminder, our first quarter is historically, our lowest quarter for these three metrics.
First quarter gross margin rate expanded seven basis points versus last year's first quarter, driven by a margin mix benefit from greater retail sales growth relative to wholesale sales growth as well as lower levels of promotional spending in our retail operations. This was partially offset by lower levels of supply related income.
In our wholesale business.
First quarter operating expense rate decreased 25 basis points, driven by the benefits of our synergy and integration efforts as well as strong leverage on the fixed and semi fixed portions of our cost structure.
As Chris stated our first quarter operating expense includes approximately $20 million or 30 basis points as a percentage of sales.
Our operating costs related to the startup of three distribution centers in the midst of the cobot pandemic as we focused on the safety of our associates and service levels to our customers. We believe these incremental costs will diminish over the balance of the year.
Our 31% growth in first quarter adjusted EBITDA on a 6% increase in sales translates to a 45 basis point year over year expansion in our adjusted EBITDA margin for the third consecutive quarter weve growth year over year, adjusted EBITDA significantly faster than sales.
These results provide evidence of unify the ability to leverage top line performance into even stronger bottom line growth.
We believe this growth algorithm overtime, we will generate significant shareholder value.
On a GAAP basis, we reported a loss of two cents per share, which included 44 cents per share in pretax non cash charges related to the acceleration of unamortized debt issuance costs and original issue discount due to the term loan prepayments made in the quarter.
And 30 cents per share in pre tax advisory fees largely related to our value pass project.
Our adjusted EPS, which excludes the impact of these items into smaller adjustments totaled 51 cents in the quarter our.
Our GAAP and non-GAAP EPS. Both include the impact of the operational challenges I referenced earlier.
Turning to the balance sheet, our total outstanding net debt finished the quarter at $2.7 billion, a $128 million increase compared to year end, but a $460 million reduction compared to just 18 months ago.
This reflects our customary first quarter investment in working capital as we add inventory going into the holiday selling season in support of our customers.
This higher level of working capital should convert to a source of cash in the second quarter.
Our net debt to adjusted EBITDA leverage improved to 3.9 times as the increase in trailing 12 month adjusted EBITDA more than offset the small increase in our net debt balance compared to year end.
We expect a seasonal reduction in working capital and the proceeds from the sale of our Tacoma DC, which were collected early in Q2 to contribute to debt and leverage reduction in the second quarter.
In mid October we issued $500 million in eight year unsecured notes a first for you in fr.
This note issuance used to pay down an equal amount on our secured term loan was executed to extend and stagger. The maturity dates of our capital structure, while maintaining ample liquidity and flexibility to meet the needs of the business.
This refinancing was a key step towards optimizing our long term capital structure, and we believe it will enhance our ability to refinance the remaining balance of the term loan in the coming years.
Steven Chris mentioned, we believe the current operating environment, we will continue to benefit food at home consumption, which combined with further anticipated cost savings from the work Chris from two gives us a high degree of confidence in our ability to achieve RF why 21 operating guidance.
Therefore, we are reaffirming our full year guidance for net sales, which we continue to expect to be in the range of $27 billion to $27.8 billion.
Adjusted EBITDA, which we continue to expect to be in the range of 692 $730 million.
And adjusted EPS, which we continue to expect to be in the range of $3.05 to $3.55 per share.
As Steve mentioned, we are strategically investing in a new distribution center in Allentown, Pennsylvania to serve key food because of this investment we are updating our F Y 21 guidance for capital expenditures debt reduction and leverage.
We now expect capital expenditures to increase by roughly $50 million to a range of 250 million to $300 million.
We also expect a corresponding $50 million decrease in our debt reduction outlook and now expect to reduce total outstanding net debt by approximately $250 million in fiscal 21.
And we expect to achieve net debt to adjusted EBITDA leverage of approximately 3.5 times by year end, a small increase from the 3.4 times provided as a part of our original outlook.
This assumes as I said on the last call a nominal amount of asset sales beyond the proceeds from Tacoma additional proceeds from asset sales, which last year totaled nearly $150 million could improve our net debt position and further improve our leverage.
The capital we are investing in our Allentown facility will improve our competitive position in northeast allow us to further build market share in Metro New York and position us for further growth beyond the incremental key fee revenue of 1 billion per year.
And while it will reduce our net debt reduction outlook for this fiscal year, we believe it will lead to higher levels of free cash flow in the future.
We remain very focused on improving our operating efficiency and have completed a substantial portion of the integration synergies related to our acquisition of Supervalu ahead of schedule and above our $185 million target.
As Steve mentioned in his remarks value path is our next set of productivity initiatives that will enable us to transform our business and lay the foundation for continued top line growth and EBITDA margin expansion.
The current year benefit of these initiatives is included in our fiscal 21 guidance. We expect the full impact of these productivity initiatives to ramp up overtime, reaching an annualized incremental gross benefit of $70 million to $100 million by the end of fiscal 2023.
We expect to reinvest a portion of these savings in driving market share gains accelerating innovation and investing in automation.
Balance of these cost savings are expected to expand operating margins.
Before I turn the call back to Steve Let me state that we are committed to increasing value for our shareholders. We remain confident we can grow our business overtime and realize that consistent performance is the cornerstone to driving shareholder returns.
We expect to generate meaningful cash flow over the coming years, and we're committed to further reducing debt to improving our leverage.
Thank you for your time this morning and for your interest in unify with that let me turn the call back to Steve.
Thanks, John as John discussed, we are laser focused on driving our business forward and highly motivated to increase shareholder value.
In the near term, we'll use our free cash flow to continue to reduce debt overtime, well look at a broader range of capital allocation alternatives.
In the next month or so we'll release, our 2020, environmental social and governance report cash.
Operating performance in the 2020 fiscal year.
After over a year or work will also be announcing our 2030 SG vision.
Any ambitious 10 year plan.
To pioneer solutions to pressing social and environmental issues within our foods system.
This plan includes expanding and enhancing our policies and practices related to climate change waste reduction food access safety wellbeing and diversity and inclusion.
Notably, we recently announced our formal intent to set a science based emissions reduction target.
Our target, which is under development today will be submitted for approval to the science based targets initiative within the year and will serve as a foundational goal under our better for our world pillar, which commits unified to reduce our contributions to climate change and increase Rick.
Zillions through operational excellence investments in clean energy and the pursuit of environmental Justice.
With this important milestone you want to fight is the first grocery wholesaler to join a global movement of companies.
Moving to mitigate the worst impacts of climate change and transition to a low carbon economy.
With millions of Americans struggling every day to access nutritious food.
Simply unacceptable, that's so much food gets wasted.
We recognize the importance of collaboration as we work to address this challenge and are thrilled to have recently joined US foods loss and waste 2030 champions to share best practices with others in our industry.
As a critical link in the food supply unifies committed to digging in to help find solutions.
Finally.
Working with our board succession Planning Committee Ahmad.
Optimistic that we will be able to announce my successor early next calendar year.
Our process has been quite robust and as identified exemplary talent, both inside and outside of unify.
I'm also excited about our search for board members, who bring a wider range of transformational and large scale experience to our company.
To wrap up.
Im really pleased with our business performance and encouraged by the holiday selling period and the sequential improvement in sales, we've seen compared to the 6% growth in the first quarter.
We're confident in our ability to deliver on our full year guidance and more excited than ever for our future prospects with that we're ready to take questions.
Okay.
Ask your question.
And your telephone keypad.
Our first question comes from the patch.
With Oppenheimer.
Okay.
Good morning, Thanks for taking my question. So Steve just going back to your comment is that you are seeing a sequential improvement quarter day. If you can provide any more color in terms of what you guys are seeing is or pantry loading are you seeing any geographic differences would just love to hear what youre, saying wait wait.
Well we are like.
Like I said.
Sequentially improvement improving.
I don't think its pantry loading I think that we're winning more business or cross selling more products to a wider range of customers.
If you look at the growth across our channels I think thats, a consistently getting better and so we feel pretty good about what the numbers are telling us now remember that we're going to be lapping.
Mark April and June.
Coming up early part of next year, but as we see it right now and the numbers look really good.
Okay, Great and then just for the quarter itself, how did the average Q1 play out versus your internal expectations.
We were pretty much right on target.
Exactly where we thought we would be.
Okay, Okay, Great and then I guess just my final question for you guys.
Meaningful success, so far with the key foods when it sounds like you're doing well in the cross selling front as well I. Just overall what are you seeing out there on the compelling from from came from the other players.
Hey, Rupesh net Rupesh, it's Chris yes.
Yes look it remains a competitive environment, but what we're seeing is.
Through the pandemic, we performed really really well and that's opened up our pipeline and in Q1, we began closing new business and that's basically because we have a stable supply chain, we have our scale to procure new products, we have the ability to sell natural conventional private label.
And so yes, it remains competitive but what we're hearing from the customers and what we're seeing in our results as we're getting new business.
Okay, great. Thanks very much.
I'm sorry, Thank you to you rupesh, but the other thing I would really add which which Chris mentioned in his script, which I think is really important and that is $140 billion addressable market and.
And so because we have the largest position in fresh the largest position in conventional and natural.
We've done the work Weve calculated where the opportunities are and it's a 140 billion at wholesale and so there's lots of opportunities to continue to grow both with new customers existing customers New channel.
Panels expansion of channel, which we're really excited about.
Okay, great. Thank you.
Your next question from Phil.
Correct.
Okay.
Good morning, everyone, Steve I believe you said.
Spec you can announce a formal extension with whole foods.
Early next year.
Can you help us understand that expectation has it come from conversations with them or is it based on your understanding of.
Aligned incentives.
You know look we've got a long standing relationship with them our businesses are deeply intertwined and as you as you would suspect when both of our companies Scott.
Embedded in making sure we could get food out into into our communities whole foods in their stores into our DC.
We just consciously fad.
We know we typically renegotiate right at the five year, Mark and we're just going to put it off until the beginning of next year.
To help us get through what's most important which is operating the stores and NRDC. So I have every expectation and they have every expectation that this is going to get done in the first part of next year.
Okay, Great and then.
My second question I think I heard 20 million in extra costs in the quarter related to covert and startup at the Dcs how much of the 20 million is Jeff.
Related and how much of it.
Phil This is Eric thanks.
Thanks for the follow up I would just start by saying and reinforcing the investments we've made in the sustainable safety protocols and all of our Dcs and that's a part of that expense.
Frankly these are unprecedented times.
As Chris mentioned, we've gone from five Bcf to two Dcs in the Pacific Northwest, We opened a new facility in southern California.
And we had some challenges with labor. So we had some over reliance on third party, which we are in the process of resolving.
Net needed to and our commitment to our customers from a quality service and I remain very confident on our operating expense plan for the balance draft wide 21, and we're seeing all the significant trends for the stabilization in the Pacific northwest as well as in the new DC in Southern California.
And just to also highlight we've added investment in automation and both the new DC in Southern California in one of the new Dcs in the Pacific Northwest. So we're very optimistic on where we're going.
That's great. Thank you I'll hop back in the queue.
Your next question.
With Jefferies.
[music].
Hey, good morning, Thanks for the question.
Regarding regarding value path can you can you help us conceptualize the initiatives that are within that plan and and perhaps what we should expect in terms of cadence.
Not for the for the $70 million to $100 million savings.
Yes, how should we think about how much of that is earmarked for reinvestment.
Thanks, then I have a follow up.
Great. This is Eric I'll address that question as well.
I might just start out by re.
Emphasizing our performance around synergies for the Supervalu acquisition, we exceeded our four year target of 185 million in two years and we still have a few initiatives remaining.
Add space, but value path is designed to unlock different work streams in different sources of value throughout the organization, it's really optimizing our operating model, it's covering things from private brands sourcing delivery frequency distribution center.
Productivity organizational effectiveness and we have those work streams stood up we're starting to see some value show itself. We're reinvesting some of that in fiscal 21, and then the 70 to 100 million that Steven John of reference.
We have those targets well underway for the end of fiscal 2003. So you can look at this as overall, it's the fine tuning of our operating model, how we're going to market were investing in our people and we're really driving EBITDA growth through this process.
Okay, Thanks and.
Yes, just along with the 20 million in operating costs absorbed in the quarter how much of these two items value path and the and the operating costs were already included in your.
Yes fiscal 21 expectations versus what's what's been kind of incremental since.
Yes, you were last on the phone three months ago. Thanks.
Well, the 20 million was incremental and we've reflected that but we still had improved opex from.
For the quarter of 25 points that reflects the leverage that we're getting in our fixed expenses and our transportation and our administration. So we're we're we're highly.
Looking forward.
Our balance from 21, and knowing where were going as far as expectations.
And I would just add debt.
We have to be focused on safety first.
Keeping our team safe keeping our DC safe.
And.
Once we do that once we checked that box, making sure we're providing a high level of service and as you might imagine to open up to large highly sophisticated dcs in the middle of Cove. It is really difficult. So the fact that we were able to still deliver the operating expense number.
But still have the 20 million worth of cost.
It was a pretty heroic effort on the part of our operations teams.
Okay. Thank you for the color.
Our next question is from cash.
Barclays. Your line is open.
Hi, Good morning, Howard on for Karen short.
So I guess first I was just wondering are you planning on giving providing EBITDA.
Thanks.
When you Rick.
The channel and if not can you give us some color on how that shipped out.
Retail team et cetera.
Yeah, we'll provide this is John I. Appreciate the question on that we'll we'll certainly provide that if you look through the supplemental schedule Youll see that information included in there.
Okay, and what do you what can be done.
Retail numbers, if you think that a year over year with that 15% and change growth and failed you'll see.
A big uptick in the EBITDA retail number at about a 130% growth.
Mark its case it will also be some supplemental information in the 10-Q player coming out later today.
Great.
Your next question is from John.
Hi, Michael.
Your line is open.
Hey, Steve I want to drill down on the 38 billion dollar opportunity with existing customers. So I know, it's probably a broad range, but when you think about your average share of wallet right, maybe some color on that and how that might differ by channel.
And independent et cetera.
And what you think the.
Friction points are picking up more than 38 billion.
Why is that not happening.
And then lastly, if you think about the incremental margin on that writes the drop size goes up with the incremental profit margin be 50.
50, 50 basis points higher on that revenue, what's the thought there.
Yes, so first of all that the addressable market is 140 billion.
I think you said 38.
John for existing customers.
Okay I got it so.
One I think that there is a dramatic shift happening within the industry right I think pretty similar to what happened in foodservice, maybe 10 years ago as the larger players started to take more share.
Independent.
Customers who use.
Use 10 different suppliers migrated to just a few.
So that dynamic is happening in the retail space as well as the retailers see the economies of scale in saying you know what if we can buy our center store frozen chill dry brands floral produce meat and so on and so forth.
From one supplier it's more efficient.
It's cheaper and the economies of scale really work.
And everybody's favor.
So.
One thing cobalt has done is just skyrocketed that industry change to the forefront because retailers were really focused on let me just get the supply from the people that have it where I don't have to worry.
And you want to Pfizer really the only.
All sale or that can do that on a national scale from our margin perspective, I think it's essentially unchanged.
The only difference.
The exception to that would be.
As you sell more protein the mark up on protein is inherently less than the mark up on everything else.
Just because it's a more expensive case.
On a margin dollars perspective, it's the same and wildly accretive.
We will.
Two last things it would sound like based on what your existing businesses that you're Tobey. This is wrong. Your your share of wallet with those with those existing customers is probably maybe.
Third.
Or something like that certainly under 50%.
Well under 50 is that fair and.
And then secondly, your cross sell does the $60 million.
I would assume thats going to ramp during the course of the year. So you would think it would you think the cross sell opportunity.
Three to 400 million.
It was at that high for the year.
This year.
Hey, John This is Chris So I'll just add some color to this I think it will help so.
Food is 1.4 trillion dollar industry. If you if you break that down into wholesale and then you remove all the stuff that's not available either through captive sports channels were not going to play and that's how we get to the 140.
And.
The way, we get to the one forties exactly I think the way you're thinking about as we have customers that were a 100% saturated it right and we say, okay. We're 100% saturated with these customers now what is that saturation look like with the balance of the customers, both new and existing.
So when you look at the existing customers, we say, okay to get to that same saturation point Theres $38 billion, there and just just to give an example.
Our seventh largest customer were up 58% with debt.
Because they're very large natural customer and we began selling them conventional food to help them with their captive distribution. So one really small example, but a very big example of how we see the cross selling opportunity where that $38 billion come from and you are 100% correct. They.
They are margin accretive it is at the truck is already going there. The more we have not dropped the better it is youre right about that.
As far as the cross selling we don't have a specific target for the year.
It is sequentially growing every quarter for some of the opportunities that I mentioned earlier our.
Our cross sell wins in fiscal 20 were largely new item introductions. So for example, a conventional store that was just getting into your views to natural and organic.
What we're seeing in 2021 is large opportunities with bigger customers top 20 customers to sell them expanded fresh to southern expanded branch sell them expanded.
Conventional and natural products, so I would.
Not going to put a target for the year, but we do expect it to sequentially growth throughout the quarter.
Yeah, One thing I would also add John is we've also been really successful in further rolling out our solutions business, which as you know more than a double digit margin business for us.
And those margin solutions those solutions group includes.
The use of data coupon processing payroll in some cases and those things really lock the India into us in a much bigger way and what's been incredible is.
We've actually begun rolling out these solutions and some of our regional.
Regional conventional and larger national.
Customers.
Thank you.
Your next question is from Edward Kelly with Wells Fargo. Your line is.
Yes, hi, guys good morning.
Steve I was hoping could you just talk about how youre calculating that 300 basis points inflation difference between retail and wholesale and then I assume this is primarily in the chain and independent customer base. So is that number even bigger for them and.
What is that saying is that just all margin for that customer base.
Yes, Hey, Ed it's Chris that is because of the promotional dollars contraction. That's happened that retail. So if you look at the quarter and you look at promotional dollars year over year.
There is contracted.
And it depends on what period, you are talking about over that three month quarter, but it can be anywhere from 5% to 10% less promotional dollars being spent at retail and so that's why you're having such a net deflation expansion at retail that's not happening at wholesale.
Theres also by the way skew contraction, which has something to do with that some retailers are claiming 5% to 10% less skews on the shelf again because.
You know all the constraints on the supply chain.
And what was the second question well, but it's also it's also a combination of the lack of promotional spend and quite frankly retailers are taking price. So those two things combined.
Our about 300 paces points, a little more than 300 basis points.
So what's your thoughts on how that Unwinds next year, obviously promotional cadence.
Should at least normalized but do you think there is some pace sometimes patient for these guys to try to.
Retain some of this business and maybe provide a bit more.
Well if you look this is my opinion only I think that you know the largest CPG companies have scaled back so heavily on skews.
Just to produce the items that the retailers and the consumers need well when they bring them back.
The only way that retailers are going to take them is with a very heavy promotional spend.
But I don't think we're going to get there until.
You know, let's say the fall from next year.
Covert the vaccines have been fully deployed.
Getting back into a more normal cadence.
Of historical promotional spend on the part of the manufacturers to the retailers and by the way that's it that's a tremendous opportunity for us because the processing of promotional activity is a pretty significant profit center for us.
Right, Okay that makes sense.
And then just second question for you on free we continue to hear sort of negative headlines around around free pressure and I know you guys either own or contract the bulk of what you do but are.
Are you seeing any incremental pressure there at all particularly as we think about like driver pay or you know needing <unk> needing to go to spot for instance for.
Any of the.
The higher demand that maybe you're seeing and how does that.
Play out from here.
At this Eric I'll take that yes, we are continuing to see some pressure.
Primarily driven by some market factors, obviously around COVID-19ien seasonal retail and heavy imports but.
But we are changing and working our model.
Going from intermodal to over the road, we're trying to.
Push our carriers or more guaranteed road capacity and we've actually gone up from annual bidding process to our quarterly so we can stay closer to the market and manage our way through this.
But what we were seeing the effects and we're effectively managing.
Going forward and John just to be clear what Erics talking is about the freight that affects our inbound.
Not our outbound our outbound is something that we manage ourselves predominantly with our own workforce and our own fleet.
We do rely on third party carriers that we contract with.
To bring a lot of the inventory into our Dcs that are not shipped directly by the manufacturers.
Got it all right great. Thank you.
Your next question.
With Northcoast research your line is open.
Hi, guys. Thanks for taking my question.
To drill down a little bit more on day ecommerce opportunity can you just talk a little bit about what you guys take the penetration is right now and then over the next year or so what do you think the opportunity is to expand that either with new opportunities or with it.
Existing customers that maybe don't you.
Hey, Jim its Chris.
Yeah, I mean look.
Coded accelerated the E com adoption with consumers pre coded E commerce grocery purchases were around 3%.
Today, It is estimated to be around nine or 10%, which we always knew we would get there and we just thought it would happen three years from now so the penetration across the entire industry is in that 9% to 10% range.
We feel good about our position to grow what that trend for a couple of reasons. One we service the very large E commerce providers, and we mentioned our E commerce number up 92% with.
Our top E commerce customer up almost 300% and number two through 10 are equally as large.
As far from a growth perspective, so we service those D to C.
Businesses that are handling E com and we feel really good about our ability to service them nationally to service them with conventional sort of done with private label and the service and service them with natural products, because they're essentially trying to provide a grocery store online and we don't think theres anybody just positioned to do that better than you.
Five nationally. So that's number one number two is our own E commerce business, albeit pretty small through our honest screen and lead the options.
Our up almost four almost 50%.
And that's just an E commerce solution that we have been to be to provide products to a secondary market.
And then the third is we sell in E commerce solution to our brick and mortar customers that want to adopt click and collect and delivered to home and participate in this marketplace.
And you know we're going to continue to develop businesses to capture the ecommerce marketplace, but given the growth that we've seen it it's not a realistic that our E commerce business is going to double in 2021.
Great and so when you look at that doubling how much of that do you think it's incremental versus in store cannibalization and then let me just say mutual one of my board.
Right.
Yes.
It's a good question.
So the large portion of E. Commerce growth is not brown boxes to doorsteps, that's happening through click and collect and delivered to home.
So we are we are selling groceries to retailers and then they're handling to ecommerce from there. So we're benefiting because of the existing relationships.
And then as far as the growth of the operators.
I see a lot of it be incremental I see the cash the tradeoff coming from away from home dollars to these E. Commerce solutions that are delivering to home I think thats, where the share of wallet is coming from more than just the center store brick and mortar stores.
Okay. Thanks.
Sure.
Our final question comes from Kelly <unk>.
<unk> capital markets. Your line is open.
Hi, good morning, Thanks for taking our questions.
I just wanted to just see if you can share any color.
On your.
EBITDA margin outlook for the rest of the year, because if I look at this quarter I guess, it's kind of in that 2.6, maybe 2.7% range. If you take out the start up costs that you mentioned.
I guess your guidance implies kind of that same range for the rest of the year and I guess I would think that you know, especially the back half would maybe be a little bit weaker but.
Was there maybe any lumpiness that you can tell us about in terms of startup costs or other costs as we think about kind of that cadence of EBITDA margin for the rest of the year.
Yeah, Hey, Kelly from John Appreciate the question the as we think about the rest of the year, you're you're absolutely right. We had the that 20 million or so in Q1 and as Eric mentioned, we're going to continue to recover that as we move throughout the year with our operating plan and the acceleration in some of the value that come from that.
Consolidation of those the fees.
Well, we're going to see is it's not going to we're not expecting dramatic lumpiness, we know what's going to happen in Q3 and Q4 as Steve mentioned as we we lap just those incredible mine foods incredible periods from the pantry stoping last year, but as we think about 521 standalone to consistency I think it's going to be somewhere in there.
Band as we move throughout the rest of the year.
Got it and in terms of your comment about maybe reinvesting some of those those savings.
To gain market share.
What exactly does that mean does that mean building out new capacity or capabilities, the wear or being more aggressive in pricing what what does that mean is of gaining market share and reinvestment there.
In the answer is it's all of that and then from so as we think about that reinvestment is going out and winning the business. It's driving the innovation its investing in automation. It. It's it's an amalgamation of all of the things you touched on as we continue to do to drive that that value path forward.
It's going to be touching on all of those items.
But just to be clear.
The reason that we initiated value path is to drive improvements to our bottom line and Thats still the goal even though it does give us the flexibility to invest in resource into our fastest growing.
In most efficient areas.
Yes.
Absolutely. So okay. That's helpful. And then maybe just last one from me. So you talked about the closing of the four D.C.'s really when you kind of optimize that network and I think you have somewhere just under 60 or so around 60 right now I'm just curious if you can talk about the.
Savings.
Of the closure of those 40 sees and just what you think the potential is over the next few years as you continue to optimize either gross dcs or continue to consolidate.
Yeah, I think it often it okay go ahead John John.
As we think about those the fees.
Currently there's value attached to reporting out those fixed costs and weve embedded the anticipated value in our 21 guidance and I think if we think about the future Kelly that where we're going to go with the network optimization as well as some of the other aspects attached the value path I think thats embedded in the incremental annual $70 million to $100 million run rate.
That we want to achieve by the end of that 23.
Yeah. The other component I was going to add is there is a significant working capital improvement that comes with it because obviously, we have less inventory and we've been wildly successful at selling our dark or on U.S real estate and so certainly if you look at whats.
Transpired since we bought supervalu.
We've monetized a lot of real estate that we no longer need or use and that will continue to happen as we move forward.
Thank you.
And that work and debt is the real quick follow up on net working capital that's and you can see that embedded in our Q1 numbers as we think about the improvements in our working capital in Q1.
Compared to last year and the impact on our free cash flow was in Q1 that have improved by $80 million from Q1 last year to Q1. This year net that's a reflection of a lot of different initiatives that include the impact of the de consolidation.
Alright. Thanks, Meg we appreciate your hosting the call we're going to conclude at that point. If anybody has any follow ups feel free to give me call. Later today, Hey, just one just one other one other comment Steve I'd like to make just in closing.
I am so proud of this team so proud of this team and what they've accomplished in very difficult circumstances. Our primary focus has been and continues to be to keep our people safe.
In the midst of the pandemic not only from the virus perspective, but from physical safety as well when we think about the quarter.
Growing 6%, but on an adjusted basis, probably more like nine wells, we're exceeding the growth of the industry in a pretty significant way, we're leveraging the bottom line by growing more than 30% on the EBITDA. We continued to grow free cash we paid down over $460 million of.
Debt over the last 18 months or so we're meeting our internal objectives in almost every way and so the company is really really really doing well and I'm. So proud of what we've accomplished and look forward to delivering a really strong year. So thanks for your participation. We appreciate it.
Hey, Scott.
You may now disconnect.
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