Q4 2021 United Natural Foods Inc Earnings Call
Yeah.
Good day, and thank you for standing by.
Welcome to the U N if ice fourth quarter fiscal 2021 earnings call. At this time all participants are in a listen only mode. After the speaker 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 please.
Please be advised that the discount friends as being weak or did.
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I would now like to hand, the conference overdue Speaker today, Mr. Steve Bloomquist, Vice President of Investor Relations. Please go ahead.
Good morning, everyone. Thank you for joining us on unified fourth quarter fiscal 2021 earnings conference call by now you should have 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 Sandy Douglas, our Chief Executive Officer, John Howard, Our Chief Financial Officer.
Chris Testa, President of UNFI, and Eric Dorn, our Chief operating Officer Sandy.
Sandy, 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 in the company's earnings release and SEC filings.
Actual results may differ materially from the results discussed in these forward looking statements and lastly, I'd like to point out that during today's call management will refer to certain non-GAAP financial measures.
Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release.
I'll now turn the call over to Sandy.
Thank you, Steve and good morning, everyone and thank you for joining us on our fiscal 2021 fourth quarter earnings call.
Let me begin by saying, how happy I am to join UNFI and how excited I am to be back in the food business.
Over my career I've had the opportunity to meet and work with many of our customers and I look forward to renewing and carrying forward those relationships.
I also look forward to meeting customers that I've not met and learning how UNFI can help make all of them even more successful.
I've been on the job for about seven weeks now and I've spent the majority of my time meeting with customers, our senior team and with associates across the organization.
Kissing on growth opportunities for customers and how we can all work together to capture these opportunities in a very complex operating environment.
Several things have become apparent to me about this company first I've been impressed with the leadership team both on an individual level as well as how they work together collectively to solve problems and serve our customers and our associates and move the business forward.
They brought me up to speed and giving me the support ive needed to successfully onboard during these interesting times. They also embody the values and culture that were a key part of what attracted me to UNFI.
Second my early take is that there are significant opportunities to improve the way, we serve existing and new customers and the opportunity to partner with suppliers to bring customers the highest quality differentiated products and services that they want and need.
Importantly, as the Covid pandemic lingers, our operating environment remains challenging.
From our suppliers to UNFI to our customers, we are all facing challenges, making moving and delivering products to our interdependent supply chains.
So my focus will continue to be learning the full extent of this business and assisting our team as we manage through the challenges and execute our plans for the benefit of our incredible community of customers.
In doing so I'm confident that we will continue to find ways to help our customers create value, which will benefit all of our stakeholders.
The final point I'd make is despite the challenges that we're managing we have momentum in our business and it is accelerating and I believe our plans for the new fiscal year, we'll carry that momentum forward.
Under the leadership of my predecessor, Steve Spinner, and our senior team, we delivered a solid fiscal 2021 and we expect this new fiscal year to be even better.
We start fiscal 'twenty, two with less debt and an improved leverage ratio and plans for further growth driven by a sincere focus on doing everything we can do to serve our customers.
John will go over the details of our fiscal 'twenty two outlook shortly and I'm genuinely excited for the year to come let.
Let me now turn the call over to our President Chris Testa for his comments on our performance Chris.
Thanks, Andy and good morning, everyone on today's call I'll provide color on our fourth quarter performance and commentary on how these results and our fuel the future strategy will help drive growth for unified moving forward.
We're pleased with our results this quarter and for fiscal 2021 and total.
Sales for the full year came in about where we expected while adjusted EBITDA and adjusted EPS were both above our previous outlook. We believe our fourth quarter results reflect the work underway as we begin to implement our field our future strategy focusing on the fourth quarter sales totaled slightly more than $13.0 billion.
This was down slightly from last year's fourth quarter as we're now cycling the months in calendar 2020 with the elevated levels of early COVID-19 consumer demand.
<unk> sales decline in our retail independent and chain channels, which are the largest gain as a year ago were partially offset by growth in the supernatural and other channels on.
On a sequential basis, our businesses growing our sales in the fourth quarter increased about 1.6% from the third quarter.
Part of this about 80 of the 160 basis point increase was the result of accelerating inflation within our business, which increased to approximately 2.4% in the fourth quarter.
The remaining 80 basis points was the result of the underlying strength of our customers retail business and our committed success with cross selling and the addition of new customers.
A meaningful portion of sequential increase came from our top 100 customers where sales increased 2.2% from Q3 to Q4.
The fourth quarter also included an incremental $80 million in cross selling revenue as customers continue to benefit from unifies unmatched product variety and the value only weaken add from consolidating purchases.
In fiscal 'twenty, one over $700 million of our total revenue.
I'm from cross selling that was made possible by the merger of our conventional and natural businesses.
Selling more to existing customers represents a 38 billion dollar addressable opportunity and we believe it's unifies unique advantage.
With over 18000 unique customers representing over 30000 locations unify has significant growth potential with customers we already service.
New customers will also play an important role for our future growth in our sales pipeline includes hundreds of opportunities to help us grow share within the 140 billion dollar addressable market opportunity, we pre released with discussed.
Let's turn to the growth platforms, we spoke to at our Investor day under a kiss the future pillar, namely owned brands professional services and fresh start.
Starting with our own brands business, our three pronged strategy for growth is built around increasing penetration with our existing customers, bringing owned brands to new customers and channels that presently don't carry them and introducing innovative items that meet the evolving needs of today's consumers, we're making progress across all three fronts.
We're now selling our own brands products to a nearly an additional 500 stores that were on boarded during fiscal 'twenty one.
And we realized significant topline growth on key brands like Woodstock Tomorrows in field day.
We've also introduced about 100, new items to our portfolio of products. This year and plan to introduce another 150 in fiscal 'twenty, two including more plant based and functional ingredient skews. This.
This combination of larger customer base and relevant new product offerings is expected to be part of our growth in fiscal 2022.
Professional services remains another key differentiator for Unifi and fiscal 2021 our services business grew 12% and we're looking for our fiscal 2022 to be another year of double digit growth.
Our optimism is based on customer feedback that our portfolio of services adds value to their businesses and a robust pipeline of opportunities that our sales organization is actively pursuing.
In fiscal 2021 we introduced 17, new services and we expect to launch similar number this coming year driven by current industry trends as well as feedback from customers on what problems, we can help them solve.
Two noteworthy services coming this year include an advanced retail pricing platform that will allow customers to manage gross margins across the entire store and more sophisticated ways that were previously available from any wholesaler.
And an offering that tracks scan data against product code dates and provides a store real time information on unsold products that may be going past their code dates and allows them to better manage inventory and reduce shrink.
Finally, as fresh where we continue to invest in people infrastructure and technology to strengthen our foundation and a platform for future growth as consumer demand continues to be strong for products sold around the perimeter of the store.
Our bullish outlook includes growing produce sales at a rate several hundred basis points above total company growth rate in.
In addition to improving our infrastructure across the network. We staff many of our facilities with produce specialists that have a strong working knowledge of this category, which gives us further confidence in our ability to better support our customers and accelerate growth.
We've also restructured our sourcing team to take full advantage of unified purchasing scale deeper relationships with growers are expected to improve our supply consistency take days out of the supply chain and ultimately improve product quality across the network and help drive sales.
Finally, our bakery daily category experienced double digit growth in the fourth quarter consumer demand has increased since the height of the pandemic and UNFI is uniquely positioned with a broad portfolio of specialty items, including a majority of the skus, we sell through our Tony's fine foods portfolio.
Turning now to operations, our fulfillment network is facing the same labor shortages supply shortages and ongoing pandemic challenges being felt throughout the U S supply chain we.
We continue to take innovative and meaningful steps to mitigate each of these headwinds, allowing us to provide the best possible service to our customers.
Starting with labor, we have and will continue to modify distribution center associate wage grids as necessary to maintain competitive compensation programs. We're also taking steps beyond wage increases to focus on the work life experience of our associates, including the implementation of new incentives daily pay any.
Health benefits and flex time programs.
These wage and lifestyle programs are part of our ongoing efforts to attract and retain talent.
We've also refocused our entire organization on our recruiting and Onboarding and training of new associates in our Dcs. So we are prepare for the upcoming holiday season and future growth.
Suppliers face many of the same challenges, we see in our network and the retailer community is growing fatigued with the limited assortments and increasing out of stocks across several key categories.
These supply challenges caused our inbound supply our service levels to begin to deteriorate in the fourth quarter to offset these challenges we continued to proactively meet with our vendor partners to get our deserve share supply and get in front of the upcoming holiday demand. So we can provide the best possible experience for our customers.
Safety and the wellbeing of our associates is our top priority as a result, we did voluntarily and temporarily suspend full operations at our Centralia, Washington distribution Center in the first week of August due to an increase of COVID-19 cases at that facility <unk>.
During the shutdown, we continue to service our customers to the greatest extent possible. Despite increased cost by leveraging contingency plans to meet essential customer needs and through moderating shipments and shifting volume to other distribution centers while.
While we do expect this voluntary temporary shutdown to be a headwind to our fiscal 2022 first quarter financial results. The impact is incorporated into the full year financial guidance that John will review with you shortly.
We continue to maintain our strong COVID-19 safety protocols that are in line or greater than CDC guidance, including Mandatary mask wearing enhanced sanitation protocols onsite vaccine clinics and strict social distancing enforcement throughout our entire fulfillment network.
Now turning to retail.
Our carbon shoppers banners had another solid quarter, the 6% decline in sales was largely the result of cycling last year's 21% year over year increase putting the two year stack at 15, 2%, which is in line or ahead of many food retailers.
As you heard during our Investor day, we are investing in our retail business to enhance the shopping experience for our consumers through.
Through efforts like an enhanced e-commerce platform expanded delivery offerings and improved data analytics and merchandising concepts, we are striving to make our stores more appealing and easier to shop.
Finally, we're proud to have been recently awarded a progressive grocer impact award in the category of sustainability and resource conservation.
This award recognizes our ambitious goals and progress under the better for all platform and is a great reflection of the strategic direction and outstanding efforts of our people.
We'll be releasing our next ESG report in early 2022 and are excited to share all the great work being done at Unifi to make our world our communities and our people better.
Let me now turn the call over to John.
Thank you, Chris and good morning, everyone on today's call I'll cover our fourth quarter financial performance balance sheet capital structure and outlook for next year, our fiscal 2022.
As Sandy and Chris both said, we're very pleased with our operating performance this quarter and the finish we had to fiscal 2021.
Sales for the fourth quarter totaled $13.0 billion slightly below last year given the prior comparisons Chris mentioned, while adjusted EBITDA of $201 million and adjusted EPS of $19.0 per share were both higher than last year and contributed to our finishing above our fiscal 'twenty one full year outlook.
Fourth quarter gross margin rate increased seven basis points compared to last year's fourth quarter, driven by the benefits from our value path initiatives, partially offset by a higher year over year LIFO charge.
Gross margin rate in our retail business was approximately flat to last year.
Fourth quarter operating expense rate increased slightly compared to last year's fourth quarter, driven by higher employee related costs as well as $9 million in startup costs related to Allentown that I mentioned on our last call.
These two items were partially offset by lower levels of pandemic related costs and incentive compensation expense as well as the benefits from value path on our ongoing operating expense.
We're pleased with the fourth quarter's adjusted EBITDA rate of 3% of net sales the second highest quarterly rate during the last three years.
We also experienced leverage in our P&L for fiscal 2021, as we increased adjusted EBITDA by nearly 11% on a one 5% sales increase our.
Our GAAP earnings per share totaled 69 cents, which included 49 cents and net after tax charges.
Our adjusted EPS for the fourth quarter totaled $19.0 per share further demonstrating our P&L leverage.
As you know unified contributes to various multiemployer pension plans across our wholesale and retail operations.
Across these plans, we look for opportunities to maintain benefits for our associates, while also reducing risk around retirement benefit obligations.
During the fourth quarter, we elected to withdraw from three multi employer retail pension plans covering certain associates in our Cub banner.
These defined benefit plans had been replaced with defined contribution plans going forward.
This action resulted in a $63 million pension withdrawal charge in the fourth quarter, which was recorded in the operating expense line of our P&L.
To satisfy our withdrawal liability will make cumulative annual after tax cash payments of $3 million, which will have a nominal impact on our annual free cash flow.
Across our multiemployer pension plans, we will continue to look for opportunities to maintain benefits for our associates, while also reducing the risk around future retirement benefit obligations.
We may have another transaction before the end of the calendar year, and we will consider additional transactions that further decouple, our retail operations from its remaining met plans.
Turning to the balance sheet, we finished the year with total outstanding net debt of $2.29 billion in total liquidity of over $4.0 billion.
A combination of cash provided by operations and asset sale proceeds led to a $317 million reduction in our net debt level compared to the end of fiscal 2020, and a nearly $1.1 billion reduction since the Supervalu acquisition.
Our lower net debt balance in Q4 operating performance drove our leverage down to three one times an improvement from three nine times leverage at the end of fiscal 2020.
And these figures include a $310 million capital investment back into our business, including nearly $80 million towards the Allentown distribution center as well as additional investments across the business to enable growth deliver automation maintain our physical assets and helped us deliver synergies and cost savings all with the goal.
With better serving our customers, let's turn to our outlook for fiscal 2022 today.
Today's operating backdrop continues to evolve and change quickly so our guidance for fiscal 2020 do reflects our current expectations.
Starting with net sales, we expect fiscal 2020 two's full year net sales to be in the range of 27.8 to $31.0 billion, which represents more than a $1 billion increase over fiscal 2021 or about 4% at the midpoint.
Net new business, including the phased onboarding of new business in the northeast and with our largest customer as well as continued cross selling of new customer wins are expected to contribute four to five percentage points of growth.
We're also assuming a modest amount of inflation, which adds roughly another one percentage point.
These gains are expected to be partially offset by an expected modest contraction in overall industry growth.
We're expecting adjusted EBITDA for fiscal 2022 to be in the range of $1552.0 million also about a 4% increase at the midpoint.
From a puts and takes perspective fiscal 2022 will benefit from the higher level of sales and the continued benefits from our value path initiatives net of dollars reinvested in the business.
Temporary year over year headwinds include the return to higher benefit costs compared to fiscal 2021 as associates are assumed to make more frequent visits to their health care providers.
The ending of our transition services agreement with save a lot.
And added rent expense from the strategic value maximizing sale leaseback at our Riverside, California distribution center, where we've exercised an option to monetize that asset.
<unk> cost as we transition from fiscal 'twenty, one to fiscal 'twenty. Two are all included in our outlook and at this point, we don't foresee items of a similar magnitude impacting the transition into fiscal 'twenty three or 'twenty four adjusted EPS is expected to be in the range of $93.0 to $24.0 per share an increase of about 4% at the midpoint.
This reflects our expectations for an increase in adjusted EBITDA lower interest expense tied to lower debt levels and an adjusted effective tax rate of approximately 26%.
It also includes lower net noncash pension income based on the improved funded status of our corporate pension and other post retirement plans, which are now slightly overfunded on a net basis compared to last year's $294 million net underfunded position.
This favorable change in the funded status has allowed us to further derisk. These liabilities by migrating to a more conservative asset allocation, which in turn leads to lower assumed return on assets.
The year over year decrease in noncash pension income amounts to about 34 cents in lost earnings per share.
Given the cadence of Onboarding, new business and the timing of the temporary voluntary shutdown of our Centralia distribution center and new distribution centre startup expenses, we expect our sales and profit growth to be weighted to the back half of fiscal 2022.
The timing and impact of these items was anticipated as we built our plans for the current fiscal year and we remain highly confident in our ability to deliver the sales adjusted EBITDA and adjusted EPS targets I've outlined for you today.
We expect to reduce net outstanding debt by $100 million to $150 million in fiscal 2022.
This includes the investment we expect to make in the working capital to support our new DC investments and growth across the business.
In addition, we expect taxes to be a use of cash in fiscal 2022. Unlike fiscal 2021, when we received an overall net refund driven by provisions within the cares Act, which required us to utilize prior year net operating losses at a 35% rate.
Capital expenditures are expected to be approximately $300 million, which excludes the amount for the Riverside sale leaseback transaction, which will be supported by a third party. Finally, we expect our net leverage to be less than three times by the end of fiscal 'twenty, two driven by higher adjusted EBITDA and further debt reduction including.
Applying the proceeds of our riverside monetization to reducing debt.
The fundamental growth drivers, we outlined in June remain unchanged and we believe they will be the catalyst that delivers the fiscal 2024 targets provided at Investor day.
Simply the Centralia temporary closure of all of the fiscal 'twenty two headwinds I spoke to were considered when we established our fiscal 2024 CAGR figures provided at Investor day.
Therefore, we continue to feel confident in our ability to meet or exceed those targets.
Increasing value for our shareholders remains a priority and focus of UNFI, we remain confident in our ability to grow our business and generate meaningful free cash flow.
Operator, we're now ready to take questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone do we draw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question is from the line of Bill Kirk from M. P. M partners. These go ahead.
Good morning, everyone. Thank you for the questions. My first question is for Sandy.
Back in June the company gave the goals for fiscal 2024, and I guess I guess my question is what areas do you envision as maybe the most challenging and the heaviest lifting and which areas toward those goals are more of the lower hanging fruit in your mind.
Thanks Bill.
Seven weeks in store.
Very much on a steep learning curve learning about all facets of the business.
And Im learning from the senior team about the details of the strategic plan and I have to tell you I like what I'm seeing the plan is customer focused and growth oriented with an estimated $140 billion addressable opportunity that we've talked about with existing and also potential new customers.
In parallel our customers are counting on us to do the very best job possible to meet their product service needs in a complicated environment. So for at least the foreseeable short term my focus continues to be on learning about our business listening to our customers and UNFI teammates and accelerating the quality of our.
<unk> on behalf of our customers.
Thank you and then and then maybe one for Chris.
How much how much promotional activity has returned so far and I guess, how much of it has been manufacturing led activity versus retailer led and what do you. What do you expect that to look like going forward.
Yes, im not going to speak to the retailer led.
Because that's really for the retailers to speak about but the manufacturer led promotions are starting to come back.
We are seeing more activity in our promotions. The the thing that is still sort of a headwind for us Bill is the fill rate. So those two things go hand in hand in hand promotions com.
Fill rate improves and we did see steady improvement on our inbound supplier fill rate up until the summer and then the summer months and started to decline for all the macro issues that I'm sure everybody is aware of.
Raw material shortages, especially in bottled beverages labor freight and so forth. So we.
From a percentage base, we're happy with what we're seeing from the promotions, but in aggregate.
There's still rates are going to continue to be a headwind on the promotional activity.
Thank you. Thank you both.
Thank you. Our next question is from the line of Scott <unk> from our five capital. Please go ahead.
Thanks, and welcome Sandy.
Looking forward to working working toward working together.
<unk>.
The supernatural channel, obviously is growing pretty rapidly even cycling I wonder if you could give us any thoughts on what's going on there how sustainable that is.
Hey, Scott this is Chris.
Well, yes, there's a couple of reasons for that growth one it was the slower growth in the fourth quarter last year.
It's cycling that number from last year or so.
That's why we're seeing the bigger year over year growth in the fourth quarter and then two as we announced earlier in fiscal 'twenty. One we got the extension with our largest customer there that's opened the door for additional categories and growth.
So we see that continuing at least for the fiscal 'twenty two year and hopefully beyond that.
Perfect. That's obviously good news.
The second question is a little bit more short term.
So you got the facility closed down because of Covid, how should we think of as you kind of sit back half weighted but how should we specifically think about the first quarter.
Revenues kind of costs, just so we can kind of get the models right here.
Yes, no I appreciate that this is John.
As you know, we generally don't provide quarterly guidance.
Alright.
Amit that I made in the script as it relates to some of the headwinds we're seeing in Q1 Centralia.
Et cetera.
I think that can help guide how you guys think about the quarter, we look at it as a full year, we know the year is.
Various degrees of uncertainty, but we feel good about the numbers that we put out there for the full year.
And then my final my final one is just you guys talked about labor, obviously labor is a challenge and you talked about some of the things you're doing to mitigate it.
Are you worried about some other distribution centers being either short labor COVID-19 or is that really not a concern that you put into the model at this stage.
Good morning, Scott, It's Eric I would just start out by saying that Centralia was our first significant disruption we've had in our networks.
<unk> began and that's largely because of the proactive and robust protocols, we have implemented across the network by our teams.
We also are very focused on our workforce at.
As Chris referenced we've taken a lot of proactive innovative steps to not only address wage challenges, but also workforce availability and workforce lifestyle. So we remain very focused we've seen some pockets of.
While we are also experiencing the challenges that we've described in other dcs across the network, but we're continually to stay on it its our number one focus and we have the entire organization supporting our supply chain teams as we work through this.
Alright, guys. Thanks for your thoughts I appreciate it.
Thank you. Our next question is from Jim Solera from Northcoast Research. Your line is now open.
Thanks, guys great quarter, good guidance for the out year.
First of all I wanted to drill down a little bit on the.
Net sales guidance for the next year, so if I'm looking kind of back of the envelope math.
$800 million in there from key food, which leaves about $500 million upside could you maybe break down where you see the opportunity is that going to come from cross sell wins from new account wins, new products or any any granularity you can provide on that would be awesome.
Hey, Jim it's Chris.
So on the key food win that we won't realize the full.
A $1 billion a year that we talked about in a fiscal year until fiscal 'twenty three so that that will be phased in across fiscal 'twenty two.
But again, we're not going to see that full benefit in a single fiscal year until next year.
So and the rest of it is going to be coming from weekly wins daily wins of all sizes. If you think about what unified has to offer there is no single competitor that we compete against so every day, we're seeing wind with Proteus, we're seeing wins that are.
Helping our customers with their captive distribution, we're seeing natural to conventional conventional to natural.
In that total fiscal 'twenty two guidance, it's all of those.
On top of the key foods Onboarding that we're gonna have throughout the year.
Okay, great and actually to build off.
You mentioned that with the captive distribution.
We've all heard about some of the supply chain and logistics challenges.
Does that end up benefiting you guys. If some of these captive retailers don't have the capacity to scale up or if they get some whether it's COVID-19 outbreak or any issues they might have.
Lean on you guys more to support their existing network do you guys view that as a tailwind if some of these supply chain headwinds for the broader anatomy.
Yes.
The short answer to your question is yes.
The supply chain is stressed right now and it's been stressed for 17 months.
And that level and that environment has been an opportunity for UNFI.
We're uniquely positioned because we have the full portfolio of conventional and natural so if you think about some of those large natural retailers I'm sorry conventional retailers that we were previously just selling natural.
Can now come to unify and leverage our network to sell them conventional and take some relief on their captive distribution. So absolutely what we've learned through the pandemic is when the supply chain stress that typically is a tailwind for us that creates opportunities for us.
Possibly if I could sneak in one more quick question.
Really impressive on the operating margin side can you maybe just touch on real quick couple of level you guys are pulling to keep that number where that is.
I will just basically flat year over year, but I would imagine you guys win some of that.
Shrink benefit just compared to the you know the big quarter last go around so any detail on that you can provide would be great.
Yeah, I mean, if you look at the EBITDA margin when we think about what's driving that we've talked before about the value path initiative, which has various underlying multi pads that we're running related to margin SG&A opex et cetera, all of which is bringing that value that youre seeing.
We can leverage the P&L.
And then as we've talked about.
For FY 'twenty, two and the go forward for 'twenty. Two we know we've got some of those headwinds that I mentioned, particularly the we looked at 'twenty. Two is a transition year, we've got some health and wellness that'll be coming back.
Some rent for the Marino Valley site, we are losing the save a lot Psa contractually.
From a contract that's been out there for years, we knew all of that was coming as we establish those long term targets. So when we think about.
EBITDA margin from 'twenty, one to 'twenty two we know we've got those headwinds in 'twenty two but we also know once we go through that transition year and get into 'twenty, three and 'twenty four we're going to be right on track for those for those targets.
Great. Thanks, guys I'll pass it on.
Thank you. The next one we have Eric Larson from Seaport Research partners. Please go ahead.
Yeah. Thank you congratulations on a good quarter, guys and Sandy work in wallboard, we're looking forward to working with you.
Over the next hopefully number of years so welcome aboard.
The first question I have is I believe you said that fourth quarter inflation was two 4%.
Obviously this is really the first inflationary period, you've had in many many years so.
Maybe this question is for Chris.
In your guidance are you building in.
Maybe a 2% plus inflation rate for this year and of course, then that should really help your gross margins and then maybe John can comment on that.
Yeah, Eric This is John I'll start and Chris can add some color as well I think.
The way, we think about 'twenty, two we're including about 1% inflation for the year, we know the situation we're in right now.
But as it relates to a full year, we think we're going to on par come back to roughly a 1% for the year.
As we've talked about before broadly inflation is a little bit of a tailwind for us.
So anything above that could provide a little bit of upside but for us. The way, we think about inflation internally, it's more about how we can coordinate and work with our suppliers. So that we can then provide competitive pricing for our customers.
And that's really our focus to support our growth initiatives.
That's the way, we view that but as it relates to purely the numbers youre seeing in the guidance, we've got 1% for the full year in our numbers.
Okay, and then just a quick.
Follow up to that.
Your largest customer has been has been trying to increase the value of their.
Their grocery portfolio relative to other conventional for some time are you seeing the same rate of inflation across all the channels or are there are there large disparities.
So Eric I think you are talking about the <unk>.
Register sales right the inflation and what the retailers are doing to pass them on our pass them on.
I don't think we're in a position really to comment on the retailer pricing strategies on that.
To your point there are many different approaches whether they pass that on or not but.
I don't think that we can comment on the strategies that Brian.
<unk> of our customers.
Okay.
I just thought I'd try thank you, Chris and then just finally a follow up.
Sandy maybe it's.
It's related to the first question that was asked on the conference call. So do you endorse.
The new Guy.
The new.
2024 guidance that was put out at Investor day in June or are you reserving the right as you get to learn the business more over the next three to four to five months the right.
Just those two.
Those guidance numbers.
John the answer to that is both.
<unk>.
<unk> about the strategic plan I think we have tremendous opportunity.
Haven't seen anything that would.
We would signal to me that the numbers that we put out there arent exactly right for 2024, but as a team we're going to always be agile and work together to make sure that our plans make the most sense for.
All of our stakeholders, our shareholders our customers our employees et cetera. So.
Very supportive and certainly reserving the right to tighten the plan in a different way based on conditions.
Great. Thank you everyone. Congrats again.
Thank you.
Next we have John Hind buckle from Guggenheim Partners. Please go ahead.
Thanks, So guys wanted to start.
Topline in the environment. So if I think about the cross sell.
Embedded in the guidance right for 'twenty two.
Seems to me it's got to be.
Maybe half less than half.
What it was in 'twenty, one is that fair on order of magnitude.
And then I'm curious in this environment, where there's so much uncertainty is.
Is it easier or harder.
To win new accounts rider are people more likely to stay with where they're at for now.
Or they are looking to move more than they did before im curious what youre seeing on that front.
Hey, John Chris.
So on the guidance moving forward.
Thank that Youre looking at it the right way and as we think about our sales growth over the next three years.
I think your estimate on half of it coming from existing customers is the right way to look at it our growth platforms like services brands fresh the majority of that is going to come from deeper customer penetration. In addition to the daily weekly blocking and tackling of getting more categories fixing the mix and just improving.
Our share of wallet with our existing customers.
That said our growth will be balanced by new customers as well key food is going to be a big part of that on fiscal 'twenty. Two so it will be more weighted that way and the short year, but long term I think about half.
Is the right way to look at it.
And then as far as the environment.
Look it has been.
Been here over 12 years, it's still a competitive environment.
<unk>.
But what we have found as I as I said earlier under these conditions in this environment of a stressed supply chain our customers are looking for security when.
And when you have the distribution network that we have.
When you have the buying scale and purchasing power that we have when you have the broad portfolio of products that we have including a huge portfolio of fresh which is where the consumer's going to the perimeter of the store.
We have proven to win a lot more than we're losing so.
It's not easy it's remains competitive we've got to show value to our customers to get those new accounts.
But but what we've seen over the last 17 months is that when the supply chain stretched it's typically where the answer for a lot of customers problems.
Alright, maybe as a follow up then.
Where you got what do you guys sit today on capacity utilization or availability.
In the network right and I know it'll vary by D C.
But are there any places that are getting stressed.
And then your thoughts on if labor is going to stay elevated.
More can you do on automation right I know you've done the big Super centers with automation can you bring automation on a more limited basis to more dcs or is that not financially feasible.
It's a good question I'll take the first part and turn the automation question over to Eric.
So look one thing during the pandemic as we learned that our network.
If I go back to the third quarter of fiscal 'twenty, we learned that our network can pump out more volume and we haven't yet hit the ceiling that we saw back then and I actually wouldn't even call. It a ceiling I would call it a realization.
That we had in the third quarter of last year. So we know that the existing network.
Can handle more volume and we're also building right. So we just started our new DC.
In Allentown, Pennsylvania to service, the New York Metro market, and we continue to invest in Capex for building expansions <unk>, new buildings where needed.
No.
It does vary by market to your point, but we have a long term capacity plan thats embedded in our fiscal 'twenty four guidance that we believe we can achieve those numbers with that with that guidance and our capex reinvestment.
Yes, John I would just add on to Chris's comments.
Going through Centralia, we saw the network pivoted very quickly during that disruption to service our customers on the west coast further demonstrating our capacity as well as some of the strategic investments were underway. Besides Allentown techs.
Texas is getting and expansion, we're investing heavily in our Carlisle PAA automated building, which should hopefully come online mid summer next year.
Just a reminder, we did add full scale automation for our re packs.
Offering in Riverside, California, as well as Richfield, Washington.
Our months in operation now and yielding terrific terrific benefits, both from a productivity quality and labor standpoint, So it's an important to add that.
Thank you.
Thank you. The next one we have Kelly bania from BMO capital.
Your line is now open.
Hi, Good morning, This is Kelly bania.
Also just wanted to add my welcome to you Sandy look forward to working with you.
Also just a question on.
On the top line outlook for fiscal 'twenty two.
Yes, I think in your slides here you have an estimated market contraction of about 1% to 2% and was just hoping you could help us.
Help us understand your thought process, there I'm, assuming that that is volume related.
But just the thought process and what you see how you see that impacting retail versus wholesale.
Well the numbers, we're providing obviously wholesale but it is it is consumer driven Kelly.
With that is the cycling of Covid and the consumer trends that we're seeing is the shift between away from home spending in in home spending and we are seeing tremendous moderation as we as we get out of the pantry loading in the in the Covid spikes, but we do think there is going to continue to be modern.
<unk> throughout the year.
Okay. That's helpful and then I guess just.
Another question on wages and benefits and can you just help quantify to what extent you are investing on a year over year basis.
Just kind of a headwind is baked into the guidance in terms of wages and benefits and overtime and so forth.
Hey, Kelly this is John we won't get into specifics on that but what I can tell you is.
Given the challenges that we all know about happening in the market. We've made what we consider to be reasonable assumptions in that guidance figure for what those costs will be for us in 'twenty two compared to 21.
And that's embedded in those numbers, but beyond that as far as providing specifics of that we generally won't do that.
Okay I'll try one one more just on retail.
If you don't mind.
I'll give you mentioned the gross margin was flat to last year and retail I was just wondering if you could talk about puts and takes there.
Sure assume shrink would be a little bit more of a headwind this year, but maybe there's some other factors and then just more broadly as you think about retail EBITDA margins.
Dave pretty much doubled over the past few years and just wondering if you expect them to stay at these higher levels.
Fiscal 'twenty two.
Yes, sure happy to answer that one so a lot of what Youre seeing is a combination of factors and I'm going to give you. The first one which is our retail leadership team, which has just been outstanding throughout the pandemic as well as just the broader unknown as to timing of a potential sale of et cetera coming out of.
The acquisition.
And as we've talked about it on the Investor Day, we are now in a position where we believe we're going to keep and continue to run those.
At this stage so when we think about that EBITDA performance I think a lot of it was just the broader stability and the expert leadership from that retail team that we have.
Thats just been outstanding and B, the two markets that we continue to operate in.
We think just about the margins.
Gross or EBITDA margin those are expected to be relatively flat just from there.
There are puts and takes related to promo spend.
There's a little bit of strength noise in there, but the reality is there is also a corresponding offsets.
The there's no dramatic movement, one way or the other.
And those margin rates.
Relatively stable beyond just the.
Market contraction that we're anticipating that Chris talked to.
Yeah.
Go on to the next question.
Certainly Sir our next question is from volume router from Bank of America. Your line is now open.
Good morning.
You mentioned some disruption in terms of the service levels from some of your vendors I guess what levels of I guess, Phil fulfillment of orders are you seeing in I guess, how has this impacted your ability with your customers in terms of service levels.
Yes.
Yes, it has been a roller coaster.
I will tell you that in the fourth quarter, we ended significantly above our service level and then we were in the fourth quarter. Prior post post pantry stuffing, but we're still well below where we were pre COVID-19.
No.
As I said earlier, we saw supplier fill rates continue continued to improve and everybody expected that trajectory to continue but over the last three months, we've seen the deterioration based for the macro factors that I mentioned earlier labor freight raw materials and so forth.
As far as our ability to service our customers booked.
Look the customers and the wholesalers.
Disappointed that we're at this place 17 months post the start of the pandemic, but our ability to service our customers goes to swapping out items, replacing items, replacing plan of grams with items that we do have in stock.
Taking high demand low inventory items off promotion.
Working with our suppliers every day from the top down on making sure that we have our fair share of product coming in.
This is where scale helps our customers because for most of our suppliers were top one two or three customer to them and so that gives us larger brought buying power and larger allocations for those high demand skus.
I would imagine just following up I missed that.
These are industry trends that your customers generally understand and don't create great risk of customer losses, when contracts and I.
Standing that right or has there been frustration from from customers.
There is.
You're right with your understanding it is an industry wide and our customers are patient and understanding on that but.
But I would say that the entire industry, our customers and the entire industry and folks that we don't even services just fatigued by it.
And we're used to it where resilience.
We're essential industry. So we've been through this.
But.
I think your assumption is correct that the industry wide trends do not get we don't get penalized for those.
Okay and then just lastly for me you provided a lot of the components of free cash flow in terms of EBITDA and Capex et cetera.
I guess the pieces that we don't know our working capital assumptions for the year as well as proceeds from the sale.
Of the facility out west. So I guess can you provide anything that's going to get us to that leverage below three times, meaning like how much below three times or are we thinking or what the.
The range of of working capital or proceeds from asset sales Maggie.
Yes, we've not necessarily the specifics of that but those are the two remaining components do you know when you think about the $4.0 million fulfill square foot facility. We have we've got to put inventory and bring.
<unk> on a large new customer you can you can imagine the working capital impact of just those two things alone coupled with the broader growth that's embedded in our topline guidance.
So it was certainly working capital be a large component and we think about that Riverside failed leaseback arrangement.
We'll talk about that when the deal closes in FY 'twenty two.
But I think.
The other component of that debt reduction is the ability to deploy capital lease off our books as well so it's a.
It's going to be a really good transaction for us from a debt perspective.
I think guiding towards below three is comfortable for us given some of the uncertainty and as we move through FY 'twenty two.
Have an opportunity to tighten that up we're happy to do that.
Great. Thanks, that's all from me.
Thank you. The next one we have Greg body scan Yang from Wolfe Research.
Please go ahead.
Good morning. This is Spencer hanus on for Greg I, just wanted to drill down into inflation can you talk about what's driving the implied slowdown and inflation from the <unk> run rate to the full year guidance of 1% for all for all of next year any additional color there.
Yes, the way the way, we think about that again.
An assumption we have in our numbers.
We've gone through what we think the next 12 months can look like and we know we're in an inflationary environment right now, but when we think about on balance for the year, we think that 1%.
Looks to be relatively reasonable for what we know today.
So when we think about.
What how Q1 and again, we don't provide that quarterly guidance, but I think it's reasonable to assume that we are seeing similar inflation situations as youre seeing and reading about elsewhere, but.
But we still believe on balance for the year will be somewhere around that at 1%.
Okay. That's helpful. And then do you think your fill rates are lagging the industry. Today are you guys in line.
And then has the worsening of service levels impacted your ability to get cross sell wins over time and then just.
Just to follow up on the Centralia D. C has that reopened yet and is it back to full full operating capacity.
So I'll take the fill rate question Spencer.
We do not believe we are below the industry and matter of fact, we think we are above the industry because of our purchasing scale.
So we also do quite a bit of our volume through fresh and the fresh categories have not impacted to the level of the center store.
CPG category so we.
We think our fill rates are actually above the standard in the industry, albeit the industry is much lower than we wish we were.
You won't take the questions sure Spencer, Eric I would just happy to report that our Centralia D. C has returned to normal operating business again.
Two day shutdown full shutdown and then we had a partial week that was disrupted and I think speaking on behalf of the whole company. We can't thank our customers enough for their cooperation as we work through that situation.
Perfect. Thank you.
Sure.
Thank you we have time for one last question then it would be from beaters Sally from BP <unk>. Please go ahead.
Great. Thanks for taking the question and congrats Sandy.
I just wanted to come back to the comments on inflation I know you guys have guided to 1% inflation for FY 'twenty two it does sound like an inflation at least from your last comments are is kind of running a similar.
In the first quarter. So are you assuming inflation kind of trails off in the back end of the year.
It would be driving that just any more color on that would be helpful.
Yes.
Think about that again, we do look at it on balance for the year.
So and as I mentioned, we're seeing relatively similar inflation as you are reading and hearing about elsewhere.
Do I think it will trail off I think it's not sustainable at its current pace.
At what point that trailed off in <unk>.
How that happens what drives that Youre guess is as good as mine, but I think certainly where we are right now in the current environment does not seem to be sustainable for 12 months.
Yeah.
Understood all right and then just on the labor environment can you guys give us a sense on where your staffing levels are today versus where they were maybe pre pandemic and maybe what youre seeing on.
Churn or turnover and how is that has that slowed or moderated at all.
In the recent past.
Yes. This is Eric our turnover has not slowed I mean, the workforce has a variety of options and it's very competitive and as Chris described earlier, we've taken a lot of steps to not only improve our associate experience, but also improve our retention.
Chip.
So I think this is this is an ongoing problem that we're going to continue to work through and as I already stated we've seen some pockets of improvement with all the actions that we've taken but we as an organization are very focused on this and are putting all of our resources against supporting our supply chain and our distribution centers.
As we work through this.
Thank you very much.
Thanks to all of you for joining us on today's call as I Hope all of you can sense, we have a solid plan on how to create value for our customers and grow UNFI. We have the leadership team in place to continue to execute on that plan and our customers or some of this country's finest food retailers.
From publicly traded chains to single store independence from value and ethnic operators to general market focused retailers to high end operators and everything in between.
Our job is to help them compete grow and serve their customers and add value to their businesses in the process.
We're confident in our ability to deliver on our fiscal 2022 outlook and the entire leadership team and I are committed to driving those results.
Look forward to meeting many of you in the investment community throughout the coming months and to continue to update you on our key initiatives and performance over the course of the fiscal year.
For our customers. We thank you for your continued trust in the business, we do together and for our suppliers and especially UNFI associates listening today.
Thanks to each of you for everything that you do for our business our customers our communities and each other thanks everyone.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
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