Q3 2022 United Natural Foods Inc Earnings Call
[music].
Good morning, My name is Christian I'll be your conference operator today.
At this time I would like to welcome everyone to the UNFI fiscal 2022 third quarter earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you, Steve Bloomquist VP of Investor Relations you may begin.
Good morning, everyone. Thank you for joining us on Unfi's third quarter fiscal 2022 earnings conference call by now you Should've received a copy of the earnings release issued this morning.
The press release and the supplemental slide deck are available under the investors section of the company's website at Www Dot UNFI dotcom.
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, Chris and John will provide a business update after which we'll take your questions before.
Before we begin I'd like to remind everyone that comments made by management during today's call may contain forward looking statements.
These forward looking statements include plans expectations estimates and projections that might involve significant risks and uncertainties. These.
These risks are discussed in the company's earnings release, and SEC filings actual results may differ materially from the results discussed in these forward looking statements and.
And lastly, I'd like to point out 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. We appreciate everyone joining us for today's call.
Our third quarter results again, validate our team's ability to successfully perform in the face of a challenging and unpredictable environment with capabilities that we believe will continue to create value for our various stakeholders.
During the quarter, we continued to navigate industry wide challenges, including inflation, where the latest food at home reading was 10, 8% higher than last year.
Record high fuel costs, low, but improving fill rates.
In challenging labor shortages.
All of which continued to impact our business and our customers.
While we expect many of these issues to persist through the fiscal year. We're encouraged by the improvements we are beginning to see.
Supply levels for many products are increasing which led to our finishing the quarter with the second highest fill rate month of the fiscal year. In addition, we continue to make strides in stabilizing our workforce even against a constrained labor backdrop.
These improvements are in large part due to the actions that we're taking to proactively secure product on behalf of our customers and improving the associate experience.
Many of the associate friendly programs, we've spoken about before including scheduling flexibility and accelerated pay options and they are now positively affecting our driver vacancy rate, which decreased to 9% at quarter's end.
In addition, we continue to make progress in lowering our D C vacancy rate, which improved to less than 7% at the end of the third quarter.
While consumer mobility has undoubtedly improved from the early days of the pandemic.
The fact is that more people continue to work from home and take advantage of more flexible ways of working.
Coupled with tighter management of household budgets in the face of high levels of food inflation, we expect food at home sales to remain strong.
Our diverse customer base paired with our expansive portfolio positions us favorably to serve customers and consumers as they react to inflationary pressures and the macroeconomic trends were.
Whether consumers stay upstream with more premium offerings, we're downstream in the value segment in the downturn, we are there to serve both markets.
In short, we have the breadth and agility to win and to help our customers succeed in a variety of macro environments, including one with shifting customer preferences.
We're pleased that our performance reflects continued sales gains from both existing and new customers and allows us to increase our full year sales and earnings guidance under what we believe to be a more transparent and meaningful definition of adjusted EBITDA and adjusted EPS, which John will address shortly.
Our fuel the future strategy is working and is setting us up for long term sustainable growth and positioning us to grow our share of the $140 billion addressable market that we outlined last summer.
As we improve our execution and move further along the spectrum from distributor to value added partner for our customers and suppliers.
We continue to see the benefits of several clear differentiators that we're working to build upon.
Our core customer service capabilities and the over 30000 independent innovative and segmented retail food locations we service.
The scale and capability of our North American supply chain, the breadth of our product and services assortment.
And finally, our talented experienced and incredibly dedicated associates.
By leveraging these competitive advantages to better serve our customers and suppliers.
We see significant opportunities to accelerate growth expand margins and create incremental value for shareholders.
To that end, we've identified four focus areas to guide our execution of the fuel the future strategy that we believe will enable us to successfully deliver the three year fiscal year 'twenty for financial targets that we outlined at last Summer's Investor day.
These four priorities are one to deliver significant value to our customers.
Second to improve the way we partner with our suppliers.
Third to provide our associates with unmatched career opportunities.
And fourth to support our communities and the planet through our wide ranging and ambitious ESG initiatives.
To deliver more value to our customers. We are focused on improving all aspects of our sales and supply chain execution to provide our customers the products and services they need when they need them. So that they can compete and win in the marketplace.
We're implementing a wide range of improvement initiatives to enhance our customer value proposition by making it easier to do business with us.
A cornerstone of this effort is our one UNFI initiative, which aims to create a single point of contact for our customers. One ordering system for all purchases are single delivery of all products on one truck and a single invoice.
In addition, we're bringing customers new and innovative ideas and solutions that go well beyond selling them traditional grocery products, bringing more value to new and existing customers will drive future success with cross selling and help us convert our robust new business pipeline into actual sales.
We've spoken before about the key growth platforms that sit at the heart of our ability to enhance our customer value proposition.
<unk> owned brands and professional services.
We are actively investing in people technology and infrastructure to deliver fresher produce in continued brand innovation at a time when customers and shoppers are increasingly seeing the value in these products and in services ranging from data analytics to revenue growth management that position us as.
More of a consultant to our customers.
These platforms are a critical component of our plan to drive continued earnings improvement and are expected to deliver 25% of UNFI is adjusted EBITDA by the end of fiscal 2020 for Chris will speak to these platforms in more detail shortly.
To improve the value we delivered to suppliers, we have a real opportunity to provide value added insights to strengthen their segmented marketing efforts by helping our customers become more visible to our suppliers.
One example of this is the high volume ethnic stores, we service that May not report scanner information to traditional data analytic companies.
The broad insights, we can provide on an aggregated basis.
Make UNFI a more valuable partner to the supplier community as companies are able to develop incremental programs to build their brands and in the process, bringing more investment and growth to our entire ecosystem.
Our clear focus is to be the best partner, we can be to our customers and our suppliers through better execution and expanding our capabilities.
Our commitment to providing unmatched opportunities for our associates stems from the recognition that they are with truly sets us apart.
Our associates are the key to our culture of innovation, our ability to execute and our ability to deliver on our mission of helping make our customers and suppliers stronger our supply chain better and our food solutions more inspired.
As a testament to how instrumental our associates are to our business.
Many of our customers that I visit with talk about our people is our greatest strength and their dedication is evident in everything they do.
We are therefore intensely focused on our people plan, which has been designed to ensure that UNFI is a preferred employer that offers unique opportunities for career growth.
At the same time, our people plan aims to equip employees with the tools that they need to help the company achieve its goals.
And finally, our efforts to support our communities and the planet builds on our long standing commitment to doing what's right and the recognition that better food can only come from a healthy planet and that clean air and water are crucial to a safe and nutritious food supply.
We view this as a critical opportunity to innovate and leverage our scale to address the impact that our company and our partners have on our people our communities and our world.
Under our better for all plan, we have ambitious goals to reduce waste lower greenhouse gas emissions and advanced sustainable agriculture to ensure a lasting supply of high quality healthful nutritious food.
This plan helps us stay laser focused on the issues, where we can move the needle the most over the next decade. We are pleased that UNFI is the first public food distributor and wholesaler to have its climate targets, which were announced last month validated by the science based targets initiative.
I am proud of the many initiatives we are undertaking and urge you to read our 2021 ESG report that we issued this spring.
As the report outlines we are now in our second year of integrating both FASB and Tcf D recommended disclosures and we are continuing to evolve and improve our reporting for.
For example, we reported that in fiscal 'twenty, one we saw a 2% improvement in fuel efficiency, which was largely the result of working with our customers to consolidate orders. So we could further optimize deliveries and reduce fuel consumption and continue to make additional progress in fiscal 2022.
Before I turn it over to Chris Let me underscore a common thread across my comments, which is to simplify and communicate the operating focus underpinning our fuel future strategy.
As I mentioned earlier, we have a very large and attractive addressable market opportunity.
Our strategy to capture the opportunity is simple.
We are focused on getting better at what we do well.
We are working toward enhancing our capabilities and improving our end to end execution for the benefit of our customers suppliers and.
Associates and by doing so importantly, our shareholders.
We will be taking a very disciplined approach to value creation through focusing on those strategic areas that will drive economic profit instead of growth simply for growth's sake.
We believe this will contribute most to shareholder value creation and.
And as we get better we expect this to create a flywheel effect in which the business will grow will gain market share and in turn enhance shareholder value.
In summary, as pleased as I am with the progress, we are making and our confidence in meeting or surpassing our three fiscal 2024 financial Kpis for growth in sales adjusted EBITDA and adjusted EPS I'm, even more excited by the improvement opportunities that we see ahead Chris.
Yes.
Thanks, Andy and good morning, everyone on today's call I'll provide further color on our sales for the quarter and our sales pipeline that we expect will deliver future growth I.
I will also highlight the performance of our growth platforms, and our wholesale operations and comment on the operating environment and performance of our retail stores total net sales for the quarter were $7.2 billion, a nine 2% increase over last year's Q3 with widespread growth across all channels, we continue to be.
Aleve that our customer centric approach is driving results and we are pleased that growth in the quarter again came from both selling more to our existing customers as well as the acceleration in business. We're now doing with new customers. Each a key growth component of our fuel the future strategy.
Cross selling gains with existing customers added an incremental $95 million of revenue in the quarter, bringing our year to date incremental total to $268 million.
This keeps us on pace to achieve nearly $1 billion and cross selling revenue in fiscal 2022 volume that would have not happened without the supervalu acquisition.
Our continued success in selling more to existing customers, coupled with new customer wins contributed to volume gains of approximately two 5% with the balance coming from inflation.
Looking ahead, we remain optimistic about our ability to grow our business further based on our unmatched product and services portfolio.
Our new business pipeline remains robust with opportunities that range from expanding category and product penetration with existing customers to new business wins with retailers, who operate captive distribution centers for.
For both smaller volume wins as well as larger new customer business. We believe our customer centric approach to growth will help us earn new business and allow us to help make our customers stronger a key part of our mission that lies at the heart of everything we do.
The strength of our pipeline is largely attributable to the breadth of our assortment as well as the growth platforms. We've spoken about on past calls, including owned brands fresh and our professional services.
I've spoken before about the scale of our own brands portfolio, which includes over 5000 skus across multiple categories and price points that give our customers a competitive advantage in the marketplace.
We're pleased that owned brands are gaining momentum as sales increases accelerated throughout the quarter.
We believe this reflects the strengthening of our program and increasing consumer demand in light of higher food and gas prices.
We're also communicating to our customer opportunities to drive business, where national brands are an allocation our fill rates into UNFI are challenged.
Inbound service level on owned brands were again higher than those of national brands. This quarter by approximately 700 basis points on the product side, we've updated the packaging of our wild harvest free from line, our new plant based meats, where the first category to rollout featuring the new brand refresh and we're excited for additional categories.
Launching this summer.
As refresh unifies produce sales in the third quarter outpaced the U S produce market by more than 300 basis points, which we believe reflects the continued investments, we're making in people processes and infrastructure to improve the quality and freshness of the produce we sell.
This includes the addition of several new experienced leaders with backgrounds in large produce operations.
Leveraging the growth of the perimeter to private label, we've recently expanded our wild harvest organic produce offering to include organic bananas, and we have over 110 more private label Skus and process all package with our new look and clear organic communication.
Lastly, as our professional services business that we've spoken about before and which we believe is a key differentiator for UNFI.
The growth rate in adjusted EBITDA from our services business was more than double that of our wholesale business as more and more customers recognize the value we bring to their operations by leveraging our scale and expertise.
Among the wide variety of services and solutions, we offer our retail shelf services continues to be one of the most widely used <unk>.
Unify has over 1000 associates, who manage a variety of in store services on behalf of our customers.
These services include ordering item assortment and packing out shelves in.
In addition, we regularly update our significant amount of plan O grams across our network and last year completed over 1100 store resets that keep store offerings current and relevant to the consumer.
These services are in high demand for both customers and suppliers, especially considering today's labor market challenges retailers love it because unify experts manage their shelves, which allows them to focus more strategically on store operations competition in other parts of their business.
We continue to add services to our portfolio based on customer feedback and the evolution of the industry. Our professional services business is constantly evolving building upon unifies culture of innovation and embracing what's next to help our customers drive profitable sustainable growth and gain market share.
Touching briefly on operations, our third quarter operating costs again reflected the investments made to ensure we can service our customers in the very best way possible as well as the continued improvement being made on the labor front.
As Andy stated our distribution center vacancy rate improved again this quarter moving from 9% at the end of Q2 to 7% at the end of Q3.
After stabilizing our driver pool in Q2, we are pleased that the vacancy rate improved to 9% a three point gain that we view as a clear signal that the programs. We've described before are taking hold.
Our results also included a modest net impact from higher fuel prices Sandy spoke too. Despite the portion of the increased shared by our customers as well as the fuel hedges we have in place.
Finally, our retail stores continued to perform in a challenging environment sales were up over last year, although margin investments led to lower adjusted EBITDA compared to last year's third quarter our strategy.
<unk> continues to be optimizing our retail network, which includes appropriate levels of investment in facilities and technology were.
We're pleased with the performance of our recently remodeled stores with sales gains have significantly outpaced total retail and technology investments have helped simplify the business and improve performance.
Looking forward, we'll open our 30, <unk> Cub wine and spirits store before the fourth of July and have approved a replacement of an older outdated store that we expect will improve its already strong market position.
We're also planning to invest in enhanced promotional planning tools that will bring us additional capabilities around customer specific promotions based on individual buying habits.
One of the benefits of having operating stores in two markets is we're able to test and refine merchandising and operational ideas that we can then share with our wholesale customers to help make them stronger.
As Sandy said, we're pleased with our performance this quarter and optimistic about the finish to fiscal 'twenty two.
The environment remains unpredictable in several ways, but we're confident in our agility and our resilience as we help our customers succeed through all that unify has to offer.
Now I'll turn the call over to John .
Thank you, Chris and good morning, everyone on today's call I'll cover our third quarter financial performance balance sheet capital structure, and our fiscal 2022 outlook.
As Chris stated third quarter sales were $7 2 billion, an increase of nine 2% from last year's third quarter, which brings our year to date sales to $21 7 billion.
A seven 1% increase compared to last year as stated in this morning's press release, we've revised our definition of both adjusted EBITDA and adjusted EPS to exclude the impact of LIFO expense.
LIFO is a noncash item, which impacts gross profit as well as adjusted EBITDA and adjusted EPS as previously calculated.
Historically, the effect of LIFO has been relatively small stable and predictable, but the recent inflationary environment is driven at meaningfully higher because we believe the volatility in this year's noncash LIFO expense meaningfully distorts our underlying operating performance beginning with this quarter, we will adjust LIFO expense out of <unk>.
GAAP net income and GAAP EPS in computing, adjusted EBITDA and adjusted EPS.
This revision has no impact on the economics cash flows or GAAP results of our business is more closely aligns UNFI with how our industry peers treat LIFO.
And we believe better reflects the company's underlying operating performance.
We also believe it will help investors assess our underlying performance in a manner consistent with how we make business decisions.
On this revised basis adjusted EBITDA for the third quarter totaled $196 million a.
A five 9% increase compared to the $185 million in last years third quarter when computed on the same basis.
On a year to date basis, adjusted EBITDA totaled $616 million compared to $564 million last year, a nine 2% increase compared to last year.
Our third quarter GAAP earnings per share totaled $1 10 <unk>.
Including the impact of the noncash LIFO charge described above and a gain on sale from our Riverside distribution center purchase and sale leaseback transaction that we've discussed before.
Including several smaller items and the tax impact of the adjustments.
Adjusted EPS on the revised basis also totaled $1 10 for the third quarter compared to $1 in last year's third quarter on a revised basis, an increase of 10%.
On a year to date basis, adjusted EPS totaled $3 56 per share a 22% increase over fiscal 2020 one's year to date total of $2 93 per share.
Within the P&L, our gross profit rate, excluding LIFO increased approximately 30 basis points compared to last year's third quarter, driven by the impact from inflation and the ongoing benefits from our value path initiatives.
Retail gross profit rate declined modestly in the quarter compared to last year.
Third quarter operating expense rate increased approximately 30 basis points over last year's third quarter as Chris discussed our elevated operating expenses continued to reflect investments, we're making to ensure the best possible service to our customers in a rapidly changing environment and the impact of inflation.
Turning to the balance sheet, we finished the quarter with outstanding net debt of 238 billion.
A $34 million reduction compared to the second quarter.
Our adjusted EBITDA net leverage ratio, which now also excludes the impact of LIFO and the denominator improved to two nine times, our supplemental slides present, the adjusted EBITDA net leverage ratio for previously reported periods under the revised definition.
We successfully refinanced and extended the maturity on our $2 $1 billion asset based revolver by over three and a half years, which brings its maturity to June 2027.
We're pleased to have completed this transaction, which leaves our secured term loan as the next material scheduled maturity in October 2025 over three years from now.
We've also upsized the ABL to $2 6 billion immediately increasing available liquidity by $500 million.
We've reduced the rates on borrowings and the unused portions under the facility and we've transitioned from LIBOR to sulfur as the benchmark rate for borrowings under the ABL and the term loan facilities.
Let's turn to our outlook for fiscal 2022.
As outlined in our press release, we're raising our full year outlook for net sales to a new range of 28 eight to $29 1 billion.
A 7% increase over fiscal 2021, reflecting the underlying performance of our business.
As for adjusted EBITDA, and adjusted EPS, Our original ranges were $760 million to $790 million and $3 90 to $4 20 per share respectively.
These included a LIFO charge of $25 million or <unk> 30 per share.
Under the revised definition I spoke to earlier, which excludes the LIFO charge our original guidance for full year adjusted EBITDA would have been within a range of $785 million to $815 million.
And adjusted EPS within a range of $4 20 to $4 50 per share.
In light of our performance year to date improved net sales outlook and a careful assessment of the current operating environment.
We're increasing our guidance for both adjusted EBITDA and adjusted EPS.
We now expect adjusted EBITDA to be in the range of $810 million to $830 million and.
And adjusted EPS to be in the range of $4 65 to $4 90 per share.
For comparison purposes, the tables in our press release and slides 10, and 11 of our supplemental slides illustrate these changes.
Our outlook for full year capital spending remains unchanged at $250 million as does our outlook for full year debt reduction, which continues to be in the range of $150 million to $200 million.
Using our revised definition for adjusted EBITDA, We now expect year end net leverage to be approximately two six times as for the longer term fiscal 2024 targets. We provided at last June's Investor Day, we're affirming the average annual growth rates provided for net sales of 3% to 5%.
The adjusted EBITDA of 6% to 10% and.
And adjusted EPS of 12% to 18%.
Under our revised definition for adjusted EBITDA, and adjusted EPS, which exclude LIFO.
Our fiscal 2024 target for adjusted EBITDA would be at least $950 million and.
And adjusted EPS would be at least $6.
As Andy stated, we remain confident in our ability to achieve these targets.
As you've heard today's operating backdrop continues to be both challenging and unpredictable, yes, we remain optimistic about serving our customers and delivering on our updated outlook for the year.
Operator, we're now ready to take questions.
Thank you and as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Andrew Wolf with C. L. King Your line is open.
Thank you and good morning.
No.
On specific quarters, but is it fair to.
And assume that.
The quarter you just reported.
Beat your internal expectations.
Decently.
And could you comment.
Alright, how that.
Is carrying through.
In the fourth quarter and your sense of the quarter on a profitability basis in.
Any color you can give as we start to think about fiscal 2023 as well. Thank you.
Sure No I appreciate the question Andy This is John I'll start.
What's your question there I think what I would say we were in line with what we're expecting for Q3 internally.
As it relates to Q4 guidance, you're absolutely right. We generally don't provide quarterly guidance, but this is the the one quarter of the year, where it actually is indirectly provided with with our full year guidance change.
Increasing our full year guidance I think you can get into back into the Q4 number.
Are you.
And then as it goes.
The third question, Andy I forgot.
FY 'twenty, obviously for FY 'twenty three at this stage, we're not going to provide any guidance other than what we provided with the.
The long range plan Investor Day, we did last year, showing what our three year CAGR would be for 'twenty, two 'twenty, three and 'twenty four and as I think all three of US said in our prepared remarks, we are on track to achieve those.
Alright.
LIFO charge itself at $72 million in the first half was $30 million.
So clearly I guess the accrual rate.
Went up a lot.
Could you comment on how that relates to it inflation jumped that much or where you had to increase steel could you increase your accrual rate or is there a catch up in there can you just give us some color on what are the actual numbers. So high compared to what you were accruing at and also just I guess tie that to what what's going on with inflation.
Yes, and Youre absolutely right Andy It is it is all tied to the inflation that we saw that uptick that we saw in Q3, that's what's driving that number there is no other.
Dramatic or fundamental change in the calculation or in the underlying business. Our inventory balances are substantially where we thought they would be its all being driven by that uptick in inflation that started in Q3.
That noncash increase that youre seeing and Youre, absolutely right. The way the math works on LIFO Theres, a full year catch up is that inflation rate changes throughout the year, we have to capture the full rate impact every time, we go through.
The calculation in our quarterly results and that does represent a little bit of a catch up in Q3 on the noncash Sandy yes, I was just going to comment on the second part of Andy's question regarding inflation, obviously inflation continues to be elevated and it's a complicated topic through the P&L it drives topline and margin, but it is.
The negative impact on sales lift.
It's really a direct result of continuing fill rate issues.
Then you've got the whole dynamic with promotions our focus.
Is really on how we can help our customers to help them stay competitive.
By working to ensure that they had the most possible lead time on price increases and then specifically through the summer working with our suppliers to give our customers good sharp promotional price points, particularly in key value items I'd.
I'd also mentioned owned brands Chris mentioned.
Consumer energy around own brands and our focus on.
Providing the best possible offer there and then finally as it relates to any margin thats moving around we have our value path initiative with which the company fielded to yielded gross amount of $70 million to $100 million of savings by 2023. So that we can make it all work as the different parts of the external environment move.
Around.
Thanks, and I'll just ask a quick follow up instead of my third question.
Sandy you mentioned.
Trying to get.
Promotions in <unk> to your clients your customers know how challenging is that one.
It is basically short.
Theres so much inflation I mean are you jumping into your own pocket to help out.
Customers in a sense.
It's actually a process of working with our customers and our suppliers.
Our customer base is is a really important source of growth for our suppliers and as I mentioned one of our initiatives is to help make them more visible and to connect the dots.
And so.
We're having good success with a number of our merchandising programs.
And for example, we have a very big sales showed that starts this afternoon in Connecticut, where we have literally thousands of customers coming in to meet with suppliers to put in place programs to byproduct set in place promotional plans for the rest of the year and by working hard to make them visible to each other and connect the dots I think we're having.
Good success in terms of doing everything we can to help them be as competitive as possible.
Great. Thank you I'll get back in line.
The next question is from Scott <unk> with RFID capital Your line is open.
Hey, guys. Thanks for taking my question, so I wanted to explore a little bit more.
The better I guess offering that you guys have to your customers and understand how quickly you think you can gain some market share specifically.
Specifically referencing is the single truck single invoice and accompanying the services.
As we've written those are.
You guys seem to have a fairly meaningful competitive advantage.
Quickly can you move to maybe gain more market share with that.
Yes. Thanks, Scott. This is sandy one UNFI is really a multiyear process.
<unk> and was made possible by the acquisition that the company made a supervalu a few years ago.
Actions have already been taken to align the sales force to align how we show up for suppliers.
But there are incremental opportunities that involve our supply chain that involve our our network distribution, then and how our IP is setup invoicing et cetera.
And I would describe it as a roadmap of continuous improvement.
The market share gains really come and Chris talked about it by virtue of the immediate impact which is that we have a really wide assortment and customers need different kinds of products for different kinds of strategies and different kinds of formats and we have seen in the cross selling results that Chris described impact impact to Mark.
Share impact to give customers flexibility and then finally I would say that and this has been particularly important in the last couple of years. When the network is as stressed as it is having backup and the ability to move distribution from one center to another has been helpful in times of stress.
As you look at our sales results and think about the industry. We are gaining share, but I think the share opportunity is really more about serving a broader range of customer needs and as that as the company mentioned, we think the total opportunity is around $140 billion.
Of which we have captured a small part of it.
So as a follow up to <unk> as a follow up to that though how many customers are actually.
<unk> have the ability to have one truck one invoice I mean, how far along as it is.
Handful or is that something you could offer to more this is my first follow up and my second follow up is if this is successful how should we think about capex spending and your capacity. If you start grabbing a lot of share if youre able to execute the one UNFI.
Well.
I would describe that.
Transformation is early stage on some of the supply chain and distribution changes.
From a capital standpoint, and Eric's here and you can comment Eric I think it offers us an opportunity to get both effective and more efficient.
As we design the supply chain, we haven't Big initiative right now to understand the network design and deploy that plan and then finally as it relates to capital.
To the extent that we're able to drive the capacity in the supply chain, that's obviously capital friendly.
But.
It also creates the opportunity for us to make progressive estimates and technology and potentially automation that will drive up our quality level.
And obviously with each investment sweat a very.
Disciplined rate of return, but Eric you want to talk a little bit about your plans there, yes, I mean, Scott. Thanks for that question Sandeep mentioned, we are looking at incredible options across the country to maximize the use of our current capacity as well as capacity that we need to add too.
<unk> growth.
As far as automation goes we are actively pursuing options, where it makes sense. As a reminder, we just added automation in southern California, and the Pacific Northwest and we are expanding our automation capability and then mid Atlantic States in the coming months. So I think we're making the right <unk>.
<unk> and we're keeping pace with the options we have to support our growth.
Perfect. Thanks, guys.
The next question is from John <unk> with Guggenheim. Your line is open.
So first thing guys, maybe you can address.
The power of scale in this environment right with inflation as high as it is should be more valuable than ever.
Obviously, but then you've got to get the product right.
So let me talk about.
The ability to lean into scale and has the benefit to come more down the road right when.
Supply is a little more.
Readily available.
Is that sort of number one and then too right. If you think about the opportunities right versus.
New customers.
Coming on to your platform versus picking up new items right from some of the existing players where is the opportunity bigger right now.
Yeah. This is sandy and I'm going to pass this over to Chris in a second but.
Scale shows up for the company and a lot of ways.
It shows up as I mentioned and flexibility when we need to be able to move distribution around.
Clearly, we're an important customer to our suppliers so we're able to.
To show our suppliers, a large opportunity in and make a important case to them that they should take good care of 32000 customers that we have.
And as the fill rates.
We mentioned in the script started to stabilize and slightly improved here towards the end of the third quarter.
What we hope will happen is that we'll start to see further acceleration in promotional activity from from our customers or sorry from suppliers and that in turn.
We will drive value for our customers and the flywheel that I mentioned will be started but Chris wanted to drill into a few more specifics, yes, hey, John so.
Absolutely our scale if you look at our private brands business, we're able to have a very large private brands portfolio that we can pass on to our customers, we have buying power and our professional services business, where we're able to acquire services at rates of our scale that we can pass onto our customers.
And then if you look at <unk>.
Our buying power on our fresh business.
Very very large fresh national fresh player and there is not many if any national fresh players and we have some purchasing power with that as well.
As far as the size of the opportunity as we laid out at the $140 billion addressable market. The largest portion of that 78 billion lays with new customers.
But the reality is that the $38 billion opportunity with existing customers. Those are the wins that we're putting on the board every week.
If you think about our conventional customer that wants to get into natural products weekend, we can flip the switch on that conventional customer that wants to expand its meat produce with us we can exploit the switch on that very quickly because we have already set them up as an account we already have the truck going from the warehouse and so I would say we get more frequent wins.
Through our existing customers and we're very excited about more than doubling the business the opportunity to more than double the business with existing customers, but from a pure scale standpoint of course, there's more white space of customers that were not currently serving.
John Sandy hit on one other comment about scale.
Other thing is the flip of the coin.
But weeks ago I was on.
Northern Midwest tour of local customer meetings, one in Minneapolis, one in <unk>.
Green Bay, and if Thats been those meetings are merchants, who are working on local product supplier opportunities promotional plans for the for this summer.
Our Delhi and specialty team, bringing together achieves merchandising opportunity that leverages local cheeses in those markets and so there's a lot of very very local conversations going on between our regionally based sales and merchandising organization.
Obviously supply chain is very local as well so on the one hand, there is scale, but the flip side is to stay really close to the independent customers in markets around the country, which is core to our culture.
And maybe a quick follow up you talked about volume up two 5% right, which would include Newark, new customers.
Is there any way to tell on a comp basis, what volume of cases are doing.
And is it possible if inflation stays elevated that.
But volume could be.
Flat to down on a comp basis.
I guess as long as drop sizes up that wouldn't that wouldn't really impact the economics right up the drop.
Okay.
Yes, we are.
Not going to talk on a forward basis about that.
John but what I would say is I think.
Our volume growth has stayed pretty consistent through the second and third quarter that we just reported.
Our focus as I mentioned around inflation is to work really hard with suppliers to give our customers the right kind of merchandising opportunities and price points to support their unit volume as they compete so we'll continue to watch that and report out each quarter.
But it's been fairly consistent for the past couple of quarters.
Okay. Thank you.
The next question is from Eric Larson with Seaport Research partners. Your line is open.
Yeah, Thanks, everyone and thanks for the question nice quarter.
John maybe.
John were sandy.
In this environment that we're in obviously.
Pretty fluid you've got high inflation, you've got consumers.
Scrambling to probably pay their bills a meter.
And get their groceries at a reasonable price are you seeing any meaningful shifts.
From branded to private label to different alternatives.
Yes.
When you put that into perspective.
Cpg's actually doing more merchandising here are the values of the merchandising programs higher.
And so that's where you generally have a pretty good profit center is when you have high levels of merchandising can you give me an update on what how much those two questions.
Kind of what im asking there.
Sure.
I'll make a comment this is Andy and then I'll give it over to Chris.
I think we mentioned that we saw some acceleration.
<unk> in the quarter, a strong acceleration in private label brands I think the interesting thing about our customer base and our product line is that we actually show up wherever the customer and the consumer is positioned and.
So you've really got both <unk> got high end customers are still spending money on things and then there is acceleration in own label and then as it relates to suppliers.
<unk>.
It's still kind of dynamic as bill rates are still stressed, but theyre getting a little bit better and the conversation with our suppliers that we added various industry conferences and I sat through about 30 meetings is all about the opportunity that that our customers bring them.
Diverse channel structures are really important to cpg's and UNFI customer base is nothing but that and so.
While there is still a dampening in promotional efforts versus where we want it to be and where we expect it to be.
I think being successful with our merchants are working with vendors and we continue to focus on improvement to get promotional dollars to the proper places with our customers. So they can be successful Chris do you want to add.
Quick quick condition is.
Look we saw the fill rates declined from Q4 to Q1, and then again in Q1 to Q2, but they stabilized in Q3 actually slight dip tech uptick sequentially. The promo dollars have a lagged behind fill rate. So it's not it's.
It's not immediate to the fill rate improvement and we fully expect that still rate continues to improve and we're hearing from manufacturers theres less temporary unavailable.
They're feeling optimistic about get healthy dates and the promo dollars will follow but theres, a theres a lag call. It a three months lag between the fill rate improvement in the promo dollars improvement and in the meantime, as Sandy mentioned, we are seeing a shift towards private brands that we had private brands acceleration and we are working with our.
Flyers to get those key value items and all the promo dollars, we can secure through our shows for our customers to help them get through this period.
So without and thanks for those comments.
Actually talking much about any kind of fiscal 'twenty, three guidance or anything it sounds like the promo environment could be.
A bigger tailwind for you in F 'twenty three than an S.
22, and can you quickly compare of 22 to F 'twenty one.
The promo rates in those programs as a benefit benefits this year or no.
Well now promo dollars are slightly above flat year over year.
And that frankly wasn't to expectations right, we expected fill rates to continue to improve like they were doing through the end of the last year at this time.
But they are roughly flat year over year.
Got it okay. Thank you.
Yes.
The next question is from Mark Carden with UBS. Your line is open.
Good morning, Thanks, a lot for taking my questions I wanted to dig into the market contraction you mentioned that continued into <unk>. So we've heard from some of the large mass merch and producing some wallet share shifts from discretionary categories into consumables and just following up with what Youre seeing and how does it impact your view of market contraction over the next few quarters could the degree of.
<unk> is more than you were anticipating.
Yes.
As we mentioned the volume that we saw in the quarter really was consistent from Q2 to Q3 and in fact, we saw.
Independents actually.
Start to gain share a little bit in February and March and April and I'm not sure whether the dynamic is that fuel prices are going up and therefore, the drive to away from home is.
Kept people closer or adjusted Independents are continuing to do a really good job of staying close to their customers with meal replacement and other unique offers as I've traveled around the country I have seen some extraordinarily agile and very very creative approaches to customer retention and the independent customer.
Base.
And so the.
The general outlook that we would have is that the winners are going to continue to win and our job is to be front and center to try to help them, whether its core execution or value added programming or connecting with suppliers.
And that's exactly what we're going to do.
Great and then another follow up on inflation I know there is a ton of variability, but as you point out your business. How long are you now expecting for these kinds of elevated rates to last and then if we do start to a year from now we see deflation how much of an impact could that have on your margin structure.
Yes.
We spend about 100% of our available hours looking at how we can get better for our customers and very little playing.
Playing amateur economist.
They certainly are elevated right now and we don't see a real change having said that as you would expect we scenario plan multiple potential scenarios and.
Interestingly enough the actions that we would take in virtually every scenario are approximately the same.
We have to make sure that we're showing up for our customers and buying right.
At keeping them competitive we have to work hard on our execution. So that we're a partner of choice and then we've got to keep our cost structure type.
So that we stay agile in the face of whatever the scenario is.
And that's been our focus as we prepare for next year.
And I think we'll be in.
Strong shape, regardless of the scenario.
Great. Thanks, so much guys and good luck.
Yeah.
Thank you.
Our final question comes from Kelly Bania with BMO. Your line is open.
Okay.
Kelly Bania. Your line is open. Please go ahead.
Hi, Thanks for taking our questions.
Wanted to ask a couple about retail first the <unk>.
Retail growth of about 2%.
It was just a little lower than the rest of your segments and I was wondering if you could just help us unpack that a little bit and understand the.
The factors driving that maybe cross selling could explain some of that is that benefits your other segments, but.
And any color you can comment on there.
Sure I mean, our retail business has been performing really well since the acquisition and.
He has held in and I think in some cases grown share.
Particularly in twin cities.
Sales in the quarter.
Our solid from a market perspective, it was very competitive up there we invested in promotional dollars.
But more importantly for that business, we invested in capability.
In digital capability.
Craft more personalized promotions to understand pricing and revenue management capability.
And several operating initiatives. So the net net is we are pleased with our retail business.
The volume in the quarter was market competitive.
A number of initiatives that give us confidence that the outlook for our retail business is strong.
Okay and can you also just expand on the factors driving the EBITDA margin rate decline. There you mentioned some of these investments.
But can you help unpack that between gross margin SG&A, where these planned or reactionary where are these too.
The need to maybe do some more promotions.
Yes, no I think in general one of our Kpis to expand EBITDA margin and <unk>.
Expect to do that and have actually year to date.
In the quarter, we invested in supply chain as we continue to make sure that we're giving our customers. The best possible service in what continues to be a pretty dynamic operating environment and the operating margin contraction was really minor.
That said.
We have a number of initiatives through value path.
And we expect as we look forward there is a little bit of a crystal ball, but our strategy to continue to make our operating expense more efficient.
Should be back on track as we go ahead.
And Sandy if I can if I can build on that a little bit there were some specific items that were cycling in 'twenty two that we've talked about before including the monetization of Riverside, which creates a rent expense which didn't.
This last year, we new health and wellness expense was going to come back on as from 'twenty two as more people are going back for medical procedures.
And we've been we've been open about the save a lot transaction.
Ed.
That service fee that we're providing them for the past five years, but also aimed at in FY 'twenty two.
Yes.
John Thank you.
And importantly, it gets to the last point too.
Share with everybody is that.
As the business has proceeded as it has performed in line with the expectations that we had in that regard.
Okay, that's very helpful.
I guess I'm, sorry, if I missed this but.
Could you just provide the inflation rates and any color you are seeing across the different.
Customer segments and.
Can or willing to just tell us.
Help us understand a little bit more what youre hearing from your supplier landscape.
In terms of more price increases on the horizon.
So I'll start with the number on the inflation.
So as we've talked about for Q3.
<unk> or nine 2% growth roughly two 5% of that was volume driven.
When you think about inflation, making up the rest of that and that's net of elasticity and other aspects related to our pricing and business model, but volume was roughly two 5% and then the rest of it would be attributed to the inflation as.
As it relates to some of the supplier information I'm not sure if we have or if we've disclosed that.
We have an al Kelly this is Chris.
Inflation is it really a channel thing it's a product segment thing right. So it's based on the suppliers and the fresh business Youre seeing changes happens daily as the commodity prices go up and down depending if we're talking about produce or proteins or so forth with.
With the center store.
Thing that we're focused on is making sure we have enough lead time to inform and adapt to our customers and making sure. We're doing everything we can to get corresponding promo dollars to keep our customers.
Keep the volume of our customers going.
I can't pinpoint any single category in the center store grocery where inflation is higher than the other.
You've read and we've all heard it's really across the entire segment certainly theres been some certain category sunflower oil.
For example that had been impacted by the war, but.
Those are sort of really.
Really small targeted segments, but in general it's been across the entire center stores.
Okay. That's helpful and I guess as you look across.
Your customer base between the different retail strategies that you have that they have between value or mainstream or premium are you seeing some.
In terms of trends, particularly on the volume standpoint, or promotional standpoint, as you just communicate with your retailers.
Yes, Kelly this is sandy.
I think again.
We're seeing some some macro trends on categories, we're seeing acceleration in own brands in particular as almost in parallel to the spike up in inflation.
Relative to retailers.
They are really operating where theyre positioned.
And as I mentioned earlier that.
The situation with the customer base is as is.
Is bifurcated.
Upper end consumers are still spending money and they are spending money on upper and things now there may be a little shifting between rest.
Restaurants, and there's dynamism between restaurants and meal replacement strategies with retailers and then as sort of mainstream retailers and then.
Those that are more value oriented are certainly seeing that side of the customer base emphasize value for money and there is a lot of price sensitivity and time demand sensitivity as as folks move away from their snap payments. So.
The net effect of all that is is that we have to show up where the retail strategy retailers strategy is and.
And we're seeing.
The winners win.
And we are fortunate enough to be doing business with a lot of winners.
Thank you.
That concludes the Q&A portion of today's call I'll now turn the call back to CEO Sandy Douglas for any closing remarks.
Thanks, operator, and thanks to everybody for joining us. This morning, I Hope you have heard and takeaway from today's call.
<unk> is growing and performing within a changing environment by steadfastly focusing on our four operating principles that underpin our execution of the fuel of the future strategy.
Bringing value to our customers improving the way we partner with suppliers.
Creating unmatched career opportunities for our associates and supporting our communities and the planet.
And through all of this our ultimate focus is on adding significant value for you our shareholders.
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. My 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 year continue.
<unk> investment and UNFI.
Thanks, everybody.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yeah.
Okay.
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