United Natural Foods, Inc.

If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Steve Blumquist, Vice President, Investor Relations. Thank you. Please go ahead.

Good morning, everyone. Thank you for joining us on UNIFI's first quarter fiscal 2021 earnings conference call. By now, you should have received a copy of the earnings release issued this morning. The press release, webcast, and a supplemental slide deck are available under the Investors section of the company's website at www.unfi.com under the Events tab. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer, John Howard, our Chief Financial Officer, Chris Testa, President of UNFI, and Eric Dorn, our Chief Operating Officer. Steve, Chris, and John will provide a business update after which we will take your questions. Before we begin, I'd like to remind everyone the comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and 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 Steve.

Thanks, Steve. Good morning, everyone, and thank you for joining us on our fiscal 2021 first quarter earnings call. As you saw in this morning's press release, we delivered another quarter of strong financial results. First quarter sales grew 6% and first quarter adjusted EBITDA grew 31%, resulting in a 45 basis point expansion in adjusted EBITDA margin. With the strength we've shown during the last three quarters, the tremendous confidence we have in our company, and our strong commitment to increasing shareholder value, it's clear to us that the best days for UNFI lie ahead. As we continue to build and optimize our DC network, expand our brands, win new business, and migrate our business towards customer solutions and expand our fastest growing segment, e-commerce. We believe the momentum from fiscal 2020 will continue as we grow sales and an adjusted EBITDA in fiscal 2021 above and beyond our results from 2020, which were partially driven by COVID. As a result of COVID-19, many Americans have been working from home, as you know, for the past eight months, and doing so quite effectively. This paradigm shift means more and more meals will continue to be eaten at home with products that have come through UNFI's distribution network. This trend will continue for the next several years as companies' office strategies evolve. At UNFI, our requirements for administrative and support offices will continue to shrink over the next several years as we've increased productivity and associate work flexibility with work from home. We've had and will continue to have great success in monetizing our dark real estate. These factors support our belief that food at home consumption is will remain structurally higher and provide a strong tailwind to our business. The strategic steps we're taking are providing benefits today, and more importantly, they're positioning us for continued success in a post-COVID environment. We're consolidating distribution centers, reshaping our footprint, and investing in automation to drive operating savings. We're completing long-term labor contracts that provide stability and lay the groundwork for future efficiencies. And we're winning new business and focusing on future on higher margin private brands, e-commerce, and retail solutions businesses. All key drivers that help our customers win. COVID has demonstrated how important the local community markets are. And UNFI is uniquely positioned to provide the unparalleled selection, brands, and solutions that will generate sustainable win-win growth for customers and UNFI. The addressable market for UNFI is significant. And Chris will share some specific insights during his commentary. Our new long-term contract with Key Food, signed in October, reflects the critical importance of scale as well as the ease of doing business with UNFI. Key Food is a cooperative of more than 300 stores with a large market share in New York and the surrounding area. And we believe their decision to partner with UNFI is a clear and unambiguous endorsement of our business model and what only UNFI can do for them. As their primary grocery wholesaler, we'll be supplying their stores with branded and private label conventional and natural products across a wide range of categories. We expect our sales to Kifood to total approximately $10 billion over 10 years, or roughly $1 billion annually. To serve Kifood's Northeast stores, we'll open a new highly productive distribution center in Allentown, Pennsylvania next fall. This facility will also serve as our enabler to significantly expand our conventional presence in the important New York City metro market. UNFI is well prepared to grow in this market with general merchandise in an automated Carlisle, Pennsylvania, D.C., large-scale natural D.C. in York, Pennsylvania, large-scale conventional and fresh D.C. in Harrisburg, Pennsylvania, and now our new DC in Allentown. As to our largest customer, we've begun the process to address our supply contract, which, as a reminder, runs through October of 2025. Since the pandemic broke, we've both been focused on operating our respective businesses and meeting the needs of our customers. efforts that will intensify during and through the holidays. We'll heighten our focus on the contract renewal as we move into calendar 2021 and expect we'll be able to announce a formal extension of our partnership early next calendar year. Finally, we're launching the next round of productivity and efficiency work streams, shifting from integration activities to a series of transformational initiatives that will position UNFI for future sales growth and margin expansion. We began evaluation of this next phase of initiatives, which we're calling Value Path, a year ago. Value Path is a holistic approach to driving more value throughout our business, including across key elements of pricing, procurement, operations, and administrative functions. We believe these initiatives will drive an additional $70 to $100 million by the end of fiscal 2023 and contribute to future bottom line growth, margin expansion, and generate meaningfully incremental free cash flow. Let me now turn the call over to Chris to provide more context on our business performance.

Chris? Thanks, Steve, and good morning, everyone. On today's call, I'll provide a bit more context for our fiscal 2021 first quarter performance and discuss the key trends in our business. I will also highlight drivers that differentiate Unify and give us confidence in our long-term growth. As you saw in this morning's press release, total sales for the quarter increased 6% or $375 million compared to last year's first quarter. To put this growth into perspective, consider the three-month period ended October 30th. Syndicated food sales, as reported by Nielsen, increased 8.9%. This syndicated sales growth includes roughly 300 basis points difference between retail and wholesale inflation. The syndicated data also excludes the food service channel, which represents a nearly 100 basis point headwind to UNFI's total company first quarter sales growth. Considering the impacts of retail inflation and those channels negatively impacted by COVID, we believe our 6% sales growth is outperforming the market and driving share growth for UNFI. Sales to our top 100 customers, representing nearly 70% of total net sales, were up approximately 10.5%. We believe our strong sales performance is being driven in large part by our long-term strategies we have discussed during previous calls, as well as favorable consumer trends in specific channels. Namely, cross-selling efforts yielded an additional $60 million in incremental sales in the quarter. As we've discussed, previous cross-selling efforts consisted largely of many small wins with new item introductions. In fiscal 21, we're beginning to realize larger wins as customers begin to aggregate more purchases with UNFI. We continue to believe that increasing share of wallet with our current customer base of nearly 15,000 is a unique and very large growth opportunity for UNFI. This includes selling more natural product to conventional operators and vice versa, expanding professional services, and increasing the penetration of private brands in fresh categories. We estimate Unifi has a $140 billion addressable market, including $38 billion from incremental revenue from cross-selling to our existing customer base. The second driver of the Q1 results is new business. During the past 10 months, the grocery supply chain was stressed, and Unifi displayed consistent performance through our safety protocols, aggressive hiring, and leveraging our scale to procure high-demand products. This performance was recognized by the marketplace and has allowed our new business pipeline to expand, including the contract with Key Food that Steve spoke about earlier. In Q1, we began shipping to some of these recently acquired customers, and we plan to continue to convert pipeline opportunities to new business wins to drive unified growth higher than the comparable industry growth. Another driver of our Q1 growth was the favorable channel trends we continue to experience. Supernatural sales were up 9.3% over last year's first quarter, representing a 570 basis point sequential improvement from the fourth quarter of fiscal 20. This performance is largely being driven by center store grocery items that are overcompensating for some of the declines from adversely impacted categories like bulk and prepared foods. The fastest growing portion of our business is e-commerce, an area of accelerating importance to the success of our customers. Our e-commerce sales were up 93% in the quarter, including nearly 300% sales growth to the largest e-commerce player, who has also grown into a top 25 customer for UNFI. It is estimated that e-commerce now represents 9% of total grocery purchases, and UNFI is positioned to take advantage of this trend in several ways, including partnering with e-commerce operators, selling an online platform to our brick-and-mortar customers and through our own e-commerce businesses under the UNIFI Easy Options and On-Screen platforms, which sell grocery and wellness items on a direct B2B basis. In addition to these growth areas, UNIFI is receiving secondary e-com growth from our brick-and-mortar customers that are using e-commerce solutions to sell groceries that they purchase from UNIFI. To put this in perspective, CUB has averaged over 30,000 e-commerce orders per week, which has led to an e-com sales increase of 200%. Although we do not recognize these transactions in our e-commerce reporting, it's an example how UNFI is benefiting from this growing consumer behavior. First quarter sales to chains were up 5%, while sales to independents increased 7.4%. The strength of our customers in these channels reflects many of the same volume-driving initiatives we discussed previously – in addition to the desire for consumers to shop local and patronize stores with smaller footprints that are close to their homes. This is especially true in the independent channel, where we grew sales with 45 of our top 50 customers in this channel, including 30 that grew sales at double-digit rate. In addition to favorable revenue growth we are experiencing across our core business, we continue to expand our professional services in private brands businesses as well. Growth from these business units is expected to contribute to margin rate expansion for UNFI as we focus resources to driving these strategic initiatives. Also, both offer solutions that help customers increase sales, improve their gross margins, and lower operating costs. And these businesses are unique to UNFI, which strengthens our long-term partnership with these customers. Our strong top line results also extend to our retail business. where first quarter identical store sales increased nearly 16%. In addition to the e-commerce growth I already mentioned, the merchandising and operational changes we put in place over the past year continue to improve product mix and favorably drive results at both the Cub and Shoppers banners. On the operations side, we continue to move forward with our strategy to maximize our network and consolidate where opportunities exist to better service our customers and deliver operating efficiencies. We have previously discussed our consolidation efforts in the Pacific Northwest, where we expect the cost savings from that project to be realized as we move through fiscal 2021 and forward. We're next consolidating our Santa Fe Springs and Vernon distribution centers into existing DCs in Southern California. In both the Pacific Northwest and Southwest projects, we are modernizing our facilities by deploying automation, which has already proven to dramatically increase throughput levels, improve our capability or track labor, and lower operating costs. As we've worked through the investments we've made in these consolidation projects, we've absorbed about $20 million of higher operating costs in Q1 as a result of COVID-related challenges and new DC productivity growth. The good news is we believe these incremental costs will diminish over the balance of fiscal 2021. To put these changes in perspective, when these large-scale optimization projects are complete, we will have consolidated from operating 10 distribution centers to six in these two areas. By eliminating a net four DCs from the network, we've removed meaningful fixed costs associated with these extra buildings. In the process, we generated approximately $125 million in cash proceeds while creating a footprint that requires less investment at working capital, and we can realize lower net operating expenses. We'd expect to achieve these type of benefits to varying degrees as we analyze and review the balance of our network. Lastly, as Steve touched on, since the end of fiscal 2020, we've finalized new labor contracts at seven distribution centers covering more than 1,200 associates. We're pleased with the long-term stability and flexibility these agreements provide, and we will continue to pursue the modernization of our labor agreements across the enterprise as we negotiate the renewal of these contracts. When we consider the strength and diversity of our growing customer portfolio, the large addressable market opportunity in front of us unifies unmatched product and service offerings in scale and the relentless focus of our people to find solutions that benefit our customers and we're confident we'll continue to increase market share. And to echo Steve's comments, we firmly believe our best days are ahead of us. With that, I'll turn the call over to John.

Thank you, Chris, and good morning, everyone. On today's call, I'll cover our first quarter financial performance, balance sheet, capital structure, and outlook for fiscal 2021. As Steve and Chris said, we're very pleased with our strong performance in the first quarter, in which sales totaled $6.7 billion, adjusted EBITDA was $159 million, and adjusted EPS came to 51 cents per share. As a reminder, our first quarter is historically our lowest quarter for these three metrics. First quarter gross margin rate expanded seven basis points versus last year's first quarter, driven by a margin-mixed benefit from greater retail sales growth relative to wholesale sales growth, as well as lower levels of promotional spending in our retail operations. This was partially offset by lower levels of supplier-related income in our wholesale business. First quarter operating expense rate decreased 25 basis points, driven by the benefits of our synergy and integration efforts, as well as strong leverage on the fixed and semi-fixed portions of our cost structure. As Chris stated, our first quarter operating expense includes approximately $20 million, or 30 basis points as a percent of sales, of higher operating costs related to the startup of three distribution centers in the midst of the COVID pandemic as we focused on the safety of our associates and service levels to our customers. We believe these incremental costs will diminish over the balance of the year. Our 31% growth in first quarter adjusted EBITDA on a 6% increase in sales translates to a 45 basis point year-over-year expansion in our adjusted EBITDA margin. The third consecutive quarter we've grown year-over-year adjusted EBITDA significantly faster than sales. These results provide evidence of UNFI's ability to leverage top-line performance into even stronger bottom-line growth. We believe this growth algorithm over time will generate significant shareholder value. On a GAAP basis, we reported a loss of 2 cents per share, which included 44 cents per share in pre-tax non-cash charges related to the acceleration of unamortized debt issuance costs and original issue discounts due to the term loan prepayments made in the quarter, and 30 cents per share in pre-tax advisory fees largely related to our Value Path project. Our adjusted EPS, which excludes the of 51 cents in the quarter. Our GAAP and non-GAAP EPS both include the impact of the operational challenges I referenced earlier. Turning to the balance sheet, our total outstanding net debt finished the quarter at $2.7 billion, a $128 million increase compared to year-end, but a $460 million reduction compared to just 18 months ago. 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. This higher level of working capital should convert to a source of cash in the second quarter. Our net debt to adjusted EBITDA leverage improved to 3.9 times as the increase in trailing 12-month adjusted EBITDA more than offset the small increase in our net debt balance compared to year-end. We expect a seasonal reduction in working capital and the proceeds from the sale of our Tacoma D.C., which were collected early in Q2, to contribute to debt and leverage reduction in the second quarter. In mid-October, we issued $500 million in eight-year unsecured notes, a first for UNFI. This note issuance, used to pay down an equal amount on our secure term loan, was executed to extend and stagger the maturity dates of our capital structure while maintaining ample liquidity and flexibility to meet the needs of the business. This refinancing was a key step towards optimizing our long-term capital structure, and we believe it will enhance our ability to refinance the remaining balance of the term loan in the coming years. As Steve and Chris mentioned, we believe the current operating environment will continue to benefit food at home consumption, which, combined with further anticipated cost savings from the work Chris spoke to, gives us a high degree of confidence in our ability to achieve our FY21 operating guidance. Therefore, we're reaffirming our full-year guidance for net sales, which we continue to expect to be in the range of $27 to $27.8 billion, adjusted EBITDA, which we continue to expect to be in the range of $690 to $730 million, and adjusted EPS, which we continue to expect to be in the range of $3.05 to $3.55 per share. As Steve mentioned, we are strategically investing in a new distribution center in Allentown, Pennsylvania, to serve key food. Because of this investment, we are updating our FY21 guidance for capital expenditures, debt reduction, and leverage. We now expect capital expenditures to increase by roughly $50 million to a range of $250 million to $300 million. We also expect a corresponding $50 million decrease in our debt reduction outlook and now expect to reduce total outstanding net debt by approximately $250 million in fiscal 21. And we expect to achieve net debt to adjusted EBITDA leverage of approximately 3.5 times by year end, a small increase from the 3.4 times provided as a part of our original outlook. This assumes, as I said on the last call, a nominal amount of asset sales beyond the proceeds for Tacoma. Additional proceeds from asset sales, which last year totaled nearly $150 million, could improve our net debt position and further improve our leverage. The capital we are investing in our Allentown facility will improve our competitive position in the Northeast, allow us to further build market share in Metro New York, and position us for further growth beyond the incremental key food revenue of $1 billion per year. And while it will reduce our net debt reduction outlook for this fiscal year, we believe it will lead to higher levels of free cash flow in the future. We remain very focused on improving our operating efficiency and have completed a substantial portion of the integration synergies related to our acquisition of super value ahead of schedule and above our $185 million target. As Steve mentioned in his remarks, ValuePath is our next set of productivity initiatives that will enable us to transform our business and lay the foundation for continued top-line growth and EBITDA margin expansion. The current year benefit of these initiatives is included in our fiscal 21 guidance. We expect the full impact of these productivity initiatives to ramp up over time. reaching an annualized incremental gross benefit of $70 to $100 million by the end of fiscal 2023. We expect to reinvest a portion of these savings in driving market share gains, accelerating innovation, and investing in automation. The balance of these cost savings are expected to expand operating margins. Before I turn the call back to Steve, let me state that we are committed to increasing value for our shareholders. We remain confident we can grow our business over time and realize that consistent performance is the cornerstone to driving shareholder returns. We expect to generate meaningful cash flow over the coming years and we're committed to further reducing debt to improving our leverage. Thank you for your time this morning and for your interest in UNFI. With that, let me turn the call back to Steve.

Thanks, John. As John discussed, we are laser focused on driving our business forward and highly motivated to increase shareholder value. In the near term, we'll use our free cash flow to continue to reduce debt. Over time, we'll look at a broader range of capital allocation alternatives. In the next month or so, we'll release our 2020 Environmental, Social, and Governance Report, covering performance in the 2020 fiscal year. After over a year of work, we'll also be announcing our 2030 ESG vision, an ambitious 10-year plan to pioneer solutions to pressing social and environmental issues within our food system. This plan includes expanding and enhancing our policies and practices related to climate change, waste reduction, food access, safety, well-being, and diversity and inclusion. Notably, we recently announced our formal intent to set a science-based emissions reduction target. Our target, which is under development today, will be submitted for approval to the Science-Based Targets Initiative within the year and will serve as a foundational goal under our Better for Our World pillar. which commits UNFI to reduce our contributions to climate change and increase resilience through operational excellence, investments in clean energy, and the pursuit of environmental justice. With this important milestone, UNFI is the first grocery wholesaler to join a global movement of companies acting to mitigate the worst impacts of climate change and transition to a low carbon economy. With millions of Americans struggling every day to access nutritious food, it is simply unacceptable that so much food gets wasted. We recognize the importance of collaboration as we work to address this challenge and are thrilled to have recently joined the U.S. Food Loss and Waste 2030 Champions to share best practices with others in our industry. As a critical link in the food supply, UNFI is committed to digging in to help find solutions. Finally, working with our board succession planning committee, I'm optimistic that we will be able to announce my successor early next calendar year. Our process has been quite robust and has identified exemplary talent both inside and outside of UNFI. I'm also excited about our search for board members who bring a wider range of transformational and large-scale experience to our company. To wrap up, I am really pleased with our business performance. and encouraged by the holiday selling period and the sequential improvement in sales we've seen compared to the 6% growth in the first quarter. We're confident in our ability to deliver on our full-year guidance and more excited than ever for our future prospects. With that, we're ready to take questions.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our first question comes from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning. Thanks for taking my question. So Steve, just going back to your comment just that you are seeing a sequential improvement quarter to date. If you can provide any more color in terms of what you guys are seeing. Is there pantry loading? Are you seeing any geographic differences? We'd just love to hear what you guys are seeing lately.

Well, we are, like I said, you know, sequentially improving. I don't think it's pantry loading. I think that we're winning more business. We're cross-selling more products to a wider range of customers. If you look at the growth across our channels, I think that's consistently getting better. And so we feel pretty good about what the numbers are telling us. Now, remember that we're going to be lapping March, April, and June coming up early part of next year. But as we see it right now, the numbers look really good.

OK, great. And then just for the quarter itself, how did Q1 play out versus your internal expectations?

We were pretty much right on target, exactly where we thought we would be.

OK. Okay, great. And then I guess just my final question. So you guys have had meaningful success so far with the key foods win, and it sounds like you're doing well on the cross-selling front as well. Just overall, what are you seeing out there on the competitive front from KG and some of the other players?

Hey, Rupesh and Chris. Yeah, look, it remains a competitive environment, but what we're seeing is through the pandemic, we performed really, really well. And that's opened up our pipeline. And in Q1, we began closing new business. And that's basically because we have a stable supply chain. We have our scale to procure new products. We have the ability to sell natural, conventional, private label. And so, yeah, it remains competitive. But, you know, what we're hearing from the customers and what we're seeing in our results is we're getting new businesses. Okay, great.

Thank you. Thank you to you, Rupesh. But the other thing I would really add, which Chris mentioned in his script, which I think is really important, and that is this $140 billion addressable market. And so because we have the largest position in fresh, the largest position in conventional and natural, we've done the work. We've calculated where the opportunities are, and it's $140 billion at wholesale. And so there's lots of opportunities to continue to grow, both with new customers, existing customers, new channels, expansion of channels, which we're really excited about.

Great. Thank you.

Your next question is from Bill Kirk with MKM Partners. Your line is open. Thank you.

Good morning, everyone. Steve, I believe you said that you expect that you can announce a formal extension with Whole Foods early next year. Can you help us understand that expectation? Has it come from conversations with them, or is it based on your understanding of some of your aligned incentives?

You know, look, we've got a longstanding relationship with them. Our businesses are deeply intertwined, and as you would suspect, When both of our companies got deeply embedded in making sure we could get food out into our communities, Whole Foods and their stores, into our DCs, we just consciously said, we know we typically renegotiate right at the five-year mark, and we're just going to put it off until the beginning of next year to help us get through what's most important, which is operating the stores and our DCs. I have every expectation and they have every expectation that this is going to get done in the first part of next year.

Okay, great. And then my second question, I think I heard $20 million in extra costs in the quarter related to COVID and startup at the DCs. How much of the $20 million is just DC related and how much was COVID related?

Bill, this is Eric. Thanks for that follow-up. I would just start by saying and reinforcing the investments we've made in the sustainable safety protocols in all of our DCs. And that's a part of that expense. And frankly, these are unprecedented times. And as Chris mentioned, we've gone from five DCs to two DCs in the Pacific Northwest. We opened a new facility in Southern California. And we had some challenges with labor. So we had some over-reliance on third party, which we are in the process of resolving, and needed to maintain our commitment to our customers and the quality service. And I remain very confident on our operating expense plan for the balance of FY21. And we're seeing all the significant trends for the stabilization in the Pacific Northwest, as well as in the new DC in Southern California. And just to also highlight, we've added investment in automation in both the new DC in Southern California and one of the new DCs in the Pacific Northwest. So we're very optimistic on where we're going.

That's great. Thank you. I'll hop back in the queue.

Your next question is from Matt Fishbein with Jefferies. Your line is open.

Hey, good morning. Thanks for the question. Regarding value path, can you help us conceptualize the initiatives that are within that plan and perhaps what we should expect in terms of cadence for the $70 to $100 million savings?

and i guess um you know how should we think about how much of that is is earmarked for reinvestment uh thanks and i have a follow-up great this is eric i'll uh address that question as well and i might just start out by re-emphasizing our performance around synergies for the super value acquisition we exceeded our four-year target of 185 million in two years And we still have a few initiatives remaining in that space. But ValuePath is designed to unlock different work streams and different sources of value throughout the organization. It's really optimizing our operating model. It's covering things from private brand sourcing, delivery frequency, distribution center, productivity, organizational effectiveness. And we have those work streams stood up. we're starting to see some value show itself we're reinvesting some of that in fiscal 21 and then the 70 to 100 million that steve and john have referenced uh you know we have those targets uh well underway for the end of fiscal 23 so

you know you can look at this as uh overall it's the fine-tuning of our operating model how we're going to market we're investing in our people and we're really driving ebitda growth through this process okay thanks and i guess just along with the the 20 million in operating costs absorbed in the quarter now how much of these two items value path and the and the operating class were already included in your uh you know fiscal 21 expectations versus what's been kind of incremental since you were last on the phone three months ago? Thanks.

Well, the $20 million was incremental, and we've reflected that, but we still had improved OPEX for the quarter of 25 points. That reflects the leverage that we're getting in our fixed expenses and our transportation and our administration. So we're highly... Looking forward to the balance of 21 and knowing where we're going as far as expectations.

And I would just add that, you know, we have to be focused on safety first, keeping our team safe, keeping our DC safe. And once we do that, once we check that box, making sure we're providing a high level of service. And as you might imagine, to open up two large, highly sophisticated DCs in the middle of COVID, is really difficult. So the fact that we were able to still deliver the operating expense number but still have the $20 million worth of cost was a pretty heroic effort on the part of our operations teams.

OK, thank you for the call.

Your next question is from Karen Short with Barclays. Your line is open.

Hi, good morning. This is Kate Howard on for Karen Short. So I guess first I was just wondering, are you planning on providing EBITDA by division such that you did last quarter when you recluded the channels? And if not, can you give us some color on how that shook out by retail change, et cetera?

Yeah, we'll provide that. This is John. I appreciate the question on that. We'll certainly provide that. If you look through the supplemental schedules, you'll see that information included in there. And what you'll see is the retail numbers, if you think year over year with that 15% and change growth in sales, you'll see a big uptick in the EBITDA retail number at about 130% growth. Okay.

In case there will also be some supplemental information in the 10Q for you coming out later today. Great.

And next question is from John Heinbacher, Guggenheim. Your line is open.

Hey, Steve. I want to drill down on the $38 billion opportunity with existing customers. So I know it's probably a broad range, but when you think about your average share of wallet, right, maybe some color on that and how that might differ by channel, right, chain independent, et cetera. And, you know, what you think the – the friction points are, you know, to picking up more of that $38 billion, you know, why is that not happening? And then lastly, if you think about the incremental margin on that, right, so the drop size goes up, you know, would the incremental profit margin be, you know, 50 basis points higher on that revenue? What's the thought there?

Yeah, so first of all, the addressable market is $140 billion, and I think you said 38. Just for existing customers, yeah. Yeah, okay, I got it. So, one, I think that there's a dramatic shift happening within the industry, right? I think pretty similar to what happened in food service maybe 10 years ago, as the larger players started to take more share, independent customers who, you know, use 10 different suppliers migrated to just a few. And so that dynamic is happening in the retail space as well. As the retailers see the economies of scale in saying, you know what, if we can buy our center store frozen, chill, dry, brands, floral, produce, meat, and so on and so forth from one supplier, it's more efficient, it's cheaper, and the economies of scale really work in everybody's favor. And so... one thing covet has done is just skyrocketed that industry change to the forefront because retailers were really focused on let me just get the supply from the people that have it where i don't have to worry and uh unify is really the only um wholesaler that can do that on a national scale from our margin perspective i think it's essentially unchanged um the only difference The exception to that would be, you know, as you sell more protein, the markup on protein is inherently less than the markup on everything else, just because it's a more expensive case. But on a margin dollars perspective, it's the same and wildly accretive.

Well, yeah, so just two last things. It would sound like, you know, based on what your existing business is that you're – Tell me if this is wrong. Your share of wallet with those existing customers is probably maybe a third or something like that, certainly under 50%, well under 50%. Is that fair? And then secondly, your cross-sell, the $60 million, I would assume that's going to ramp during the course of the year. So would you think the cross-sell opportunity is $300 million to $400 million? Was it that high for the year this year?

Hey, John, this is Chris. So I'll just add some color to this. I think it will help. So look, food is $1.4 trillion industry. If you break that down to the wholesale and then you remove all the stuff that's not available, either through captive or it's channels we're not going to play in, that's how we get to the 140. The way we get to the 140 is exactly, I think, the way you're thinking about it. We have customers that we're 100% saturated in, right? And we say, okay, we're 100% saturated with these customers. Now what does that saturation look like with the balance of the customers, both new and existing? So when you look at the existing customers, we say, okay, to get to that same saturation point, there's $38 billion there. And just to give an example, you know, our seventh largest customer we're up 58% with. because they're a very large natural customer, and we began selling them conventional food to help them with their captive distribution. So one really small example, but a very big example of how we see the cross-selling opportunity and where that $38 billion come from. And you're 100% correct. They are margin accretive. If the truck is already going there, the more we have in that truck, the better it is. You're right about that. As far as the cross-selling, we don't have a specific target for the year. It is sequentially growing every quarter for some of the opportunities that I mentioned earlier. Our cross-sell wins in fiscal 20 were largely new item introductions. So, for example, a conventional store that was just getting introduced to natural and organic. What we're seeing in 2021 is large opportunities with bigger customers, top 20 customers, to sell them expanded fresh, to sell them expanded brands, to sell them expanded conventional and natural products. So I'm not going to put a target for the year, but we do expect it to sequentially grow throughout the quarter.

Yeah, one thing I would also add, John, is we've also been really successful in further rolling out our solutions business, which is more than a double-digit margin business for us. And those margin solutions, those solutions group includes, you know, the use of data, coupon processing, payroll in some cases. And those things really lock the Indies into us in a much bigger way. And what's been incredible is we've actually begun rolling out these solutions into some of our regional, conventional, and larger national customers. Thank you.

Your next question is from Edward Kelly with Wells Fargo. Your line is open.

Yeah. Hi, guys. Good morning. Steve, I was hoping, could you just talk about how you're calculating that 300 basis points inflation difference between resale and wholesale? And then I assume this is primarily in the chain and the independent customer base. So is that number even bigger for them? And what is that saying? Is that just all margin for that customer base?

Yeah, hey, Ed, it's Chris. That is because of the promotional dollar contraction that's happened at retail. So if you look at the quarter and you look at promotional dollars year over year, they're contracted. And it depends on what period you're talking about over that three-month quarter, but it can be anywhere from 5% to 10% less promotional dollars being spent at retail. And so that's why you're having such an inflation expansion at retail that's not happening at wholesale. There's also, by the way, skew contraction, which has something to do with that. Some retailers are claiming 5% to 10% less skews on the shelf, again, because of all the constraints on the supply chain. And what was the second question?

Well, but it's also a combination of the lack of promotional spend, and quite frankly, retailers are taking price. So those two things combined are about 300 basis points, a little more than 300 basis points.

So what's your thoughts on how that unwinds next year? Obviously, promotional cadence should at least normalize, but do you think there's some temptation for these guys to try to retain some of this business and maybe promote a bit more?

Well, look, this is my opinion only. I think that the largest CPG companies have scaled back so heavily on SKUs just to produce the items that the retailers and the consumers need. Well, when they bring them back... The only way the retailers are going to take them is with a very heavy promotional spend. But I don't think we're going to get there until, you know, let's say the fall of next year. The vaccines have been fully deployed. We're getting back into a more normal cadence now. of historical promotional spend on the part of the manufacturers to the retailers. And by the way, that's a tremendous opportunity for us because the processing of promotional activity is a pretty significant profit center for us.

Right, right. Okay, that makes sense. And then just a second question for you on freight. You know, we continue to hear sort of negative headlines around freight pressure. Now, I know you guys either own or contract the bulk of what you do, but Are you seeing any incremental pressure there at all, particularly as we think about driver pay or needing to go to a spot, for instance, for any of the higher demand that maybe you're seeing, and how does that play out from here?

Ed, this is Eric. I'll take that. Yes, we are continuing to see some pressure, primarily driven by some market factors, obviously around COVID and seasonal retail and heavy imports. But we are changing and working our model, going from intermodal to over the road. We're trying to push our carriers for more guaranteed road capacity and And we've actually gone from an annual bidding process to a quarterly so we can stay closer to the market and manage our way through this. But we're seeing the effects, and we're effectively managing them going forward.

And just to be clear, what Eric's talking is about the freight that affects our inbound, not our outbound. Our outbound is something that we manage ourselves predominantly with our own workforce and our own fleet. We do rely on third-party carriers that we contract with to bring a lot of the inventory into our DCs that are not shipped directly by the manufacturers.

Got it. All right, great. Thank you.

Your next question is from Jim Salera with North Coast Research. Your line is open.

Hi, guys. Thanks for taking my question. To drill down a little bit more on the e-commerce opportunity, can you just talk a little bit about what you guys think the penetration is right now and then over the next year or so? What do you think the opportunity is to expand that either with new opportunities or within existing customers that maybe don't use the full suite of products there?

Hey, Jim. It's Chris. Yeah, I mean... Look, COVID accelerated the e-com adoption with consumers. Pre-COVID, e-commerce, grocery purchases were around 3%. Today, it's estimated to be around 9% or 10%, which we always knew we would get there. We just thought it would happen three years from now. So the penetration across the entire industry is in that 9% to 10% range. We feel good about our position to grow with that trend for a couple reasons. One, we service the very large e-commerce providers. And we mentioned our e-commerce number up 92% with our top e-commerce customer up almost 300%. And number two through 10 are equally as large as far from a growth perspective. So we service those B2C businesses that are handling e-com and we feel really good about our ability to service them nationally and to service them with conventional, to service them with private label, and to service them with natural products because they're essentially trying to provide a grocery store online, and we don't think there's anybody positioned to do that better than Unified nationally. So that's number one. Number two is our own e-commerce business, albeit pretty small, through our honest green and easy options, are up almost 50%. And that's just an e-commerce solution that we have B2B to provide products to a secondary market. And then the third is we sell an e-commerce solution to our brick and mortar customers that want to adopt, click and collect, and deliver to home and participate in this marketplace. And, you know, we're going to continue to develop businesses to capture the e-commerce marketplace. But, you know, given the growth that we've seen, it's not unrealistic that our e-commerce business is going to double in in 2021.

Great. And so when you look at that doubling, how much of that do you think is incremental versus just in-store cannibalization and then, you know, be just saying, I'm going to show one of my groceries online rather than, you know, going to the store?

It's a good question. So the large portion of e-commerce growth is not brown boxes to doorsteps. It's happening through click and collect and deliver to homes. So we are selling groceries to retailers, and then they're handling the e-commerce from there. So we're benefiting because of the existing relationships. And then as far as the growth of the operators, I see a lot of it being incremental. I see the tradeoff coming from away from home dollars to these e-commerce solutions that are delivering to home. I think that's where the share of wallets are coming from more than just the center store, brick-and-mortar stores. Okay, thanks. Sure.

Our final question comes from Kelly Banyan with BMO Capital Market. Your line is open.

Hi, good morning. Thanks for taking our questions. Hi. Just wanted to just see if you can share any color on your EBITDA margin outlook for the rest of the year. Because I look at this quarter, I guess it's kind of in that 2.6, maybe 2.7% range if you take out the startup costs that you mentioned. I guess your guidance implies kind of that same range for the rest of the year. And I guess I would think that, you know, especially the back half would maybe be a Is there maybe any lumpiness that you can tell us about in terms of startup costs or other costs as we think about kind of that cadence of EBITDA margin for the rest of the year?

Hey, Kelly, this is John. Appreciate the question. As we think about the rest of the year, you're absolutely right. We had that $20 million or so in Q1, and as Eric mentioned, we're going to continue to recover that as we move throughout the year with our operating plan and the acceleration of some of that value that comes from the consolidation of those DCs. And I think what we're going to see is we're not expecting dramatic lumpiness. We know what's going to happen in Q3 and Q4, as Steve mentioned, as we lap just those incredible months, those incredible periods from the pantry stuffing last year. But as we think about FY21 standalone, the consistency, I think it's going to be somewhere in that band as we move throughout the rest of the year.

Got it. In terms of your comment about maybe reinvesting some of those savings to gain market share, what exactly does that mean? Does that mean building out new capacity or capabilities or being more aggressive in pricing? What does that mean in terms of gaining market share and reinvestment there?

And the answer is it's all of that and then some. So as we think about that reinvestment, it's going out and winning the business. It's driving the innovation. It's investing in automation. It's an amalgamation of all of the things you touched on as we continue to drive that value path forward. And it's going to be touching on all of those items.

But just to be clear, you know, the reason that we initiated ValuePath, is to drive improvements to our bottom line. And that's still the goal, even though it does give us the flexibility to invest and resource into our fastest growing and most efficient areas. Yep. Absolutely.

Okay, that's helpful. And then maybe just the last one for me. So you talked about the closing of the four DCs, really, when you kind of optimize that network. And I think you have somewhere just under 60 or so, or around 60 right now. Just curious if you can talk about the, you know, savings of the closure of those four DCs and just what you think the potential is over the next few years as you continue to optimize, either, you know, grow or, DCs or continue to consolidate?

I'll kick it off. Go ahead, John.

As we think about those DCs, certainly there's value attached to pulling out those fixed costs, and we've embedded the anticipated value in our 21 guidance. I think if we think about the future, Kelly, where we're going to go with the network optimization as well as some of the other aspects attached to value paths, I think that's embedded in the incremental annual $70 million to $100 million run rate that we want to achieve by the end of FY23.

Yeah, the other component I was going to add is there is a significant working capital improvement that comes with it because obviously we have less inventory. And we've been wildly successful at selling our dark or unused real estate. And so certainly if you look at what's transpired since we bought super value, we've monetized a lot of real estate that we no longer need or use, and that will continue to happen as we move forward.

Thank you.

And that working capital, just a real quick follow-up on that working capital, you can see that embedded in our Q1 numbers as we think about the improvements in our working capital in Q1 compared to last year and the impact on our free cash flows in Q1 that have improved by $80 million from Q1 last year to Q1 this year. And that's a reflection of a lot of different initiatives, but that includes the impact of the D.C. consolidation.

All right. Thanks, Megan. We appreciate your hosting the call. We're going to conclude at that point. If anybody has any follow-ups, feel free to give me a call later today.

Just one other comment, Steve, I'd like to make just in closing. I am so proud of this team and what they've accomplished in very difficult circumstances. Our primary focus has been and continues to be to keep our people safe. in the midst of the pandemic, not only from the virus perspective, but for physical safety as well. When we think about the quarter, growing 6%, but on an adjusted basis, probably more like 9%. We're exceeding the growth of the industry in a pretty significant way. We're leveraging the bottom line by growing more than 30% on the EBITDA. We continue to grow free cash. We've paid down over $460 million today. debt over the last 18 months or so we're meeting our internal objectives in almost every way and so the company is really really really doing well and I'm so proud of what we've accomplished and look forward to delivering a really strong year so thanks for your participation we appreciate it