Q3 2021 United Natural Foods Inc Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome to the UNFI and fiscal 'twenty 'twenty, 1 third quarter earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
And task a question during the session you will need to press star 1 on your telephone if you require any further assistance. Please press star zero and now like to hand, the conference over to Mr. Steven Bloomquist, Vice President Investor Relations. Please go ahead.
Yes.
Good morning, everyone and thank you for joining us and UNFI.
Third quarter fiscal 'twenty 'twenty, 1 earnings conference call.
By now you Should've received a copy of the earnings release issued this morning, the press release webcast and a supplemental slide deck are available under the investors section of the company's website at www Dot UNFI dot com under the events tab.
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 that comments made by management during today's call may contain forward looking statements.
These forward looking statements include plans expectations estimates and projections that might involve significant risks and uncertainties.
These risks are discussed and the company's earnings release and SEC.
<unk> actual.
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 death.
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 'twenty 'twenty, 1 third quarter earnings call.
As you saw in this morning's press release, we delivered another quarter of outstanding financial results.
Third.
Sales were over $662 billion third quarter, adjusted EBITDA was $179 million.
And third quarter, adjusted EPS was <unk> 94 cents or.
All were in line with our internal expectations and keep us on track to deliver our full.
Quarter fiscal 'twenty, 'twenty, 1 guidance and record EBITDA year, following 2020, which was positively influenced by the onset of COVID-19, we also reduced our outstanding net debt by $62 million in the quarter.
From a year over year basis.
You'll recall that last spring was truly an unprecedented time and the food industry and.
And we indicated on our last call, we would not positively cycle last years third quarter, and which our customers benefited tremendously from the stock up buying that took place as the Covid pandemic.
Full year began to spread.
But.
We're very pleased with our strong performance this quarter, which maintains the momentum building across our business.
First and foremost our team delivered our 28000 associates across the U S and Canada adjusted learned.
<unk> and executed for our customers, we care deeply about our role and ensuring that food continues to move and our results demonstrated just that.
This quarter's results again validate the work we are doing to both make our customers stronger and to drive.
Growth or value.
We know it all begins with the simple yet powerful idea of what UNFI can do to make our customers more successful.
Our data analytics and cross selling capabilities position, our customers to quickly pivot to sell more of what.
Sure He's consumer wants.
Our private brands help them offer desirable differentiated products to their shoppers at great prices.
Our services lower their expense structure and makes running their business easier.
And our innovation is continually looking forward.
What did it and asking the critical questions of what's next followed by what will unify due to bring it to our customers and the easiest possible way.
1 of the larger industry dynamics is the return of cost inflation, which up until now has been relatively benign.
As many of you know UNFI has historically benefited from inflation based on the structure of our business model.
In addition, we expect a tailwind from the return of CPG promotional dollars, which over the past 12 months have been considerably lower than historical levels.
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During that time frame large manufacturers have been able to sell their products without the need for regular promotions, which has begun to reverse and suppliers more aggressively promote their products to consumers with more choices as overall product availability improves.
Another important topic has been the challenges around hiring and retaining associates.
1 of our most important core beliefs has always been to do the right thing, which includes continuously and proactively looking for ways to keep UNFI as an employer of choice.
This includes <unk>.
Ways to create better work life balance.
Our commitment to diversity and inclusion and our relentless focus on safety.
With June being National safety month, we are launching a new framework and rally cry for workplace safety that will drive safety culture.
And looking at further to move us closer to our ultimate goal of zero injuries.
We will be flexible.
We will compensate our team fairly and.
And we will be creative and proactive as our workforce initiatives continue to evolve.
And we will have more.
Even a about these topics and 2 weeks as part of our Investor day.
In addition.
We're always making sure our compensation levels are competitive and to that and we've adjusted wage scales and many of our markets over the past 12 months, which has led to greater stability and our workforce.
And where to start seeing improved productivity and decreased over time offsetting these wage increases which has allowed us to maintain consistent operating expense rates.
In addition, we've continuously been investing and automation to improve throughput and order accuracy.
Easing the local challenges around available workforce.
Over the past 12 months and through the balance of the year, we'll continue to make meaningful investments in 2 soon to be 3 automated facilities and we'll continue to look for further opportunities to use technology, where the business case.
While it makes sense.
We will provide additional color around our updated growth strategy and longer term financial outlook and a couple of weeks at our June 24th Investor Day.
As you read in the press release, the event will be virtual and include a live Q&A session. Following.
Case metairie from many of our leaders, we're hoping you can join us.
Fiscal 2020 was a record year for UNFI in terms of sales and adjusted EBITDA.
And fiscal 'twenty 'twenty, 1 is expected to be even stronger.
We believe the factors I just spoke to.
Income as well as the Onboarding of key foods northeast stores and the pipeline business, Chris will address will contribute to fiscal 'twenty 'twenty 2 being another record year.
Let me now turn the call over to Chris to provide more context on our business performance Chris. Thanks.
And good morning, everyone on today's call I'll provide additional color on our fiscal 2020, 1 third quarter performance and discuss some of the key trends, we're currently seeing and our business.
And as you saw in this morning's press release total sales for the quarter were $6.6 billion.
As expected this was below.
Steve and fears record setting third quarter, finishing 5.9% down but up 6.7% and a 2 year stack basis.
We calculate this by adding the year over year growth rate to the prior year over year growth rate and believe it to be and appropriate way to view sales this quarter given the unprecedented.
Low lacquered entered activity and last year's third quarter.
For additional perspective Nielsen syndicated retail sales declined 5.3% for our fiscal third quarter, which included an approximate 110 basis point inflation tailwind compared to unifies wholesale inflation.
Unproductive factoring this and we believe that change and our wholesale sales was about 60 basis points favorable compared to Nielsen's reported retail sales and this is driven by our continued success with cross selling and winning new business.
Steve touched upon inflation and the quarter, which overall was relatively benign.
However, we have received notice from many suppliers, indicating they will be taking price increases and the coming months. So.
So we expect inflation to have a larger impact on our business leading into fiscal 2020.2.
As many of you know inflation has historically been a positive tailwind to our wholesale business as our.
Our contracts generally allow unified a pass through manufacturer cost increases as well as higher outbound fuel expenses.
Additionally, we anticipate higher supplier promotional spending to coincide with price increases and we have already seen some indicators of this trend beginning.
Let's turn to the performance of each of our sales.
Sales channels.
Our change business was down 5.6% compared to last year's third quarter and up 5.4% on a 2 year stack basis.
Within change we continue to be encouraged by the year over year increases, we're seeing from cross selling wins with several of our top 10 chain customers Inc.
Including those with captive distribution networks.
Our independent retailer channel was down 11, 4% compared to last year's third quarter and up 3.8% on a 2 year stack basis.
Many of our independents have added e-commerce capability are reopening their foodservice programs and are using.
Our professional services teams for store Remodels as they look to differentiate and adapt to the shifting consumer shopping behavior.
The supernatural channel was up 0.6% compared to last year's third quarter and up nearly 17% on a 2 year stack basis.
As we reported earlier in the quarter, we signed a long term agreement with this important customer and continue to support them as they open new locations strive for operational efficiencies and look for new ways to improve their customer experience.
Our retail stores continued to perform as sales declined.
0.3% compared to last year's third quarter and increased 14, 9% on a 2 year stacked basis following last year's record comp sales growth.
Both carbon shoppers continue to do a great job adapting to various consumer changes and catering to the local consumer needs for example.
9 and the twin cities Cubs, Mike hub, and my way philosophy allows customers to shop in store 24 hours, a day or place their online orders for delivery or click and collect pickup all meant to meet the customer where and how they choose to purchase their grocery items.
And finally.
And our other channel was down 3.2% compared to last year's third quarter and down slightly on a 2 year stack basis, a strong e-commerce gains have nearly offset all the softness and both foodservice and military channels sales to our top 100 customers were down just 3.4% compared to last year's.
Lee what are about 240 basis points stronger than our total wholesale net sales.
Despite lapping the unprecedented level of stock up buying that occurred in last year's third quarter. Nearly 1 third of these customers had double digit year over year sales increases with unifi.
We believe this reflects the strength of the.
Their businesses and their confidence and rewarding us with a greater share of their purchases.
Looking forward our business pipeline remains robust and we're optimistic we'll be able to add an incremental $500 million of annual new business that will phase in throughout fiscal 2020 to.
This would be additional.
Additional volume on top of the Onboarding of key food, which will have an estimated $1 billion annual run rate, which will also phase in throughout fiscal 2022.
Our newly reorganized sales team remains committed to executing against the large 140 billion dollar addressable market that we have described on previous.
Calls and we'll discuss more at our upcoming Investor day.
Let's talk about the progress, we're making on some of our growth platforms, starting with owned brands.
As we've said previously we plan to focus on innovation and introduced new items to meet the evolving needs of today's consumer this.
And this year, we've continued to.
Previous against innovation launching over 100, new products across 15 categories on just our field day brand.
Top selling skus include functional beverages personal care items and pantry supplies at.
At the same time, our essential everyday brand has record sales and the quarter with international.
Drivers as our brands plus team is aggressively expanding distribution and central and South America.
And finally last week, we announced a new line of bolt no sugar added hot sauces that complement Woodstock strength and the condiment category and in keeping with our Woodstock brand DNA. These products are non GMO.
And cost project verified and are produced from a carbon neutral facility will continue to lean into high growth consumer segments and high margin categories for future owned brands expansion.
We are also aggressively marketing our more than 150 services that bring the following benefits to our customers.
First customers save time, allowing them to focus on running their business.
Second customers save money, allowing them to reallocate savings to other drivers and their operations and third customers receive help and driving revenue by bringing new offerings or insights.
A great example is our payments offering that generate.
<unk> significant savings and credit card fees for our customers.
We've completed 148 installs over the past 6 months and and 1 instance, saved and multi store customer over $500000 annually from just a single service.
We'll have more to say about both our brands and services.
<unk> at our Investor Day later this month.
Within the important E Commerce space, our recently launched community marketplace continues to build as more skus get added to this innovative platform.
Although it is still in its infancy, we remain optimistic about the long term prospects of this extension of our UNFI easy.
And <unk> business.
And as for e-commerce capability that we provide to our brick and mortar customers. We've now added 215 stores to our platform and the past year with another 120 and the process of being on boarded.
These customers can now offer online ordering click and collect and delivery to their shoppers.
Option moving to retail our retail banners continued to perform well under Mike Stigers leadership, we're especially pleased with the traction E. Commerce is getting at Cub, We're third quarter year over year E. Comm sales increased 27%. We've recently expanded online ordering and delivery to include all cub liquor as well as wine.
And its locations, reflecting the great work the team is doing to make sure we're meeting the needs of our customers.
We're also proud of the efforts and the community as exemplified by our recent partnership with the Minnesota Twins, where we've administered COVID-19 vaccines and select home games and support of Minnesota's roll up your sleeves, Minnesota fans.
And spirit campaign <unk>.
And finally, we're proud to have reopened our second Cub store damage during last year's civil unrest local leadership has built both a friendship and business relationship with the community group, we push for peace, whose employees now greet customers entering the store.
This progress.
Progressive New model has not only strengthening our ties with the local community, but simply makes good business sense.
On a trailing 4 quarter basis retail has contributed nearly $100 million and adjusted EBITDA, reflecting the strength of our operations and the brand loyalty within their markets.
Lastly, let me make.
<unk> comments on the operation side of our business.
In addition to the comments, Steve made earlier about our approach to compensation and workforce stability. We also continue to move forward with optimizing our supply chain and expanding our distribution center network to better service, our customers and deliver operating efficiencies.
A couple for the first time this year, our outbound fill rate improved year over year as we continue to work with suppliers on the journey back to pre Covid service levels.
And our 1.3 million square foot Allentown campus remains on track to begin shipping early next fiscal year, and we're looking to add additional volume through.
Customer wins, and the New York Metro area.
In addition, the third quarter saw us begin to deploy several emerging technology initiatives, including new material handling technology to improve both the efficiency and work environment for our associates, who.
We will provide additional detail on our distribution network initiatives at Investor Day.
From new concluding some visuals that will help bring some of these amazing locations to life for you.
Despite all the change with the industry and macro environment unify has remained committed to our plan to leverage our scale and help our customers win we.
We have executed this plan throughout fiscal 'twenty, 1 and we're all very excited and optimistic for the future.
And associates have done an amazing job through this pandemic getting product to our customers on time and in a safe professional manner.
We're operating at a high level and we have every reason to believe our momentum will continue into next fiscal year and beyond.
With that I'll turn the call over to John Thank you Chris Good morning every.
On today's call I will provide additional context on our quarterly financial performance balance sheet capital structure and full year outlook for fiscal 2021.
And as Steve and Chris said, we're very pleased with our operating performance. This quarter, we delivered strong results as we cycled last year's unprecedented and stock ups.
<unk> serves as Covid driven demand began.
Sales for the third quarter totaled $6.$6.2 billion and.
Adjusted EBITDA was $179 million and adjusted EPS was <unk> 94 per share.
Third quarter gross margin rate was 34 basis points lower than last.
Last year's third quarter, driven predominantly by lower levels of supplier related income and our wholesale business.
Last year's third quarter was a largely normal promotional environment, which didn't begin to change until well into our fiscal fourth quarter and has yet to return to the pre pandemic levels.
The gross margin rate and our.
<unk> business was approximately flat to last year.
Third quarter operating expense rate decreased 13 basis points to 13.09% of sales.
This included the deleveraging impact of lower sales and nearly $3 million and startup costs related to our newest DC.
And Allentown, partially offset by lower COVID-19 related costs as well as the benefits from our value path program.
This quarter's strong performance was the result of the team doing a great job managing expenses in light of the changing environment, demonstrating our ability to run the business more efficiently over time we're.
We're pleased with the third quarter adjusted EBITDA margin rate of $2.7 1%.
On a GAAP basis, we reported <unk> 80 per share, which included <unk> 14 per share and after tax charges, primarily related to advisory fees for our transformational value path initiative.
Our adjusted EPS totaled <unk>.
<unk> per share.
Turning to the balance sheet, our total outstanding net debt finished the quarter at 2.43 billion setting another quarter ending record low following the Supervalu acquisition.
We generated $129 million and net cash from operating activities and the quarter.
94, which led to a reduction and total outstanding net debt of $62 million.
Our year to date net cash from operating activities and asset sale proceeds net of capital expenditures have allowed us to reduce our net debt by approximately $200 million on a face value basis, which keeps us on track.
<unk> achieve our full year debt reduction target.
Our net debt to adjusted EBITDA leverage ended the quarter at 3.3 times up a 10th of a turn from the second quarter due to the expected year over year decline and adjusted EBITDA as we cycled last year's third quarter, partially offset by lower debt levels.
Back to Rick This is a full turn lower than where we were at the end of last year's third quarter.
As you read in our press release, we are reaffirming the comments we provided on our last call towards the guidance ranges. We originally provided on last year's fourth quarter call.
As for net sales, we are anticipating several new business wins to take long.
Longer than originally anticipated to on board, which will cause us to finish at the low end of our sales guidance.
This includes some of the business, Chris referenced regarding our pipeline as for adjusted EBITDA and adjusted EPS are strong cost controls and the benefits from the value path initiative. We introduced earlier this year will allow us to finish.
At the upper end of the guidance ranges, we provided for each metric.
Both of which include approximately $13 million and Allentown startup costs were.
We're maintaining our previous guidance of $250 million to $300 million for capital expenditures and approximately $250 million of net debt reduction on our face.
Face value basis, both of which include this year's investment and our new Allentown distribution center to support key food.
We continue to expect our net debt to adjusted EBITDA leverage ratio to finish the fiscal year at approximately 3.3 times and.
And increasing value for our shareholders remains a priority and focus.
<unk> of UNFI with our differentiated business model and large addressable market, we remain confident and our ability to grow our business and generate meaningful free cash flow.
We look forward to providing more details on our future growth plans, including the metrics, we will use to measure our success at Investor day in 2 weeks.
Thank you for your time this morning and for your interest and UNFI with that let me turn the call back to Steve. 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.
And that will deliver on our full year outlook.
Fiscal 2020 was a record year for UNFI in terms of sales and adjusted EBITDA and fiscal 'twenty 'twenty, 1 is expected to be even stronger.
We believe the factors I just spoke to as well as the Onboarding of key foods northeast stores and the pipeline.
Wine business, Chris addressed will contribute to fiscal 'twenty 'twenty 2 being another record year.
We're also in the midst of active succession planning for UNFI as new CEO, while we don't have any incremental update today and don't plan to announce anything prior to or at.
Our June 24th Investor event, and the process continues with the support of our top tier search firm <unk>.
And our board of directors.
To reiterate my comment on the last call. Our business is strong our future is bright and I am confident UNFI will have a new and exciting leader.
Later this year.
In conclusion, I am thrilled with our performance this quarter, we have a great deal of momentum and I continue to believe that unifies best days lie ahead with that we're ready to take your questions.
If you'd like to ask a question at this time.
And please press Star then the number 1 on your telephone keypad. If you would like to withdraw your question press about key first question comes from Edward Kelly with Wells Fargo.
Hi, guys good morning.
And so the first the first thing I want to ask you just about you know and the.
Our sales guidance and being at the lower and sales guidance.
And you talked about.
Some of that business, when it's taking a little bit longer to materialize could you just provide a bit more color on that and and and what's happening there and then.
In addition to that the $500 million and new business wins that you're talking about for 'twenty..2 just additional color on what's what's what's driving that as well.
Hey, Ed This is Chris Thanks for the question.
So yeah, so as John mentioned, we're reaffirming the sales guidance at the low end of the range for the year, we feel very good about where we're coming in and sales for Q3, and where we will finish in Q4.
We have some commitments from new customers there.
And they are rather large and large commitments always take a little bit more time than the smaller ones.
And we're winning new business every day every week from multiple sources from multiple competitors.
And it's just going to take time to on board. It that said, we have the commitments as why we feel comfortable given the 500 million dollar number and just.
Just to reiterate that's on top of the Onboarding of key food, which will happen in phases, starting in fiscal 'twenty 2 as well.
Okay, and then just a follow up I wanted to ask you about the <unk>.
Cost side, and specifically related to drivers and driver pay and retention.
Just curious as to the extent that that's impacting you and then what's your outlook for driver pay inflation from here.
And do you think that that's a line item that will tick up.
Or do you think sort of business as usual.
Yeah I'll start it.
And then Eric May want to weigh in as we think about the rest of this year and next year.
I would say that there are a couple of different.
Current inputs to look at right. So fuel cost of goods labor inflation. Those are the primary inputs that are that are changing.
Fuel is somewhat neutral to us because the vast majority of fuel increases we pass through and.
Increase in cost of goods as a benefit to us.
Because as a wholesaler.
The vast majority of our businesses on a cost plus debt will turn out to be a benefit to us because as we increase.
Cost of goods, we pass through and we typically volume to rising markets.
Inflation to which there has been very little.
Obviously, we expect to have some more inflation come our way throughout the balance of this year and certainly into 'twenty..2 that's also a benefit.
Because we pass that through on the labor side.
We've done a ton of work throughout the year and making sure that our folks drivers include.
And.
Are being paid a competitive wage and as you heard in the script.
Increased wages throughout the year and that's obviously reflected in our numbers, but more importantly than wages.
And is having a really good environment, having really good work.
Work life balance managing overtime, managing productivity managing turnover and as a result of doing that we've seen and increasing productivity, we've seen more stability and our turnover. So I think we're optimistic.
But again.
And.
The labor market for drivers and and warehouse is shifting and we've done a really good job shifting with it we have a new facility opening and Allentown, Pennsylvania, which is going to be our first lifestyle center, which has some really sophisticated technology around flexible.
Work hours shift.
<unk> sharing.
So.
And we feel pretty good about where we are Eric anything you want to add yes.
Thanks, Steve and thanks, Ted I would just add my optimism as well given all the.
Associate focused program that we've introduced over the last 12 months and.
Just to reinforce.
Which Steve mentioned earlier, we've adjusted a good deal of markets across the country to maintain pace on wages on premiums and we're going to continue to modify as we go here, but the big headline here is around and associate focused programs around flexible work around ship share.
Sharing and.
We're expanding rosters necessary to help mitigate.
Do you work life balance situation and manage over time as well as reducing throughput.
Our turnover excuse me so.
And that's all I'll add.
Great. Thanks, guys.
Next question comes from John <unk> with Guggenheim.
So let me start with cross sell.
And when you think about 2021.
The cross sell revenue contribution come in.
And you think and how that compares to what you expected and.
And then when you think about 'twenty, 2 just order of magnitude.
And the cross sell contribution be.
Could it be as much as double 21 or is that optimistic.
Yeah, Hey, John This is Chris So 2 stats on cross selling 1 is the incremental cross sell right. So there was other wins that we gained over the year and then 2 is the rolling.
And cross sell so ones that we gained and the prior year or prior quarters that we continue to maintain.
For fiscal 'twenty, 1 we think the incremental will be somewhere around $250 million. So that's new revenue gains that we didn't have and the prior year.
The vast majority of that coming from conventional.
Customers.
That's where debt we sell natural too and that we are augmenting their captive distribution with our now broader portfolio of conventional products.
So that's where our fiscal 'twenty 1 is going to come in I think fiscal 'twenty, 2 and we're not giving fiscal 'twenty 2 guidance, but I think you could expect to see fiscal 'twenty.
Incremental cross selling to again be in that range around 250.
And to 300, but also realizing the gains of the $2.50, we got this year.
Yeah, I would only add.
And that John if you think about kind of if you think about.
<unk> said during the script.
<unk> was a record heavily driven by Covid.
'twenty, 1 is going to be a record heavily driven by cross selling and <unk>.
And control.
And also said the 'twenty 2 is going to be a record driven primarily by new sales onboarding.
And so.
Control most of that most of those sales wins and most of the pipeline.
And our.
By selling more to existing customers.
And then maybe secondarily.
And when you think about 2 topics right. So you've been hurt by supplier by supplier promo income being down.
What we've and negligent.
And that would that'd be a drag of as much as 40 or $50 million this past year.
And for 'twenty 1.
Order of magnitude that should come back and then secondly, when you think about key food and Allentown.
Right. So it's a drag $13 million this year.
Youll sort of ramp up next year or is it neutral do you think too.
<unk> and 'twenty, 2 we're still a drag.
Yes so.
And I don't know exactly what the drag on.
Our supplier promo is.
Material.
Uh huh.
And I don't know what the exact number isn't it's not going to come back all at once and it'll start to come back over time.
Yes.
And.
John.
As you know.
And the heat of Covid.
Pliers discontinued a lot of skus to focus on the ones that they.
And manufacturer and the ones that consumers want and obviously in order to get those skus placed back into retail.
<unk> youre going to have to pay for that.
And so we're going to start to see that turnaround I think.
Towards the back half of this year and the back quarter of this year and throughout.
2022, as far as the expenses and Allentown.
I think.
The majority and I'll, let John or Eric Correct Me here I would say the majority of the startup cost will be taken and the.
Fiscal year, I think there'll be a bit of a drag next year as the business starts to ramp up.
And that's right John.
Yes that is correct, Steve we've got the 13 million net that John mentioned that we've talked about in my script and and we're expecting somewhere in the neighborhood of maybe another $5 million to $10 million and FY 'twenty 2.
And that'll be part of that number as well.
John.
This is this is amazing facility.
Yes.
And I think its 1.3 million square feet between 2 buildings.
Campus.
It's really the first building, we're opening as I said earlier, our lifestyle building.
And that's going to be really associates friendly.
And it's going to be a fun place.
Facility work and we're really excited to see that rollout and 1 other comment I want to make back to and it's.
Question earlier on drivers as 1 of the 1 other significant benefits we have.
Is unlike foodservice our drivers are not touching every case.
And our trailers have hydraulic lift gates and electric.
Electric power jobs and.
And they are bumping a dock for the most part and they are moving the full pallets off the truck and into the retail store, whereas the foodservice drivers have to touch every single case and put it on a hand trucks and so thats 1 of the reasons why we've had so much success and.
Hiring drivers specifically.
<unk> had a foodservice while they were down.
Thank you.
Next question comes from Eric Larson with Seaport Global partners.
Yeah. Thanks, everyone. Thanks for the question so.
Steve I'd like to drill down a little bit more.
And kind of the underlying and.
Inflation rate and obviously, what we're seeing from the CPG companies.
Kind of you know high single digit input cost inflation and I.
I think it's probably been 10.12 years since we've actually seen it that high.
So is that is that would you is that sort of underlying cost rate what you.
You think that the CPG companies will price and you're starting to see that now where it will be up.
Most of the 2022 event.
That seems high to me Eric.
But look I think there's going to be material inflation that makes its way through the system.
But we're going to have to wait and see and Youre right. We havent seen inflation and then a very long time, Chris and John you want to add something to that.
Yeah, I'll just add we have a process for CPG increases our suppliers increases where we get notification and 60.90 days in advance.
And to your point Eric.
They are higher than normal I think a lot of cpg's held off during COVID-19.
And in the meantime, labors increase transportation increased and there's been raw material inputs that have increased so they are coming in and.
And they haven't quite hit yet, but what we've seen and the notifications they are higher than normal I would put them more and the.
But mid single digits and high single digits, but we surface. So many suppliers that it's hard to say.
And aggregate, where they'd come in and I agree with Steve that the high single seems high.
I think it's going to be more and the mid single digits, which again is significant.
Inefficiently higher than the 1% to 2% that we typically.
Okay.
Good day.
We did see from Eric from inflation.
And our protein and that.
And it was almost exclusively driven by.
They are.
Meat producers and ability to actually make the product.
What I would call short term labor.
Okay, Yeah that that that's sort of the refrigerated kind of the perimeter of the store stuff and that tends to be sort of pass through.
And that those tend to be sort of pass through price, but your center of the store items tend to be more.
And when Cpg's take those prices up and hold them and.
And then they if they do.
Tenda promoted back.
And you rarely see those prices go back down again, so when you when you look at it when you look at what you might be what we call transitory inflation or not I mean, what are your viewpoints on that because we see.
I mean could we see more.
More volatility like let's say in your fiscal 'twenty, 2 or 'twenty, 3 or maybe late 'twenty 2 prices come back down which are you.
So more volatility and that or would you expect to see with higher prices a higher rate of sustainable.
Yes, you're exactly right. There so whats going to happen is those costs are not going to come down and they're going to.
Stay inflated and and in order to move the product the.
The product will be heavily promoted and and either way that's a big tailwind for us because of the cost of goods go up refinements and rising.
Moshe and pass through the price.
And the CPG is heavily promote the product we manage the promotion.
And that turns into gross margin for us.
Okay perfect. Thank you everybody.
And.
Next question comes from Jim <unk> with Northcoast research.
And then towards cash.
Alright.
So looking at the top 100 customers.
Obviously, you guys performed better on the sales side, there and just kind of what's the business in general whats driving the discrepancy between those top 100 customers just that you have.
Broader selection and the portfolio that you're selling to them.
Cross selling some other service platform and what's driving the better performance, both compared to business as a whole.
Hey, this is Chris and I'll take that 1 and it's really a couple of things.
1 we're talking about really sophisticated longstanding.
Standing customers that have quickly adopted E. Com have quickly adopted our pricing strategies have quickly adopted to offering foodservice and prepared foods and their store. So they're just really good at strategy and execution.
But the second part is is is cross selling.
Now we have.
A huge benefit to offer large customers that want to use us.
To offset some of their either capacity constraints or they are transportation constraints and use our system to offset that and distribute.
Distribution that they would typically carry.
And so the other thing is now that we have this broader portfolio by bringing these 2 companies together, we have a really unique offering to sell natural and conventional nationally.
Really no 1 else can do and the benefits of that are really being seen with our top 100.
Yes, because we're selling them a broader portfolio of products that we didn't have 2 and a half years ago.
Yeah.
Great and I, just when you're looking at debt overall incremental cross sell opportunity, especially on the service side.
Percentage of that would you say comes.
Comes from those top 100 customers versus the rest of the business portfolio.
It's hard to say you know the 1 top 100 customers are bigger wins I mean, we're getting smaller cross selling wins at every level. If you think about just a and.
Independent and conventional store that wants to top.
Customer 205 hundred natural items.
Those are really helpful to them and their customers, but its not really moving the total needle.
I don't have that top 100 customers that I would say the vast majority over 75% of those wins are happening with the top 100.
Okay, great. Thanks, guys.
Sure.
Next question comes from Greg <unk> with full free search.
Good morning, Mr. Spencer Hanus on for Greg just a quick follow up on the inflation discussion what is your outlook for retail and wholesale inflation in 2021 and are you hearing anything from your retail partners about concerns.
Passing through elevated cost increases and and then how should we expect the cadence of benefits from higher inflation flowing through to your business.
So I don't have any additional color on the actual numbers related to inflation and other than we know and inflation is going up.
Turns around as to when it goes up and how much it goes up.
And.
I'm not sure, but I certainly believe that it's going to be in the mid single digits, which was.
Earlier as.
As far as pass through as Chris said earlier.
From a policy perspective, depending.
And depending upon the product catalog.
And we typically get between 60 and 90 days advance notice.
Which gives us the ability to want to buy into rising markets.
Which is a source of gross margin for us which is so it will be a tailwind.
But we passed through 100%.
Pretty damn close to a 100%.
<unk> the cost of goods that get pushed to us.
Okay. That's helpful. And then can you give us a quick update on on fill rates and then any sense of when vendor promos and get back to pre COVID-19 levels. And then are there any categories that are standing out as being a laggard and getting back to those historical fill rates.
Spencer This is Chris yeah, so fill rates.
We're seeing the highest fill rate we've had all year, we have over 600 bps improvement from the start of the year, albeit we are still well below where we were pre COVID-19 levels, it's a tailwind for us because as Steve mentioned.
Fill rate going up means a lot more.
New products are starting to come into the marketplace New products is a good thing for us. It's a good thing for our customers with slotting fees and promo promotional dollars.
As far as the categories, it's really mixed.
You know some of those categories that are we're really far behind are still lagging.
Expect I'm talking about are disinfectants and cleaners.
And far behind pre COVID-19 levels, but theyre, gaining right now what suppliers are really dealing with is transportation, which is a new challenge that didn't exist and.
And labor.
And so that's what's kind of cash.
Causing.
The fill rate to get even higher but we are optimistic we had 600 bps improvement from the start of the year, we and 200 bps improvement from Q2 and.
We're talking to our suppliers every day about how we can get.
And our fair share of those high demand products.
As you Rick.
Great. Thank you.
Next question.
Comes from Peter Sally with B P I G.
Great. Thanks.
Thanks for taking the question I just wanted to come back to the conversation around labor inflation, and <unk> shortages and warehouse personnel and and drivers.
How much of this issue the ongoing issue right now do you feel is related to outsized or high unemployment and benefits.
As you know I guess more transitory is that ends in September or how much of this do you think is kind of a more permanent change and industry structure.
Yeah, you know.
This is personal opinion I don't think much of it is really associated with.
Unemployment benefits on the driver side.
Our drivers are sophisticated.
They're knowledgeable and are working I think we're and a temporary period.
The demand for freight.
Outpacing.
The ability of the industry to move the freight.
But I do feel like it's temporary.
Once we get back to stability economically.
People are back at work.
And where.
And the pandemic is predominantly behind us.
I think this is all going to stabilize.
And like we said earlier there.
There are pockets, where we have some struggles around finding drivers for generally speaking.
We're.
And really good shape for all the reasons, we talked about earlier so.
It's a long way of saying I think we're just and a temporary period, where demand for for drivers and fleet.
<unk> outpacing the ability for the industry to cover it but its near term it will pass.
Understood very helpful and just lastly on the.
On the inflation and you guys are anticipating on the cost of goods.
Is the pass through is there any delay and the pass through of the other costs 2 to them to your customers or is it fairly immediate.
It's immediate no delay.
Great. Thank you very much.
Next question comes from Bill Kirk with MK and partners.
Hey, everybody. Thank you for taking the question just 1 from me.
What does the capacity utilization look like at the at the New New York facility. Once you have the the 1 billion annual from.
So John and once you have the incremental $500 million up and running and.
And I guess the question is how much more room physically will that will that location have for future wins on top.
Yes, Bill this is Eric.
Net.
And just as a reminder, the facility is 1.3 million square foot, it's multiple buildings.
Keith.
Yes, we are Onboarding 300, and so Keith foods stores, but we do have additional capacity there post the opening day.
And can handle the Metro New York marketplace for future customer growth. So were pretty excited about what that building offers us a scott marketplace and looking forward to seeing.
And come to life here and less than 8 weeks.
And keep in mind.
Have big facilities In York, Pennsylvania, Harrisburg, Pennsylvania, Carlisle, Pennsylvania, Hudson Valley, New York.
We have that market really well covered.
Thank you that's it from.
Okay.
Next question comes from William Reuter with Bank of America.
Good morning.
Earlier, when you were discussing the challenges with drivers you noted that it wasn't necessarily about wage inflation, but it was more about offering greater flexibility to them.
Will the effect of offer and greater flexibility or to your drivers to attract them have the same impact in terms of the labor hours that you'll be using as inflation would and is there some way to put some sort of numbers around that.
I'm not sure I understand the question.
I think what you're saying is.
Inflation youre talking about wage inflation.
Yeah, So earlier and analyst asked about whether you were seeing wage inflation of your drivers and the answer was kind of no. It's not necessarily about wage inflation, it's about trying to.
Cracked additional drivers by offering greater work life balance flexibility et cetera.
I was I would expect that offering that flexibility is going to require more hours. So effectively your total cost of labor increases is that incorrect.
So we have we have already.
<unk> increased wages for our drivers and in some markets around the country and that's reflected in our and our financial performance and in our expectations for the year, but what I. What I believe is happening is the workforce is changing.
<unk>.
Lot of associates today want less.
And overtime.
They want work life balance they wanted to be able to leave and the morning of come home at night. They don't want to go on multi day runs.
And so thats very different and the way it was.
And even 3 or 4 years ago.
<unk>.
The opposite was true.
And so our routes and our route planning and our DC management.
Our all predicated on what the worker today really wants out of a job and as long as we can give them what they want and we're going to keep our turnover down and our productivity high and the other thing Thats.
And really important to us is safety.
And having a really robust safety program that demonstrates to our workforce drivers in particular that we care.
And we do.
And all those things combined into a different type of workforce today that was here 3 or 4.
4 years ago and companies just have to change and be cognizant of.
What the work growth today really demands and all of that is reflected in our numbers that you've seen so far this year, how we're committing to the numbers from the rest of the year and what we see happening and.
In 2022, which by the way we've already said is going to be another record year.
Okay. That's helpful and then just as a follow up.
Obviously, the retail business has performed very well over the last year.
Trying to figure out what a sustainable level there may be challenging but has your perspective changed on your interest.
Bring that asset are you know given that you had to explore different options you know and the past.
And where is your guys are playing with that currently thanks.
I can tell you and just as a leadership team. We are so incredibly proud of what our retail division and that's done.
They've been there a day.
Being open and they've been supporting the communities and so many different ways and yes, our financial results are.
And just incredible throughout the pandemic and they continue to be incredible I think as you know we took the mark to market and during Covid.
And feel like it was an appropriate time.
And to try to sell a retail business.
And keep though they are not back on the market.
Today, and we'll talk a lot more about that at the Investor day, but today, we own it and we love it and we're going to continue to run it and just an exemplar and <unk>.
<unk>.
And that we have over the last couple of years.
Thank you for the insight.
Yeah.
The last question comes from Jim Celerity with Northcoast research.
Hey, guys just a follow up question on the.
Drivers suppliers, Steve you had mentioned that the demand for freight is really outpacing the supply right now do you anticipate that the.
Where did.
That will balance itself out and you'll see more people more drivers entering the market, so theres going to be a greater labor supply.
Fill rates will improve and so that'll take miles off the road or maybe the build more dcs, you'll have less miles and travel just trying to put.
Put some cash yeah, I mean, I think that what's.
What's really.
As there has been just so much pent up demand for product that gets shipped by truck.
Over the last year, or so and we're seeing that demand.
And in all of them all of the primary statistics that you would look at.
But.
And I would say that it will come off and.
So as that demand falls off.
The labor market for freight will stabilize.
And that's really what I was trying to get at.
We're hiring drivers and I think there will be drivers more drivers coming into the marketplace.
And we know how to do it and we've got a big fleet of owned vehicles.
And drivers who represent US every single day so.
We're just and a temporary.
Low and if you certainly look back and the history of freight we've seen this before.
And the demand will come off.
More drivers will enter the marketplace.
And and it will be much more stable it may take another year or so.
And there's lots of things that we're doing.
To make sure that we have a terrific driver workforce to deliver our products every day.
Great. Thanks.
Alright, well, thank you very much.
Thank you very much for joining us today I can't tell you I've been here for 12 years. There has never been a more exciting time to be at UNFI I truly believe that the best years are in front of us.
And as I said earlier 20 was a record 20.
And it's going to be a record and 22 is going to be even better.
So thanks for joining us be safe and we look forward to seeing you at our Investor day on June 24th to have a great day.
This concludes today's conference call you may now disconnect.
Yes.
And.
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