Q2 2021 United Natural Foods Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the U N F I fiscal 'twenty 'twenty, one second quarter earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone keypad. Please.
Please be advised that today's conference is being recorded if you require any assistance. Please press star zero for the operator.
It is now my pleasure to turn the call over to Mr. Steve Bloomquist, Vice President of Investor Relations. Sir the floor is yours. Please go ahead.
Good morning, everyone and thank you for joining us on Unfi's second quarter fiscal 'twenty 'twenty One earnings conference call by now you should have received the copy of the earnings release issued earlier. This morning, the press release webcast and the supplemental slide deck are available under the investors section of the company's website at www.
W Dot UNFI dotcom.
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 UNFI, 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. The 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 <unk>.
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.
And lastly, I'd like to point out the 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 turn the call over to Steve.
Thanks, Steve Good morning, everyone and thank you for joining us on our fiscal 'twenty 'twenty, one second quarter earnings call.
As you saw in this morning's press release, we delivered another quarter of outstanding financial results.
Second quarter sales grew seven point of 1% second quarter, adjusted EBITDA grew 57% or $74 million and second quarter adjusted EBITDA margin expanded 95 basis points.
This quarter's $206 million of adjusted EBITDA was the second highest in Unfi's history.
The only last year's third quarter that benefited from the significant jump in demand as consumers began loading their pantries heading into the pandemic.
This quarter also represented the fourth consecutive quarter, where we've grown adjusted EBITDA and adjusted EPS at a significantly higher rate than we've grown sales.
We continue to make great progress in our debt reduction efforts of this quarter and improved our net debt to adjusted EBITDA leverage ratio to 3.2 times of full two turn improvement since last year's second quarter.
As a reminder, we have paid down almost $1 billion of debt since fiscal 2019 and are well on our way towards less than three times leverage.
Momentum continues to build throughout our business and we are delivering strong results as we execute on our strategies.
This quarter's results are a clear validation of the great work, we are doing to increase shareholder value.
Our cross selling strategy is resonating with both existing and new customers, who are looking to aggregate volume.
Our award winning brands business, an important differentiator for UNFI.
Continues to grow as does our professional services business, both of which help our customers succeed in today's evolving retail landscape.
Looking forward, we continue to believe that UNFI is well positioned for continued growth in that food at home consumption will remain elevated for the next several years.
Companies continue to push office return dates further into the future as they evaluate return to work strategies in light of increased productivity and work flexibility that come with working from home.
At the same time, many Americans continue to manage their household budgets closely with dining in providing a more affordable meal option and a great opportunity to connect as a family.
Consumers also continue to look for better food options with ingredient transparency and UNFI continues to lead the way forward in this important segment.
We expect this backdrop will continue to provide a tailwind for us as.
As we pursue growth within the 140 billion dollar addressable wholesale market of which $38 billion comes from gaining share of wallet with our current customers and an additional $78 billion from adding new customers.
In addition, we continue to move forward on optimizing our distribution network generating.
The additional operating benefits through the value path initiative and investing in technologies that provide valuable insights into our future business growth and lower our cost structure.
Finally, I'm pleased that we've extended the contract with our largest customer through late 2027, almost seven years from now.
We believe this reflects the strong working relationship.
Between the two companies and the benefit UNFI brings to their operations and growth.
Let me now turn the call over to Chris to provide more context on our business performance Chris.
Thanks, Steve and good morning, everyone on today's call I'll provide additional color on our fiscal 'twenty 'twenty, one second quarter performance and discuss the key trends. We're currently seeing in our business I will also highlight the drivers of that continue to differentiate UNFI, giving us confidence in our ability to drive long term market share growth.
As you saw in this morning's press release total sales for the quarter increased seven 1% of $450 million compared to last year's second quarter.
Excluding retail or wholesale growth rate was $6 five per cent.
For perspective, we believe unifies growth was about 200 basis points higher than Nielsen's retail syndicated data when accounting for the 400 basis points of difference in retail versus wholesale inflation, and our 80 basis points foodservice channel headwinds.
Our second quarter sales growth also accelerated 110 basis points compared to the 6% sales growth in our first quarter.
We believe there are several reasons for the sales growth expansion.
The first is unifies unique ability to cross sell our cross selling efforts generated approximately $90 million in incremental sales for the quarter, bringing our total incremental revenue from cross selling to nearly $500 million since the Supervalu acquisition looking forward, we see a path of.
Every accumulative of $1 billion in cross selling revenue by the end of our fiscal 2022, as we continue to gain traction with larger wins.
As we mentioned on the last call. We believe that Theres, a 140 billion dollar adjustable market for UNFI, including $38 billion of upside opportunity by cross selling and gaining further penetration with our existing customers.
We are gaining momentum in cross selling remains an exciting key benefit for our customers and UNFI.
The second reason for our Q2 sales growth was revenue gained from new customers. Our sales teams have been aggressively capitalizing on our opportunities to drive sales gains across all parts of the store and we're winning business every week across all categories, including fresh and general merchandise center store grocery frozen and <unk>.
Others.
Unify has the portfolio and distribution footprint to compete with the local and national wholesalers and provide customers with the advantage of our scale.
We also continue to invest in our people and expertise.
To that end, we've hired dorn weninger as our SVP of Proteus Dorn comes from Us from Walmart, Mexico, and he's already hit the ground running he is another great example of the talent we've added over the past year to accelerate growth for our customers and UNFI.
The third reason driving our outsized growth is the changing consumer behavior at retail.
Mckinsey has reported that roughly 10% of people have changed their primary grocery store during the pandemic largely based on proximity to home.
Unified customers of benefited from this especially are independents, who tap into an additional growing consumer preference to shop smaller footprint stores.
We have and will continue to support all of our customers, particularly as the future of work remains uncertain, but likely does not until everyone. Returning to work in the same fashion they did pre pandemic.
Also the rising importance of ecommerce is changing how consumers interact with their stores, we estimate that 70% of independence and a larger percent of change now offer e-commerce solutions to their customers and unify provides the digital platforms at necessary support to help our customers succeed.
By point of fact, we have on boarded hundreds of new customers onto our E. Commerce platform solution since the start of the pandemic and have many more in the pipeline.
Moving forward. We believe these consumer trends will continue and UNFI is uniquely positioned to adapt to changing consumer behavior by servicing our diverse customer base. There were an unmatched portfolio of products programs and services.
Turning to our sales performance by channel second quarter sales to chains were up six 5% and to independent retailers were up 9%.
Both channels were ahead of the syndicated data I cited earlier when adjusting for inflation and both experienced accelerated growth versus Q1, 'twenty 'twenty. One our continued growth with customers in the sales channels is the result of the factors I just mentioned specifically with change we have had cross selling gains with natural customers that had begun.
One to use UNFI to support their captive conventional distribution.
And we have won new business with many independents that are now unified customers.
Wholesale sales of the supernatural channel were up seven 2% compared to last year's second quarter, which was the combination of greater sales to existing stores as well as sales to stores opened less than one year.
And finally, our other channel grew slightly as strong gains in our e-commerce business more than offset the softness in foodservice and military.
Second quarter E Commerce sales increased 97% led by new business and sales growth to the largest E. Commerce player who is now of top 25 customer for UNFI.
Speaking of E Commerce will soon be introducing a new platform called community marketplace.
This will be an exciting extension of our easy options B to B E. Commerce solution that will provide unified customers additional access to growing on trend local brands Sim.
Similar to other e-commerce marketplaces sales on unifies proprietary community marketplace will bypass the traditional distribution through our DC network and allow for smaller emerging brands to be ordered and shipped directly to retail customers throughout the U S.
This will give our customers access to an even broader assortment of items with flexible order sizes and convenience the order from multiple sources online in one place.
For existing Unifi suppliers' interest in the expanding their portfolios or for newer brands of suppliers looking for a gateway into unify they gained immediate opportunity to access unifies more than 30000 unique customer locations and benefit from a fast and easy onboarding that could eventually lead to broader distribution and our DC network.
In short, we believe community marketplaces, the disruptive digital innovation needed to connect growing brands with our customers to ultimately bring and consumers more freedom of food choice. We're finalizing the details and I look forward to sharing more on our next call.
Strong topline results include another quarter of growth in our retail business, where same store sales increased 15, 3%.
E Commerce at retail continues its robust growth trajectory, increasing by nearly 190% of Cub.
Last month, one of the two cub stores that were damaged during last year's civil unrest in Minneapolis reopened and included several new offerings and departments based on input from the community come.
<unk> maintained its long held the number one market share position in the Minneapolis market and we're very proud of our commitment to serving communities that depend on us we expect the second store to reopen in the next 30 days. Another sales growth driver was our brands plus private brands business, which grew seven 3% in the second quarter.
Within the portfolio, our largest brand essentially every day grew double digits driven by gains with larger customers and better in stock levels. The many of the national brand alternatives.
Our inbound fill rates for our own brands had been averaging a thousand basis points higher than national brands.
Our field day brand exclusively distributed via of natural independent customers has seen over 30% growth. This fiscal year fueled by supporting core grocery categories of new items.
Across the entire brands plus portfolio innovation continues to be the focus with approximately 200, new item launches planned for this fiscal year.
To this end, we've seen tremendous growth from products like Woodstock organic frozen avocados, which quickly became the number two ranked new item in the frozen fruit category in the U S natural enhanced channel.
We have a strong long term plan for this portfolio of that capitalizes on the upside opportunity with existing as well as new customers and leaning into brands plus as a point of difference for unifi and our customers.
Moving beyond our product offerings, we continue to expand our professional services portfolio to offer customers unique solutions beyond selling groceries to them.
One recent example involves bringing digital currencies, such as bitcoin to our customer stores through the relationship with coin cloud coin.
Coin cloud as a small footprint kiosk that empowers consumers to buy sell or trade digital currency with cash without the need for a bank account or debit card to date, we've signed 80 contracts and see this potential to grow to 4000 plus unified locations.
This is just one example of new services, we are adding to our current portfolio, including more traditional services like store design merchandising and payment processing.
In total Unifi offers of 150 types of services to keep our customer stores relevant to drive the retail sales and to help them lower their costs.
Lastly on the operation side, we continue to move forward with optimizing and expanding our distribution center network to better service, our customers and deliver operating efficiencies and.
In Pennsylvania, our work is well underway on our new Allentown campus, which will be operational in time to ship key food early next fiscal year are.
Our new Riverside, California facility and a major expansion in Richfield, Washington are complete and fully operational.
We introduced automation and portions of both of these distribution centers, where we expect to experience a 100% increase in throughput as measured by units picked per hour, which will yield of expense savings. In addition to improving our order accuracy and lowering operational credits given the truly differentiated business model, which includes aggressively growing our <unk>.
Wholesale business, while monetizing our unique assets like brands E Comm and services, we're optimistic about the rest of the year and our prospects beyond fiscal 2020 one as Steve said, we're running on all cylinders and we truly are with that I'll turn the call over to John.
Thank you Chris Good morning, everyone on today's call I'll provide additional context on our quarterly financial performance balance sheet capital structure and full year outlook for fiscal 2021.
As Steven Chris said, we're very pleased with our operating momentum and this quarter's strong performance, we set second quarter records for net sales, which totaled $6 $9 billion.
Adjusted EBITDA, which came in at $206 million and adjusted EPS of $1 25 per share.
Second quarter gross margin rate expanded 12 basis points versus last year's second 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.
Gross margin rate for our wholesale and other businesses was approximately flat as a decrease in shrink expense, which last year included about seven basis points of expense associated with customer bankruptcies was offset by lower levels of supply of related income.
Second quarter operating expense rate declined 82 basis points to 12, five nine percentage of sales, including 45 basis points associated with the reduction in bad debt expense versus last year's second quarter that included three customer bankruptcies.
The remaining improvement was driven by our value paths productivity initiatives and strong leverage of the fixed and semi fixed portions of our cost structure.
Our second quarter results also included the benefit of lower health and welfare costs based on lower usage levels during the pandemic.
As COVID-19 vaccination levels increase and Doctor visits and medical procedures return to pre pandemic levels, we expect our benefit costs to return to pre pandemic levels as well.
Our 57% growth in second quarter adjusted EBITDA on a 7% increase in sales translated to a 95 basis point year over year expansion in our adjusted EBITDA margin the fourth consecutive quarter, we grew year over year adjusted EBITDA at a significantly higher rate than sales.
Excluding the impact of last year's customer bankruptcies second quarter adjusted EBITDA margin grew approximately 45 basis points.
These results again demonstrate our ability to translate top line performance into even stronger bottom line growth, which we believe will continue to generate significant shareholder value.
On a GAAP basis, we reported one dollar in the earnings per share, which included <unk> 25 per share in after tax charges, primarily related to advisory fees for our transformational value path initiative and the acceleration of unamortized debt issuance costs and original issue discount tied to the hunter.
$50 million term loan prepayment made early in the quarter.
Our adjusted EPS, which excludes the impact of these items and several smaller adjustments totaled $1 25, turning to the balance sheet. Our total outstanding net debt finished the quarter at just under $2 $5 billion, the lowest quarter ending level since the Supervalu acquisition.
We generated $265 million of net cash from operating activities in the quarter, which led to a reduction in total outstanding net debt of nearly $250 million.
Free cash flow in the second quarter included the anticipated working capital recapture as we sold through inventory that it increased for the holiday selling season.
Our year to date net debt reduction now totals approximately $115 million.
Our net debt to adjusted EBITDA leverage improved to three two times and benefited from both lower debt levels and higher trailing 12 month, adjusted EBITDA compared to the first quarter.
As Steve mentioned this leverage ratio has improved by two full turns since the second quarter of fiscal 2020.
In addition to lower debt levels. We recently took two other steps to lower our annual interest expense early in the second quarter, we borrowed $150 million on our asset based revolving credit facility and reduce the balance on our term loan by an equal amount.
Then following the end of the second quarter, we took advantage of favorable credit markets and successfully repriced the term loan lowering the interest rate by 75 basis points.
Based on the second quarter ending balances. These two actions will reduce annual interest expense by approximately $11 million, which equates to about a 13% annual increase in earnings per share.
We believe the operating environment will continue to benefit from food at home consumption, which combined with our year to date results and the anticipated continued build of benefits from our acquisition synergies and value per.
Gives us a high degree of confidence in our ability to achieve our fiscal year 2021 operating guidance.
We are reaffirming our full year guidance for net sales, which we continue to expect to be in the range of 27 to $27 $8 billion and now expect of finished towards the upper end of the previously provided ranges of 692 $730 million for adjusted EBITDA and $3.
Five cents to $3 55 per share for adjusted EPS.
We're maintaining our previous guidance of $250 million to $300 million for capital expenditures and approximately $250 million of net debt reduction both of which include this year's investments in our new Allentown distribution center to support key food lab.
Last we now expect the finished the year with a net debt to adjusted EBITDA leverage ratio of approximately three three times.
Although we don't provide quarterly earnings guidance I do want to comment briefly on our expectation for the third quarter. As a reminder, our third quarter results in fiscal 2020 benefited from the unprecedented stock of surge as COVID-19 driven demand began to spread.
While we expect continued elevated demand and strong absolute levels of performance in the back half of fiscal 2021, we.
We do expect our fiscal 2021 third quarter sales adjusted EBITDA and adjusted EPS to be below prior year levels.
However, we remain confident and optimistic in our full year outlook as reflected in our expectations of finished the year towards the upper end of our ranges for adjusted EBITDA and adjusted EPS.
Increasing value for our shareholders remains a priority and focus of UNFI with our differentiated business model and large addressable market, we remain confident in our ability to grow our business and generate meaningful free cash flow.
In the near term, we will continue to use our free cash flow to further reduce debt and improve our leverage.
Thank you for your time this morning and for your interest in UNFI with that let me turn the call back to Steve. Thanks.
Thanks, John.
As John discussed we remain laser focused on driving our business forward.
And are committed to increasing shareholder value.
We're pleased with our year to date performance and remain confident we will deliver on our full year outlook.
Since our last call, we released our 2020 ESG report.
We're proud of the progress, we're making and have launched in the ambitious 2030 agenda built around the theme better for all of this past year UNFI has improved its CDP climate change response score to an a minus through purposeful actions and.
Lance disclosures, we've announced new paid parental leave benefits.
We've delivered the equivalent of 19 million meals to those in need and achieved a 7% year over year improvement in food waste diverted from landfills just to name a few longer term, we've challenged ourselves to reduce food waste by <unk>.
The percent by 'twenty twenty-five achieve zero waste to landfills from our Dcs by 2030.
Reduce our distribution center energy intensity by 30% by 2030 and donate the equivalent of over 200 million meals to those in need by 2030.
Corporate citizenship is very important to us and part of what makes UNFI a special company, we're dedicated to serving our customers while doing right for those of need all while being sensitive to our impact on the planet and the environment too.
To that end, we've expanded a zero emissions all electric trailer pilot with 53, new trailers that will operate in California.
We also remain focused on succession and continue to evaluate candidates to serve as you want of fives next CEO.
<unk> has made the process a bit more complicated and the board has asked me to extend my timeline in order to ensure that we continue to have a comprehensive process and I'm committed to staying until I can turn the reins over to our new CEO of our business is strong our future is bright.
And I'm confident UNFI will have a new and exciting leader later this year.
Our associates deliver results every day safely and efficiently and I want to thank them for all of their hard work during the quarter.
In conclusion, I'm very pleased that fiscal 'twenty 'twenty, one is unfolding largely as we had originally anticipated.
Our optimistic full year outlook demonstrates the confidence we have in our people and business and as I stated on our last call I continue to believe that UNFI is best days lie ahead.
With that we're ready to take your questions. Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone keypad, we'll pause for just a moment you can pile of the Q&A roster.
Your first question comes from the line of Edward Kelly from Wells Fargo.
Yeah, Hi, guys good morning.
Good morning, the first question is.
Is on the the whole foods contract.
Any more details you can provide I think the economics, where the same which are not so share was the case. The last time you extend the dates.
And then it's been extended for two years I thought last time, maybe it would extend it longer.
So just any any additional thoughts you can provide their.
Sure sure. Thanks.
I am unbelievably proud of what we've accomplished in this negotiation because it really demonstrated to Washington has demonstrated to Amazon and whole foods, how important the programs are and how important the companies are to each other.
And if you remember those of you have been around for a while we typically had.
<unk> had negotiated with whole foods, the every five years and now.
We've got a whole new process because the whole foods is no longer independent so we're dealing with two parties.
And so really one way to look at is in the old and the old World.
Even though we had a 10 year contract we were really negotiating of brand new one every five years, which to me meant we had a five year contract.
And now we have of seven or almost seven.
And so that's the spectacular result.
For those who follow Amazon.
You know that those kinds of contracts of really unusual.
And so we were we feel really fortunate to be able to get that done as far as the economics of your 100% right. There of essentially the same as the agreement that we currently have in place.
And just for perspective.
Seven years is a long long time, it's I think one of the longest contracts that we have throughout the entire company and just for perspective Amazon in 2014 was 80 billion I think they did $386 billion of last year. So six times growth so to be able to half of customer that is.
Some of it's that kind of growth.
I think of something that is a really good for our shareholders.
Great and then just the second question for you on <unk>.
Christopher.
The products of our vendor promotions.
And the kind of what Youre seeing out there in the marketplace today has that picked up at all.
And us what of normalization.
And that sort of means for your P&L and then as we look at the gross margin.
I know shrink helped.
But I guess the vendor stuff her as we started thinking about the world normalizing can.
Can you sustain sort of flat wholesale gross margins when we when we net all of this out.
Yes.
Well I mean, we don't guide to gross margin number one but number two is.
What I would tell you there is there is far more tailwind than there are headwinds.
As it relates to generally the gross margin because if you think about.
General service level is still lagging where it was pre prep pandemic pretty significantly.
And when you're in a situation where suppliers are having a hard time fill the debt filling the demand. There was there's obviously a lack of promotional activity as well. So the retailers are seeing that in the gross margin right because.
Since theres no promotional activity they have a higher retail margin.
But because of.
We do have a.
The margin that we earn in promotional periods.
When we start to get the fill rate back.
When the manufacturers start promoting again when the retailers start promoting again, that's going to be an opportunity for up for UNFI to be able to jump back in in the big way.
To that that marginal income now we don't we don't disclose.
The value associated with it but it's it's a good number and it's pretty significant.
Tailwind force the other thing is inflation.
Inflation still runs in the 100 basis point range.
And we all have an expectation that again once we come out of Covid.
Once products start returning to the shelves once retailers start bringing back all the items that the manufacturers discontinued.
We're going to start seeing some of those in part of input cost pass through and that's a really good thing for us as well.
Okay.
Alright, thank you.
Your next question comes from the line of repurchase per week from Oppenheimer.
Good morning, Thanks for taking my question and congrats on the nice quarter.
Just starting with the guidance. So you guys now expect EBITDA and EPS to be at the higher end of the range, but you didn't change your sales expectation. So just curious why you still believe.
In the current sales range of and you have been adjusted out and also the key foods contract I was just curious in terms of what type of contribution you expect related to key foods. This year and then what percent of impacts next year.
Well I can share with us.
I'll start with the key for key food is not going to start until our next fiscal year into 2022.
Yes, John.
Yes, no I appreciate that that was going be a part of the comment though there's the key food of your FY 'twenty two as we continue to invest in the Allentown facility as we think about the the sales and the EBITDA numbers that we're seeing right now we feel comfortable from a from a topline perspective with the range that we provided what we're seeing as we think about the.
The first half of FY 'twenty, one and what we are forecasting the back half of where we're seeing the continued improvement in value coming from.
The leverage and the scale that it comes from UNFI and we're seeing the continued value from our value path and productivity initiatives that are flowing through our margin and the SG&A Opex, we're seeing all of that flow through our P&L. So that's why we're thinking about from the holding net debt sales and net in that.
But guiding towards the upper end on the EBITDA and EPS.
And of course, the majority of getting the benefit of the interest as well.
You know refresh what I would tell you as you know.
Good management teams.
Look out.
Two years in advance.
And.
I would tell you. This is a really good management team because as you know we made a lot of big strategic decisions of couple of years ago.
And what's proving out is.
Pretty close to what we hope to do and that was to be able to grow our bottom line EBITDA at a rate that was considerably faster than our top line and that's exactly what what's happening as a result of a lot of initiatives to increase productivity.
To optimize the network and to provide a higher level of service to our customers and that's what we're doing.
From a revenue perspective, I think Chris gave some just terrific.
Analogies.
In his script that essentially tried to explain wholesale.
Revenue growth versus retail revenue growth and I think that's where a lot of people get confused because the retail revenue growth has retail margin embedded in it I think the important notice that you want of Fi on a net basis is growing considerably faster than the market itself.
Okay great.
It's just the just to build on a lot of that is just the idea that number one we are so confident in the guidance that we provided that we're actually providing that guidance I mean, it's something where we.
We feel good about our numbers, we feel good about our outlook for FY 'twenty one.
Of that we're putting the guidance out there.
We feel really really good about debt.
Okay, Great and then just one follow up question. So since we don't have comparable financials for the prior year for Q3. So you look at the expense the operating expense. This quarter is around $860 million or so is that the right baseline to think about Garner board I don't know if you can provide any color. There and then you also called out the reduction in benefit expense this quarter.
So I don't know if you can quantify what that what that temporary benefit was for the quarter.
Yeah. So we generally don't provide any information or the guidance by quarter.
If I think about the I know you want to think about your model in the back half I think the the part that we would focus on is the upper end of that EBITDA range and the upper end of the EPS range I think that that's what we're focused on when we manage of course, the entire P&L, but the we.
We wouldn't provide that information by quarter rebirth.
Okay, great. Thank you I'll pass it along.
I appreciate it thanks.
Your next question comes from the line of John.
The <unk> from Guggenheim.
Hey, Steve.
Various you talked about the $90 million of cross sell revenue.
Roughly speaking what was the contribution from new accounts right as part of that $4 50.
And then what does the pipeline look like and is it predominantly.
If you think about independence.
As I mentioned theres, not theres not too many key foods out there, but is it predominantly the independent pipeline is robust.
Larger accounts, maybe a little less so or no.
Christopher John just one John Yep.
Hey, John it's Chris.
So the 90 million so that is incremental on a rolling basis since the acquisition, it's a it's of close to $500 million.
The the pipeline literally has a thousand different opportunities in it ranging from all categories, all sizes and what we saw in the quarter.
Was the wins were not concentrated in any category or any channel. So what we're experiencing is exactly what Steve laid out two years ago. When we talked about the strategic decisions. We made to build out the store the wins are happening and independents, they're happening in chains, they're happening in E com.
And it's cross produce meat General Merchandised Center store natural conventional so.
The key food Youre right Theres not a lot of key foods out there and we announced key food because it is a significant new win. However every day every week, there's a lot of smaller ones coming in across all channels across all categories.
And John what I would add is.
Two things one one of the one of the really interesting outcomes is that.
Some of our fastest growth is in conventional distribution with retailers that have captive facilities.
Either because we're closer to the stores or we can do it more efficiently, but more importantly.
Is the whole world has changed.
Retailers think about supply chain differently today than they did a year ago and the focus is on aggregating volume to few it drives down their cost it makes it easier it lets them focus on what they really need to concentrate on which is keeping.
Consumers either in their store or on their site.
And.
Again, as you think about the strategic acquisition of Supervalu.
And the migration towards being a wholesaler of scale that can provide everything that a retailer needs. That's kind of benefit you on the fire for years to come.
And then just a follow up on the the cross sell right. So going from 500 millions of $1 billion I think that's by the end of fiscal 'twenty two.
Correct me, if I'm wrong, and so that's 500 million over six quarters.
Would seem to be a little bit less than what you've had this last quarter.
Is that conservatism do you think that for whatever reason, maybe cross sell slows down a little bit and then picks up again curious.
That $500 million.
Yeah, John it wasn't meant to be strict financial guidance for the next fiscal year. It's just what we think we're doing for the run rate basis on our cross rate. We don't expect it to slow down the number was over 1 billion and I think that is.
That's a fair estimate based on what we're seeing and what we're adding each quarter.
And I would tell you John where we're just starting to get really really spectacular at fresh.
We've made some additions to our leadership team that Chris mentioned.
We're building out the infrastructure I think we're now the largest in protein and produce across the country.
There are some holes that we need to fill.
But but that.
Could be the lead the the leading driver towards cross selling over the next couple of years.
Okay. Thank you.
Yeah.
Your next question comes from the line of Greg Manish Canyon from Wolfe Research.
Good morning, Mr. Spencer Hanus on for Greg.
The industry is facing pretty tough compares over the next few weeks any color on how much of the sales growth youre expecting the industry to retain and then I guess post COVID-19.
How are you thinking about what your customer mix is going to look like.
Yeah good questions.
It is Dan.
It's been a really volatile environment.
And just to lay out the guidance like we did in the beginning of the year and reaffirmed at this call.
It basically what we're looking at is what we thought was going to happen for the year was grocery was going to remain elevated throughout the fiscal year, we still believe in that.
As we head into a post pandemic world. We still think the work from home is going to be a tailwind for us. So we'll continue we continue to have elevated levels. We think that shopping closer to home is going to remain at the consumer behavior. That's going to mean, that's going to help our independent and chain business that is out in the suburbs.
Greg.
Greg Spencer what was the other part of your question.
Just in the next couple of weeks.
I don't think I don't think we could comment on kind of what's going to happen over the next couple of weeks, but what I I think what I would tell you is first of all our revenue did kick up quarter to quarter.
One to two.
And we've.
We've seen some real consistency in our overall revenue.
Since you know we got passed.
Call It may of last year and so since then.
We think the revenue.
It's been pretty consistent and will likely be pretty consistent, albeit you know, leaving the next month or two out.
Got it that's really helpful. And then just to follow up on the on the cross selling commentary I think you mentioned the one of the biggest sources of the cross selling lift youre seeing is opportunities from retailers with captive distribution.
So.
If you think out longer term do you think that retailers with those type of distribution systems do they move to a more capital light model. How are you thinking about that longer term.
I think that people are doing the work you know maybe 20 years ago reached certain large retailers of scale said look we just need to own our own captive network now remember that some of our largest customers on the natural side.
Our retailers, where the captive network, it's just that they couldn't replicate and they can't replicate what we did on the natural side.
But you know.
I think retailers today are very sophisticated, especially retailers with captive networks and theyre, taking a look at what's the most efficient route to market and if that means you're using a third party like UNFI then that's what they're going to do and that's exactly what's happening.
Got it thank you.
Yeah.
Your next question comes from the line of Jim Suva from Northcoast Research.
Hi, guys. Thanks for taking my question.
I wanted to drill down a little bit on the operating margin line you guys had a really impressive improvement both year over year and quarter over quarter.
Wanted to see how much of that is just benefit from not having some of the COVID-19 related issues at the warehouse and how much of that is sustainable from the investments from the consolidation in the automation across the distribution network.
So this is Eric I'll start out and then John maybe you can jump in I mean, I would start by just acknowledging our teams efforts around COVID-19 in our safety protocols and all of the.
The tireless efforts that they put forward keeping each other safe.
I think what you saw was a reflection of our consolidation stabilization in the Pacific Northwest We've mentioned it on the first quarter call in our Dcs have really become fully operational in those markets, which were reflected in the overall reduction in opex expense.
We've also introduced our operations excellence program as part of our value path initiative, which is also starting to show out some.
Some results so I think we're very confident.
And going forward on where we are in part of our guidance obviously is maintaining.
John I'm sorry.
Yeah, Eric I mean, I think you're spot on with that you know when we think sequentially we saw.
Three 2% increase in sales from Q1 to Q2, but a 30% increase in EBITDA.
Some of that is driven by those Q1 challenges that we've talked about before particularly in the Pacific northwest.
The debt of.
Substantially subsided at this point.
We're much more sustainability in those and the rest of it comes down to.
Some of the additional productivity, we talked about earlier of the value path initiatives.
As well as some of the timing of those those benefit costs that'll come back towards the end of the FY 'twenty. One so I think it's a it's really a great quarter and of great year from that perspective to show that sequential improvement in EBITDA, even with the the anticipated or one time.
The Pacific northwest consolidation of issues.
Great.
So looking forward do you think that there is any room for improvement.
Historically.
Wholesalers have been able to have that EBIT margin level above 2% I mean do you guys think the as you worked through some of the older distribution centers like I said <unk> had some of these efficiency gains do you think it's possible to get to a sustainable level, where you know your EBIT margin.
Two two and a half percentage somewhere in that range.
Yeah, I'll tell you I think about it and Eric can chime in as well with that without providing any type of forward looking guidance on numbers or anything else I think it is a comfortable to tell you. The we are still working through productivity initiatives, we still have upside related to value path, but we know we're still going after.
Between now and the FY 'twenty three we know we still have a large final component of the synergies related to the systems standardization, that's going to be a big tailwind for us as we get on the other side of that aspect.
So I think we still have lots of opportunities in front of us to continue to improve our our EBITDA margin.
We have only really optimized to networks.
The Pacific Northwest and Southern California.
And are there still quite of few to go.
And we're also in Q2.
Best of men in the automation.
Which is really starting to settle in and we'll continue to throw up productivity improvements.
Perfect. Thanks, guys.
Yeah. Thanks for the question.
Your next question comes from the line of Matt <unk> from Jefferies.
Hey, good morning. Thanks for the question just just really a clarification question from me and I apologize if I missed it or I misunderstood here.
The the SG&A step down sequentially from Q4 Q1 levels.
But even though you have higher sales this quarter I think you.
You're talking the Pacific Northwest stabilization combined with <unk>.
Productivity initiatives.
Just want to make sure I understand correctly is it some trap costs coming offline in the Pacific Northwest or I think you just said maybe its route consolidation just trying to get a sense of.
What inning, we're in with the the <unk>.
As you saw in Q1 going away.
And then if you can just clarify I guess on the value path and what so far has been John.
For you to.
Include value path in the explanation of.
The operating margin improvement this quarter.
And kind of what inning are we in with hitting those targets I know those were much longer term targets and I'm surprised that we.
We're already seeing some of that play through in Q2.
Yes. This is Eric so I'll start on the Pacific Northwest I would say, we're in the middle innings.
Our optimization those one of the Dcs was brand new came out of the ground. So we had the startup and the subtle in another experienced large remodel and expansion and I can tell you that the staffs in the buildings have been.
Become fully productive we've eliminated most of our third party labor support. So I think we are well on our way, but we still have room to continue as far as value path goes.
We've experienced a lot of progress on our initiatives from private brand sourcing to working with our customers on delivery frequency or distribution center productivity initiative that we call our operational excellence as well as working on our administrative footprint across the network.
As Steve mentioned, our distribution Center network footprint and then we're also tackling our organizational effectiveness and looking at all of the components for all of the support functions. So.
Yes, we are seeing value, but there too we're probably in the middle innings, and we have a line of sight over the next couple of years of where that will shake out, but a really solid progress given the pandemic and the all the other challenges we've been dealing with but the momentum is there and the team.
<unk> is really in a different mindset.
All about our.
Well evolving as an organization.
Your next question comes from the line of Karen short from Barclays.
Yeah.
Hi, Good morning, this is cait Howard on for Karen.
Just one question from me I don't know if I missed it but can you share of any update on what you're seeing with salary currently and where do you think that will go over the next day.
Yes.
Yeah.
Hey, Kate this is Chris so are they still remain.
They still remain behind historical fill rates pre pandemic, we did see sequential improvement by about 400 basis points.
Across the business largely from the.
Larger CPG suppliers that are catching up the demands.
But we are still seeing we're still lower than we expected and that Steve mentioned, that's it that's the headwind as it relates to promotional dollars. We are getting get healthy rates from all of our suppliers. We have hundreds of calls every day about get healthy rates and most of the sediment is is that it's going to come back over the course of the summer and we will start.
To see a little bit better fill rates historical fill rates as we go through the summer months.
Great. Thanks.
Sure.
Your next question comes from Eric Larson from Seaport Global Securities.
Yeah. Thanks, Rick.
And congratulations on a good quarter.
Steve I.
EMEA of her just right or wrong, just it's just the near term.
The comment that I.
I think you sort of inflation was a 100 basis points this quarter.
We obviously are in the industry have quite a bit more of inflation and it seems like many of the CPG companies arent, all taking pricing up.
You know fairly aggressively obviously theres the leg the how that.
It comes in but could you comment more on how you might see inflation. Maybe later in this fiscal year, maybe it's more it really accelerates in your next fiscal year, but but how that might.
Translate into your inflation rates, and then would that maybe possibly increase the promotional activity or how would you view of that.
Yeah. So your euro of 100% right and we have very marginal inflation right now, but we do expect that the inflation rate will start to ramp up I think pretty dramatically I mean, I don't have any facts that.
I would say, it's going to happen other than they've been doing it a long time.
Upon what we see in the pipeline I think one could make the assumption that inflation will start to ramp up.
Pretty dramatically in our fiscal 'twenty two not non.
In the current year, but in fiscal 'twenty two and.
What will also happen at the same time is a pretty significant increase in the promotional rate.
You know as the Cpg's.
Really work hard to get the products back on the shelf.
The product that was discontinued.
And so we will start to see a lot of that promotional activity return and so that'll be a pretty significant tailwind for us as we go into 'twenty two.
Because obviously, we do make a profit on retailer promotions.
And the math of inflation just works in our favor in a really big way.
Yes, that's exactly what all of us.
Getting to so thank you for that answer and then let me just ask a little longer term question and I.
You've already touched on it where you optimize some of your distribution systems, obviously in the Pacific Northwest.
You've only hit really in southern California, and you've got a whole bunch more.
I think of the center of the country like Iowa et cetera, where you have concentration now.
You know three or four D CS.
Number one as is.
Will that require a lot more capital number one and number two is what is really truly the the.
The upside for that and have you given any guidance or any kind of notion of what.
EBITDA benefits or margin benefits might be a gradually get through those optimization programs.
So this is Eric.
Try to fill in those blanks I mean, we are still very much in the process of evaluating our network.
Both conventional natural given cross selling giving the additional demand and protecting our capacity for growth. So I think we're very early on that planning the <unk>.
<unk> the markets, we've already talked about we also have utilization of automation that's across the network.
We're also very focused on and I think over the coming months, we will have a little bit more detail to share, but we're not just quite there yet.
Okay.
Just from a common sense of perspective.
Have multiple D. C. As you have multiple inventory you have multiple overhead.
And so and multiple trucks and multiple material handling equipment and so on and so forth. So.
Obviously, we can improve our service level, we can improve heart of the capital.
Nature of our market.
By operating out of fewer D season, one thing that.
Is a big part of our strategy is the power and scale.
In the distribution business.
The more volume you can flow through of singular D C.
The more EBITDA youre going to create.
Correct. So the.
Of the capital side of that is it is more of consolidating existing facilities and eliminating maybe the less efficiently the ore.
Does it require.
Buildup round the Greenfield.
Yeah No. It's Scott this is not a this is not of Capex play, it's not a greenfield.
I mean, it's possible that could happen within the next five years, but we don't we don't see that near term. We're still comfortable you know we're still operating in that kind of one per cent of revenue from a capex perspective, and we've been pretty disciplined.
With that number.
Perfect. Thank you.
Your final question comes from the line of Kelly <unk> from BMO capital markets.
Hi, Good morning. Thanks. This is Kelly bania from BMO.
Hi, just wanted to follow up on inflation again.
And what you're seeing at wholesale versus retail and if theres any differences maybe between what you're seeing across channels at retail and in terms of inflation.
Hey, Kelly.
Yeah.
The promotional dollars.
So.
Yes.
Yes.
Yeah.
[noise] toward the inflation.
Thank you.
Yes.
Yes.
Yeah.
Oh, we lost Chris.
Although the second okay.
Sorry, I'm on background can you hear me is the echo John sorry about that Kelly, So I'll I'll start from the top.
The biggest the biggest driver of the retail inflation of the lack of promo dollar spend right. So that's the CPG dollars that are going against the retail dollars and they're just not spending those promos and the Bill you mentioned a few times. This promo dollars also flow through us and impact our margin, but it doesn't impact our inflation and that's where you're seeing the biggest GAAP.
It's not.
And any specific channel at least we're not seeing any specific channel we look at inflation across all of retail and the number that I mentioned earlier, the 400 basis points difference was across all channels.
So that's that's the biggest reason it's best from a dollar spend that's not happening. Yes. There are there is there is also Kelly.
Many retailers have also taken price.
And so that's also embedded in the number as well.
So that's the GAAP the gap the gap between what you're seeing of retail and wholesale is what Chris just said, it's retailers taking price and the lack of promo which gets you that.
Three of 400 basis point difference.
Okay. So youre, saying your wholesale inflation was 100 basis points.
I don't I don't remember exactly what it was but it was it was in the 100 basis point range, which has been what it's running what it's been running for the past year and a half two years, but I.
I find it hard to believe that coming out of Covid, where so many products have been discontinued fill rates have been so poor.
That.
And by the way manufacturers to a large degree of health have held there.
The pricing relatively flat despite increasing input costs.
We know something we know that theres been a lot of increasing input costs a lot of through a lot of the commodities.
So I really believe that.
Once we get into late summer fall or we're going to start to see our inflation rate ramp up pretty materially.
Which is good for us because remember we we get the benefit of the math on the inflation and then we get the benefit of running the promos through our systems.
Great.
Okay. That's helpful.
And I just had to ask another another question on whole foods and the contract I guess I was looking at it as if it were a shorter duration than historically given that it's seven years versus 10.
I guess are you expecting that you would return the renegotiate halfway through that contract doesn't historically or no renegotiated in seven years is that this will be renegotiated in seven years. So that's that's one of the major changes.
You know in in the contract you know in the old World. When we were just negotiating with whole foods. It was you know we had a 10 year agreement we negotiated every five years.
We all decided that was not in the best interest of either company.
They're focused on growth we're focused on growth and so now we have a full seven year contract without renewal periods in between.
I see.
And just last very basic question on the DC optimization.
As you look back to what you laid out to us at the Investor day in terms of the.
The Dcs and how the inventory would flow between slow moving and fast turning.
Is that how does that compare to what you are doing or what has changed.
And when would we get product going on one truck is that you know part of the vision or can you just really help us understand logistically what is happening and what is changing yeah. Yeah. So that is still the vision. The vision is to get the product onto one on one truck that obviously is what drives the real economies of both for us and for the customer.
We are doing that.
In some markets.
It's still a little clunky.
But obviously, we have gone through a network optimization in the Pacific Northwest and the Southern California, We've added automation to those facilities, which is handling a lot handling a lot of the slower moving and each pick inventory.
But the strategy is still the same and that is to have fast moving warehouse slower moving warehouse and a general merchandise regional facility to supply all of those types of products.
Again. This is a this is a multiyear journey.
We're migrating onto a singular platforms because that obviously is a precursor.
To getting onto that one invoice one truck.
And we've made a lot of progress of the strategy hasn't changed.
Covid did delay us a little bit because obviously, we had to ramp up the demand.
But we will get there if that is still the strategy.
Thank you.
Yes.
Well, thanks, everybody for joining us it was of great quarter I.
I really want to thank our.
Our team of over 30000 associates around the U S and Canada are.
The work that they did to get product delivered every single day for weather and Covid and so many other things.
It's just amazing the.
Strategy that we've put in place is working.
Our customers are telling us, it's working and they're showing.
It's working with what they are buying from us and what they continue to buy from us So terrific quarter, we anticipate having a really good year and thank you for being with us today.
Ladies and gentlemen, this does conclude today's conference. Thank you for your participation you may now all disconnect.
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