Q1 2022 United Natural Foods Inc Earnings Call
Good day, and thank you for standing by welcome.
So the U F I fiscal 2022 first quarter earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Bloomquist, Vice President of Investor Relations. Please go ahead.
Good morning, everyone. Thank you for joining us on Unfi's first quarter fiscal 2022 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.
Thanks, Steve Good morning, everyone and thank you for joining us on our fiscal 2022 first quarter earnings call.
As you saw in this morning's press release, we delivered first quarter results through a time of continued challenges across the industry.
Including ongoing supply chain difficulties declining fill rates and rising inflation.
UNFI is performing through this unpredictable environment by steadfastly focusing on what we need to do to make our customers successful, which will continue to be our core operating objectives.
Tomorrow as I crossed the four month market UNFI I continue to invest a significant amount of my time meeting with our customers.
With the simple goal of learning as much as I can about their business what differentiates their offering in the marketplace. What are their biggest opportunities and pain points and what can we do to add value to their operations.
Making customers stronger is a core tenet of Unfi's mission statement.
And I have a genuine passion for helping food retailers succeed and I'm committed to doing everything possible to bring solutions that accomplish this.
Our teams regularly meet with customers to introduce new items to plan and coordinate promotions and to look forward to the next major selling event.
Customers were encouraged to order early for this year's November December holiday season, and build their inventories wherever possible.
We also make sure they know about the many services that UNFI offers to lower their cost structure increased sales and simplify their operations.
We've received positive feedback from our customers on the work that we did together around Thanksgiving and now we're laser focused on doing the best possible job to meet their needs as we move through the upcoming holidays.
Further I've initiated conversations with several of our larger suppliers, many of whom I've known for quite some time, having been on the supplier side of the industry for 30 years I know how important it is to partner across the supply chain to transparently share information and identify opportunities to increase distribution.
Tribunal and maximize sales UN.
Unfi's b to B to C business model puts us in a unique position to help suppliers understand and access are diverse and vibrant retail customers and there are 30000 retail locations.
To more effectively bring together suppliers and customers, we're developing unique new programs that provide better and deeper insights into UNFI diverse retailer base, so that UNFI, our suppliers and our customers can collectively work together in partnership to create more and more value together.
I've also enjoyed meeting many of our frontline sales and supply chain associates and sales meetings and in our distribution centers. This is giving me the opportunity to hear firsthand what's on their minds what issues are most important to them and how we can continue to increase engagement in meaningful ways.
A common theme. During these visits is how proud our associates are to be part of the important role that UNFI plays in keeping the food supply chain flowing.
I also touched upon unified culture on our last call, which I've now had more exposure to we're proud of the work that we've done around ESG topics and are better for all mission of making the world a better place not just for one but for all and it's core to who we are as a company.
From our top priority of associate safety to an ongoing commitment towards diversity and inclusion to ambitious climate and environmental goals to name just a few unfi's core value remains doing the right thing every day.
We look forward to sharing our 2021 ESG report with all of you in early calendar 2022 overall, we're encouraged with the first quarter and the start to fiscal 2022, despite a difficult backdrop, which isn't likely to change in the short term the momentum that I spoke about on the last call is continuing.
And we expect to carry forward the momentum for the balance of the fiscal year.
Our fuel the future strategy is customer focused growth oriented and the blueprint for what will drive UNFI for the foreseeable future.
Our energy is dedicated to every element of customer support to make sure. We do the best job possible, taking care of our customers in a complicated environment.
Having said that I also find it encouraging that our associates across the board are never satisfied they're continually looking for how we can get better for our customers and our suppliers in the days weeks and months ahead.
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 further color on key drivers behind unified Q1 results and future growth the trends that are impacting our industry and some insights and unified operating environment.
Let's start with our results for the quarter were consolidated sales came in at $7 billion of 4.7% increase over last year's Q1, and nearly a 4% sequential increase from the fourth quarter.
It's worth noting that this is only the second time in the company's history that revenue totaled $7 billion in a single quarter.
All three major sales channels experienced year over year growth, which was driven by two primary factors new business wins and inflation.
Modest market contraction and continued supply chain challenges. We're also partial offsets to these favorable sales drivers.
Our strong supernatural sales were driven by winning new categories, and skus with our largest customer which reflect the strength of our relationship and the value we bring to their business independent.
Independent sales channel growth was driven largely by new sales, we realized from our Allentown, Pennsylvania facility, which began serving independents in the New York Metro area in Q1.
This new D. C has been the largest distribution center startup and unified history and its run rate volume has quickly made it a top 15 warehouse in terms of revenue.
As you would anticipate we've had some learnings along the way, but we are pleased with our progress and the greater opportunity to pursue enhanced customer service to existing customers and new customer growth in the New York Metro market.
Both in the supernatural and independent new business wins have been exceeding volume expectations and we expect continued strong performance through the balance of this fiscal year.
Our sales team also remains focused on cross selling and we generated over $60 million of incremental cross selling revenue in the quarter. The majority of the incremental cross selling revenue occurred in our chains channel, where we have expanded the categories. We sell to these large retailers by offering the benefits of consolidating their purchases.
With UNFI this.
This includes retailer to operate their own captive distribution networks.
Our first quarter cross selling gains kept us on track to deliver the $1 billion cumulative cross selling revenue target by the end of this fiscal year.
Across all channels, our top 100 customers realized year over year revenue gains of six 7% driven by expanding the categories, We service with our existing customer base and new business initiatives.
Our growth platforms that we previously outlined in our view of the future strategy also expanded in Q1, our fresh sales team has been working closely with our existing customers to add meat produce and bakery deli items in the all important perimeter of the store.
In addition to the fresh categories were Onboarding and supernatural will now be distributing produce to another large national customer as the result of our expansive D C footprint and category expertise and every week, we're gaining shelf space with fresh categories at a regional level.
Our own brands business continues to rollout new items and push for additional points of distribution with a 30000 customer outlets unified currently services.
Our brand portfolio of over 5000, Skus allows us to pivot quickly and tap into emerging consumer trends Accordingly, our revenue from natural organic brands increased over 6% in the quarter as consumers seek products with these clean label attributes.
We've also seen traction with a new save everyday pricing program for our value items that are positioned to be attractive affordable alternatives to national brands.
Finally on the professional services side, we had a strong quarter from retailers seeking solutions to lower their operating costs or expand revenue beyond retail and groceries.
We're seeing a 15% increase in the number of Remodels being done by our customers compared to last year as they look to reinvest in their businesses.
Our coin cloud offering which enables our customers to bring crypto currency to their shoppers continues to gain traction. We've now placed nearly 500 machines and customer stores and are scheduled for another 200 in the coming months.
Regarding inflation, we saw inflation impact our wholesale net sales by 2.5% to 3% net of volume and next changes.
Due to the cost plus nature of the majority of our pricing agreements inflation is typically a positive driver of top line revenue and margin gains for Q1, our gross can be looked at as roughly half coming from new business wins net of expected market contraction and half coming from inflation.
At least for the next several months, we don't see inflation easing.
Our procurement and merchandising teams are working closely with our suppliers to offset some of these price hikes with increased promotional activity to help our customers manage through this period.
Many of the underlying drivers of this inflation ranging from commodity shortages to labor shortages to limited transportation are also adversely impacting unified fill rates. After many months of steady improvement, we like the broader industry have seen supplier inbound fill rates deteriorate.
Simply put lower fill rates adversely impact our customers, who may not receive everything they order and rely on unified carry a broad assortment of skus that go beyond just the top sellers.
At the same time limited product availability typically reduces vendor new item launches and promotional spend our suppliers aren't likely to promote products were supply levels are scarce.
To do the best job, we can for our customers. We continue to diligently work with our suppliers to find and source as much product as possible and to recommend alternative solutions. So our customers can present, a complete offering on their shelves.
These alternatives include actions like substituting owned brands, where national brand availability is low updating planet grants to focus on items with higher anticipated in stock positions in daily contact with suppliers in an effort to make sure unify receives its fair share of product and has the critical insight of what's to come.
So we can plan accordingly.
For the most part we were successful in helping our customers navigate through fill rate challenges during Thanksgiving and we are now focused on the December holiday season, we.
We believe we are well positioned from an inventory perspective and had been planning with our customers secure holiday focused items well in advance.
Shifting to operations I'm pleased to report that our Centralia facility that experienced a temporary voluntary shutdown in August due to late summer rise in Covid cases is fully operational we incurred some higher operational costs during the recovery period as we did everything possible to leverage the scale of our network to continue to service impact.
Customers, including temporarily shifting volume to neighboring Dcs.
Broadly speaking unifi is not immune to the challenges facing today's labor market, but we are actively managing our way through these difficult times with innovative employee programs designed to attract and retain frontline workers.
We have made significant investments in wages and are focusing our recruiting efforts on attracting associates into our Dcs.
Investments in programs like flex shift and early access which is a program that allows D. C employees to receive pay earlier than traditional weekly paychecks are helping us attract and retain more employees.
These efforts are paying off and have led to a 30% reduction in open head count in our warehouse operations compared to a year and we're still not where we need to be but these programs and others are designed to address work of concerns and lifestyle needs. They are also expected to contribute to long lasting associate retained mint and consistent performance.
For our customers.
Finally, we're encouraged by the performance of our retail stores, our sales were down only slightly against a very strong comparison in fiscal 2020, one first quarter when sales increased by more than 15%.
On a two year stack basis retail sales increased 14, 7%.
Operationally, we introduced enhancements to our e-commerce and delivery platforms at Cub to better meet the needs of our customers online orders of Cub now allow customers to use their my Cub rewards card to gain access to exclusive promotions and digital coupons and all orders are shopped locally by dedicated team of Cabo Soc.
Yes.
This is another great example of adapting our business model to the changing needs of today's consumer. So we can serve them in the best way possible.
Although we expect supply chain challenges to continue we also believe that strong food at home trends and inflation will help offset some of these headwinds against that backdrop as Andy said I energy is focused on making sure. We are fully resource towards customer support as we can be.
While there are challenges, we're focused on implementing solutions to minimize supply chain disruptions and delivering for our customers.
We also continue to build our pipeline with customers looking to consolidate purchases with unifi or potential new customers looking to leverage our scale to provide consistent service in these volatile times.
Our new customer pipeline is more robust than any time in my 12 years here at Unifi and we're optimistic about our prospects.
We are pleased with our performance this quarter and optimistic about the balance of fiscal 2020 to the.
The environment has been challenging and will likely remain that way at least in the near term, but we're confident in our ability to make our customers stronger through all that unified can offer them now let me turn the call over to John Thank.
Thank you, Chris and good morning, everyone on today's call I'll cover our first quarter financial performance balance sheet capital structure and comments on our fiscal 2022 outlook.
As Sandy and Chris both said, we're encouraged by our operating performance this quarter and the start to fiscal 2022.
Sales for the first quarter totaled $7 billion, a 4.7% increase compared to last year's Q1 adjusted.
Adjusted EBITDA increased nearly 19% from $159 million to $189 million.
First quarter gross margin rate increased 38 basis points compared to last year's first quarter.
Our wholesale margin rate was impacted by this quarter's elevated inflation as well as the continued benefits from our value path initiatives.
First quarter operating expense rate declined 20 basis points compared to last year, driven by the favorable leverage from higher sales and lower year over year costs, when comparing last year's costs related to the consolidation in the Pacific northwest against this year startup costs for our D. C supporting the New York Metro area, because were partially offset.
By higher operating costs in our supply chain, including transportation costs part of which came in support of our customers during the temporary and voluntary closure of our Centralia, Washington distribution Center. The first week of the quarter as well as investments in adding and retaining labor to better service our customers.
As we've stated before one of our goals is to grow adjusted EBITDA faster than sales and this quarter's 19% growth in adjusted EBITDA on a 4.7% increase in sales exemplified just that and translated to a 32 basis points year over year expansion in our adjusted EBITDA margin our GAAP.
Earnings per share totaled $1 25, which included 28 cents and net favorable items.
This includes our GAAP tax rate, which benefited from employee stock award vesting as well as the release of various tax reserves.
Our adjusted EPS for the quarter totaled <unk> 97 per share compared to 51 since last year, an increase of 90% further demonstrating our P&L leverage.
Turning to the balance sheet, we finished the quarter with total outstanding net debt of $2.48 billion, a $194 million increased compared to year end.
This reflects our customary first quarter investment in working capital as we add inventory going into the holiday selling season in support of our customers as well as the addition of inventory into our newest distribution center.
The expected seasonal increase in working capital should convert to a source of cash in the second quarter.
As expected our net debt to adjusted EBITDA leverage ratio increased slightly compared to the end of fiscal 2021 to three two times as the higher trailing 12 month adjusted EBITDA was more than offset by higher net debt balance driven by seasonal working capital increases.
We still expect full year, adjusted EBITDA growth and a lower year over year debt level to push our adjusted EBITDA leverage ratio below three times by year end.
Late in the quarter, both Moody's and S&P upgraded our corporate family credit ratings as well as the ratings on our secured term loan and unsecured bonds.
We subsequently repriced our term loan at a rate of LIBOR, plus 325, which is 25 basis points lower than the previous rate.
Simultaneously with the repricing, we drew $150 million under our ABL facility and made a prepayment on the term loan reducing its outstanding balance from $994 million at quarter end to $844 million.
These two actions combined are expected to save UNFI nearly $6 million in annual cash interest expense.
Let's turn to our outlook for fiscal 2022, we are reaffirming our full year outlook for net sales, which we continue to expect to be in the range of 27.8 to $28 $3 billion.
Our outlook for adjusted EBITDA remains unchanged with a range of $760 million to $790 million.
And finally, our outlook for adjusted EPS is also unchanged and expected to finish between $3 90, and $4 20 per share.
We now believe that inflation will be above the 1% level, we provided on our last call, but they're more prolonged challenges across the supply chain will offset potential sales impacts.
Our base measure of inflation is the increase to our landed cost of goods, which was approximately 4% for the quarter.
However, we believe the inflation impact to our net sales as Chris discussed was approximately 2.5% to 3% when we factor in changes in consumer buying habits, including mix shifts in certain fresh categories.
Although our sales were impacted by inflation there are offsets in our P&L that include a higher LIFO charge and an increase in certain operating expenses.
Our outlook for debt reduction remains unchanged at $100 million to $150 million as does our expectation for capital expenditures of approximately $300 million.
Which as a reminder, excludes the amount for the Riverside purchase and sale leaseback transaction, which we expect to occur in the second half of the fiscal year.
As you've heard today's operating backdrop remains challenging yet we remain confident in our ability to serve our customers and deliver on our full year guidance.
Before we open up the call for questions, Let me reiterate our commitment to increasing shareholder value and delivering the long term targets presented at Junes Investor day.
Our business model and mission are built to succeed in normal times as well as those that we've characterized as more challenging.
As Andy stated earlier, our focus on helping our customers succeed remains at the center of everything we do and who we are as a company and we appreciate your continued support.
Operator, we're now ready to take questions.
At this time, if you would like to ask a question press star one on your telephone keypad again that is star and the number one for any questions. Your first question is from the line of John <unk> with Guggenheim.
If you guys, let me start with.
Do you have any way of telling relative allocation and fill rates.
Versus various competitors and retailers right. Because you would think you should have a better allocation than smaller distributors.
And smaller retailers you have a <unk>.
Sense of that and then Ken that drive.
New customer acquisition right.
In the short run here, because you have product and others don't or is that too optimistic.
Yeah, Hey, John it's Chris.
It's impossible for us to tell what's going on with CPG allocation of products.
What we do is we work with them every day to make sure that we're securing our fair share of supply and given our scale and given that we're in the top 123 customer for many of these CPG is weak.
Yes.
We get more products right on a straight allocation basis. So that is what the cpg's are telling us.
As far as acquisition of new customers that is an attractive selling point in addition to.
Since COVID-19 hit almost 20 months ago.
It's stressed the supply chain and what we have found is that our customers are looking for alternatives and this stressed environment and what we found is UNFI isn't attractive alternatives not only because of the product availability that you asked about but also just the consistency and the size and the scale of the network.
So that has been that's been helpful for us to attract new customers.
Now if you think about the pipeline you referenced right. So it's the biggest you've had I don't know if that's.
Number of folks who are having conversations with or volume that they represent but if you think about the composition of that so maybe speak to that but also the composition.
Large versus small.
Conventional versus more specialty.
Or even maybe non food retail.
What does the composition look like.
Sure.
So first to answer your question is it's the <unk>.
They represent so that's how we're measuring that.
Look we are tracking hundreds of opportunities and if you think about what UNFI cells.
With over 300, Skus with a deep fresh portfolio with a deep conventional portfolio with the deep natural portfolio brand services. There is really no single competitor out there.
The customers the potential customers in the pipeline are really range from the large national national customers. They range from customers with captive distribution looking for alternatives.
There are also a lot in hundreds of local regional customers as well. So it really is the range John.
And.
We still look at that $38 billion opportunity with existing customers as white space as well as the 78 billion.
Opportunity with new customer so.
The <unk> the.
Pipeline represents a fair amount of both.
And one last real quick one.
Key food will get to the 1 billion dollar run rate win.
And I guess for the first quarter.
My key food had been running at.
100 million plus or or something like that.
So we don't disclose how much we do with each customer.
We won't realize the full volume of the key food until fiscal 'twenty three.
<unk> ramped up throughout the year, but.
But we won't get the full volume until.
12 months next year.
Okay. Thank you.
Sure.
Your next question is from the line of Scott Moskin with <unk> capital.
Hey, guys. Thanks for taking my call and great work given the environment.
So I guess, that's the first thing I want to ask about is obviously, it's really hard right now operating.
Sean the Campbell's call and they were talking about how difficult to run some of those plants. So I was wondering if you guys could talk about what your expectation is I know theres a lot of pressure points in the quarter. You just reported how are you thinking about the next couple of quarters as far as availability of labor.
The challenge of running your network as he can lessen or is it going to remain the same.
Yes.
Scott This is Andy I think our outlook is.
Essentially realistic.
It's very hard to predict what's around the next corner.
As Chris said in his remarks.
<unk> made some improvements in terms of our net openings in our fulfillment system and we're doing that by intensifying our recruiting but also working on simplifying the associate experience as well.
And as we talk to suppliers. They continue to believe that theyre going to have constraints around their supply environment and so our general expectation is that we're going to have to stay agile we're going to have to stay customer focused and that the environment will continue to be difficult.
And staffing levels are okay right now I was just looking at the Covid cases are going through the roof. I mean are you able to staff.
Eric why don't you take that yes, Scott we operate in.
And we're actively enforcing our protocols around COVID-19.
Whether it's mask wearing social distancing and we continue we've offered incentives for vaccinations were encouraging and educating our staff around the benefits of vaccinations and as Chris referenced we've closed our head count gap by 30% and we're continuing to work on that.
And associate friendly programs like flex shift is really starting to take hold we are seeing almost 4% of our total hours with those associates and it's growing every week. So we're focused on it we're going to stay focused on it and we'll work our way through it.
Then my follow up is much more of a longer term question I mean, I know the thought processes, we're going to do more consolidation of the distribution networks. I don't think you mentioned it maybe maybe I missed it but I was wondering where we are in that process. Like how are you guys are thinking maybe out the next couple of years.
<unk>.
On that on that item.
Yes, Scott I'll take this again, it's Eric.
We are actively looking at that but we are focused on meeting our capacity needs for the here and now so we have looked at and expansions that we have underway, obviously with Allentown coming online and adding a million three square feet to service, the New York market and we continue to invest strategically.
<unk> invest in automation.
We've got two new automated systems on the West coast that we've talked about in Richfield and river side, we're expanding our Carlisle.
Automation system and we're looking at other strategic expansion surround the network. So I think this is very much a dynamic situation based on our growth and leading the pipeline that Chris referenced making sure that we can continue to stay flexible and agile as the business comes off.
Alright, perfect guys. Thanks, very much appreciate it.
The next question is from William Reuter with Bank of America.
Good morning.
On the the Allentown distribution center have you talked about how much of that capacity is going to be used by key foods and <unk> been hoping to get additional customers in the New York Metro area, how has that process gone so far.
Yeah. So we are focused on that start up any startup that you have for any warehouse you want to build gradually and work out the Kinks as I said, we've had some expected challenges there, but we're really proud of the progress.
We're just focused on servicing the business, we have there and we will we do plan to continue to add to serve that very attractive in dense marketplace in the near term.
Okay and then in the prepared remarks, you talked about limited product availability and how that's reducing promotions.
Can you talk a little bit about how the balance of this I guess, how this is negatively impacting margins versus the positive of inflation.
Yeah. So I'll say this is first off Theres still right.
We're still growing over $300 million in the quarter year over year in the fill rate was only up slightly so there's plenty of product and supply out there.
Just might not have the skus and everything that our customers want because of the supply constriction. So.
We're selling a lot of product we're doing everything we can to keep our customer shelves filled.
Regarding promo we are seeing it come back as far as activity. Our merchandising team is working closely with suppliers to make sure that we're getting the best promos for our customers doing everything to mitigate price increases.
And we did see a year over year increase in promo activity.
The fill rate and less new Skus is a headwind, but overall, we're actually our promo expectations were in line with what we thought was going to happen for the quarter.
Okay, and then lastly, if I could just sneak one and with regards to the one facility that was shut down in August is now fully operational are there any facilities that are getting levels. A COVID-19 transmission. They are concerned you may have to shut them down again.
Bill This is Eric no we have not seen that and again I would reinforce the protocols that we have in place we've been maintaining mask wearing it all facilities social distancing, we continue to offer incentives for vaccinations and I encourage our associates to get vaccinated.
We're monitoring where we have a really robust program in place to monitor.
We are continuing to just see the normal trends across the country. So nothing alarming that we would communicate.
Great. Thanks, a lot and good luck in the holidays.
Your next question is from Bill Kirk with M partners.
Hey, good morning, everyone.
So more so than normal it sounds like customers ordered early for the holidays, maybe expanded their inventories so I guess how.
How big of a benefit was that or how abnormal was that inventory load relative to other other like periods and does it reverse out here in later in <unk> do their inventories come back down.
<unk>.
Hey, Bill this is Chris.
I think youre talking about for the November and Thanksgiving season, and the December season. So this is always this quarter Q2 that we're in right now always represents our highest inventory build because of the inventory.
I'm, sorry, because of the holidays.
It's in line with what we've seen for prior years, nothing dramatically lower nothing dramatically bigger.
As far as the order early I mean, we started talking about Thanksgiving in July and that was just to work really closely with our customers and our suppliers to make sure. We had those high demand items on on their shelves. So we feel pretty good about our performance in Thanksgiving Theres always off.
The teams do better and we're focused on the December holidays right now.
And kind of as a follow up did you see retailers, who normally rely on their own captive distribution did did you see them lean on your services more in the period and if they work as soon maybe maybe they were having some of their own supply chain restrictions.
But if they leaned on you more do they did they stay or do they go back to their normal.
Sourcing systems.
Bill This is sandy I'm going to make a strategic point and then I'll turn it over to Chris to answer your question I think one of the things we've been paying attention to is making sure that we take care of our customers that exist. While we think about growing new customers as Chris said the pipeline is is very rich and robust.
All types of customers, maybe describe that but what matters to us every day is that the customers who have trusted us before we will get the best possible service and then we add customers as we have the capability and capacity to do it.
So because you can get into the detail, but I think the point I want to reinforce is how loyal we are the customers who have been loyal to us.
Yes, just just to add to what Sandy said, we have not seen a retraction from that new business gains from captive customers that is actually if anything it's gone the opposite direction.
Okay. Thank you everyone.
Your next question is from Eric Larson with Seaport research.
Yeah. Thanks, everyone. Thanks for the question, so I would like to.
Dig a little bit more maybe just a question for Chris into the promotional environment.
Obviously, the manufacturers are taking prices up aggressively it looks like they might they might even need another round due to higher costs.
Traditionally that's been a good profit center for you as they increase their promotional discount rates during promotional periods. So is that.
Is that kicked in fully yet here Chris or.
Do you still expect.
Increased benefits going forward on that.
Yes.
So I will say that it has not kicked in fully and although we are getting those promotions to your point that behavior staying consistent what's preventing us from fully kicking in is the product supply.
So I mean, if you think about promotions promotions are based on transactions and number of transactions and when you have less skus when you're on allocation when youre not launching new product those transaction levels are lower than promotions are there. The programs are there, but I wouldn't to your question directly about fully kicking.
No I don't think it has I think theres been some headwind because of the product availability issues that we're having.
Okay. Thanks.
And.
A little bit more detail kind of on on fill rates.
Obviously product availability is part of it has has it.
Any other any other part of the supply chain been an issue either I think you mentioned a little bit about transportation, but is it is it like 90% just product availability fill rates or are there other.
Constraints in your supply chain that are that are restricting their fill rate completion.
No.
Fill rate is a reflection of our inbound fill rate from our suppliers and there is no surprises there is labor, it's availability transportation its raw materials.
It's all of the macro environment factors that you've been hearing about an action we spoke out in the last call.
Theres really nothing unique to our environment, our supply chain, that's enduring fill rate its really about inbound.
Got it Okay and then my final question I think is for John.
And John I think you talked a little bit about this at your end your $300 million of Capex spending.
I think if I recall correctly that that is still a little bit of an elevated spending rate for this for this upcoming year is that is that the case or is 300 million more of kind of what we should expect going forward.
And what we've said.
Appreciate the question, Eric what we've talked about it on that is.
Being roughly around that 1% of sales and we put in for our 'twenty two guidance the $300 million and just as a reminder, as I said in my script Thats, excluding the financial reporting aspect related to how we're going to monetize river side, because it will give you the impression thats driving that up much higher.
That $300 million, we're still targeting that $300 million of cash capex for FY 'twenty two.
We haven't brought that down yet we're seeing some similar supply chain challenges on some of the projects, but we're continuing to keep that that 300 million out there and doing everything we can to make those investments lineup with our customer focus.
Okay. Thank you everyone.
Again, if you would like to ask a question press star one on your telephone keypad again that is star and the number one you're next.
Question is from the line of Greg, but asking with Wolfe research.
Good morning. This is Spencer hanus on for Greg can you talk about your expectations for inflation for the full year should we expect the <unk> run rate of two and a half to three to be a good proxy for the full year.
And then how much of a sales headwind, where the lower fill rates in the quarter and just how does that flow into the full year guidance as you should see a really significant benefit from the higher run rate inflation.
So Spencer I'll take the first part of that as it relates to the inflation as I mentioned, we did raise our view on that from the 100 bps.
250 to 300 bps is how we're thinking about certainly in the near term, but as I mentioned there is also some of those corresponding offsets relate.
It related to the supply chain and other challenges that we're seeing that although they keep that sales.
In line with where we provided our original guidance.
And then just as far as the fill rate impact on sales. So I'll say that fill rate was up slightly year over year and sales were up over four 5%. So we we have products and that we work with our customers to sell when we don't have.
The products exact products they want right, so, namely replacing in stock Skus from our branch portfolio, which typically has a 5% to 10% more favorable fill rate the national brands.
We look for alternatives for products that are going to be in stock longer term. So we are we're generating the sales for those out of stock and constricted items.
The exact headwind is.
I can't put a number on it I don't think anybody can because we work so hard with our customers to control the controllable right to find the products to.
To keep their shelves full and make sure that where we're getting the revenue from whatever we have in our warehouses.
Got it that's helpful. And then just to follow up on the DC consolidation question do you still think that the plan laid out by Steve make strategic sense and how long would you expect the consolidation plans could be pushed out or just six months 12 months 18 months any color there would be helpful.
I don't think Spencer, we would put a timeframe on it as well.
We're trying to stay agile here and leverage our capacity to service the customers that we have and that we're acquiring so I think this is very much a dynamic situation and we're going to continue to leverage our building.
As we add new customers.
That profile will really change so I think more to come on that as we move forward.
Great. Thank you.
Your next question is from the line of Peter <unk> with BTG.
Great. Thanks, Thanks for taking my question and congrats on the quarter.
I just wanted to come back to the conversation around labor.
And the changes you guys have made to the employee.
Compensation.
I think you guys mentioned, there was a 30% reduction in <unk>.
The GAAP versus head count gap that you guys are expecting maybe can you elaborate there and then just.
Have you seen any changes in your turnover rates have those come down as you've made changes to the compensation structure. Thank you.
Yes, Peter this is Eric.
80%, we referenced is the gap of associates, we need to service our business.
Versus what we had so we've closed that gap by 30% by doing a variety of things all of which focused on the associate experience. The lifestyle inside the buildings were striving after work life balance reducing over time, increasing flexibility. So it's really not just about wages that we have adjust.
We're going after more than that.
Other things like early wage access as an innovative program that we've put in throughout the network. We've revised our success share plan for inside the Dcs and we've also modified our health benefit options to all associates. So this is more than just wages and we're optimistic.
Mystic on what we're seeing and again this is a focus for us moving forward through this challenging time.
Great. Thank you for that and then just lastly on the leverage I know it ticked up a little bit here.
Can we expect or whats the timing you guys anticipate to get to call that two five times leverage can we anticipate that you might get there by the end of FY 'twenty two or is this more of a sometime in 'twenty three.
Target.
Yes, so what we've put out there Peter as we've talked about getting to the two to two and a half range as part of our Investor day, which would be the end of FY 'twenty four for us.
We will be doing it on a gradual basis, we're forecasting being below three times at the end of this fiscal year and we are anticipating at this point continuing that trend to get to that two to two five range by the end of FY 'twenty four.
Thank you very much.
Okay I appreciate the question.
Let's see I think we've answered all the questions in the queue. So I guess I had one more comment why you wanted to bring that one in for it.
And your next question is from Edward Kelly with Wells Fargo.
Yes, hi, guys good morning could.
Could you just talk a little bit about the rate of labor inflation that you are currently seeing and expect going forward both from a driver perspective and warehousing perspective.
Service has been ramping hiring wondering what's been happening with sort of market pressure there.
There and your expectations around that.
Ed This is Eric I'm not sure I would put a number to it but as Chris referenced in his script, we've made market adjustments and we will continue to make market adjustments.
As things continue to evolve here as far as driver specifically, we've put different programs in place for our drivers whether theyre premiums or sign on bonuses and we feel very confident with our.
Associate profile here on drivers that we offer a different experience than other players in the market and will continue to leverage that as we move forward.
This is sandy I think what I'd add to that is that.
Market competitive is the key and then where we're trying to differentiate is to the different.
Life style and employee friendly programs Theres, a whole lot of effort going on across Eric's organization to get closer to our team and to make UNFI, a better place to work and through that to be able to take market competitive investments, which is all about customer capability, but leverage it to get the most value possible out of.
Every dollar spent.
Okay, and then can you just.
Is there any update on on retail and the strategic outlook for that business and how it fits within UNFI over the long term.
Yes, no happy to answer Ed This is John.
We talked about at Investor day.
We are going to continue to optimize retail we've got an outstanding leadership team that is in place there.
Spearheaded by Mike Stigers and E.
That function that segment has been performing outstanding both co banner in the Minneapolis market as well as the shoppers banners on the East coast.
Our approach that is to just continue to optimize which means we're going to run we're going to invest we're going to grow and we're going to do all the things that you would expect us to do with an asset that we own.
And at the same time, what that means is.
If an opportunity presents itself to monetize it at an appropriate value, we're happy to consider it but under the leadership that we have and the results that they're producing we're going to continue to optimize and grow it.
Sandy again, what I'd also add.
A great place for us to learn.
Our retail leadership team gives us really direct feedback about what they need and what program services brands and other things, we can do to serve them better and that visibility is very helpful to us.
Okay and then just lastly for you related to the change you mentioned changed with with captive distribution and.
Making inroads there can you just provide a bit more more color on that.
How much of that is just people are looking for product right now versus.
Versus you Bill.
Building a more sustained relationship.
Great.
Hey, Ed It's Chris I think it's more than just product supply I think.
There is retailers with captive distribution that are looking long term and considering their own capital investment versus leveraging unifies network.
And.
Given the scale of our network, we can provide an attractive option to them rather than investing on their own and I think generally that's where it's coming from.
And I think also this is sandy.
Serving captive retailers not new I mean, it could be category specific natural products different kinds of items that they want to have innovation et cetera.
So.
It's a growing part of the business, but it's not a new part of the business.
Great. Thank you.
Yeah.
Okay.
Thank you guys for joining us today and for joining US. This morning, I hope you've heard and takeaway from today's call that UNFI is growing and improving within a challenging and unpredictable environment.
I steadfastly focusing on what we need to do to make our customers successful.
As I said on the last call our job is to help our customers and suppliers compete grow serve their customers and add value to their businesses across our network. Our success depends on repeating this day in and day out and I am pleased with how well, we're doing while being challenged by significant opportunities for ongoing.
Improvement for our customers. We thank you for your continued partnership and the business, we do together and for our suppliers and UNFI associates listening today alright. Thanks to each of you for everything that you do for our business our customers our communities and each other and for our shareholders. Thank you for the trust you put in us through your continued invest.
<unk> and UNFI thanks, everyone.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.