United Natural Foods, Inc. (UNFI) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the UNFI Fiscal 2022 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Steve Bloomquist, Vice President of Investor Relations. Please, go ahead.

Good morning, everyone. Thank you for joining us on UNFI's first quarter fiscal 2022 earnings conference call. By now you should have received a copy of the earnings release issued this morning. The press release, webcast and a supplemental slide deck are available under the Investors section of the company's website at www.unfi.com under the Events tab. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; John Howard, our Chief Financial Officer; Chris Testa, President of UNFI; and Eric Dorne, our Chief Operating Officer. Sandy, Chris and John will provide a business update. After which, we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release. I'll now turn the call over to Sandy.

Thanks, Steve. Good morning, everyone, and thank you for joining us on our fiscal 2022 first quarter earnings call. As you saw in this morning's press release, we delivered first quarter results through a time of continued challenges across the industry, including ongoing supply chain difficulties, declining fill rates and rising inflation. UNFI is performing through this unpredictable environment by steadfastly focusing on what we need to do to make our customers successful, which will continue to be our core operating objective. Tomorrow, as I cross the four-month mark at UNFI, I continue to invest a significant amount of my time meeting with our customers, with the simple goal of learning as much as I can about their business, what differentiates their offering in the marketplace, what are their biggest opportunities and pain points and what can we do to add value to their operations. Making customers stronger is a core tenet of UNFI's mission statement, and I have a genuine passion for helping food retailers succeed. And I'm committed to doing everything possible to bring solutions that accomplish this. Our teams regularly meet with customers to introduce new items, to plan and coordinate promotions and to look forward to the next major selling event. Customers were encouraged to order early for this year's November, December holiday season and build their inventories wherever possible. We also make sure they know about the many services that UNFI offers to lower their cost structure, increase sales and simplify their operations. We've received positive feedback from our customers on the work that we did together around Thanksgiving. And now we're laser-focused on doing the best possible job to meet their needs as we move through the upcoming holidays. Further, I've initiated conversations with several of our larger suppliers, many of whom I've known for quite some time. Having been on the supplier side of the industry for 30 years, I know how important it is to partner across the supply chain to transparently share information and identify opportunities to increase distribution and maximize sales. UNFI's B2B2C business model puts us in a unique position to help suppliers understand and access our diverse and vibrant retail customers and their 30,000 retail locations. To more effectively bring together suppliers and customers, we're developing unique new programs that provide better and deeper insights into UNFI's diverse retailer base so that UNFI, our suppliers and our customers can collectively work together in partnership to create more and more value together. I've also enjoyed meeting many of our frontline sales and supply chain associates in sales meetings and in our distribution centers. This has given me the opportunity to hear firsthand what's on their minds, what issues are most important to them and how we can continue to increase engagement in meaningful ways. A common theme during these visits is how proud our associates are to be part of the important role that UNFI plays in keeping the food supply chain flowing. I also touched upon the UNFI's culture on our last call, which I now had more exposure to. We're proud of the work that we've done around ESG topics and our better-for-all mission of making the world a better place, not just for one, but for all. And it's core to who we are as a company. From our top priority of associate safety to an ongoing commitment towards diversity and inclusion to ambitious climate and environmental goals, to name just a few, UNFI's core value remains doing the right thing every day. We look forward to sharing our 2021 ESG report with all of you in early calendar 2022. Overall, we're encouraged with the first quarter and the start to fiscal 2022. Despite a difficult backdrop, which isn't likely to change in the short term, the momentum that I spoke about on the last call is continuing. And we expect to carry forward the momentum for the balance of the fiscal year. Our Fuel the Future strategy is customer-focused, growth-oriented and the blueprint for what will drive UNFI for the foreseeable future. Our energy is dedicated to every element of customer support to make sure we do the best job possible taking care of our customers in a complicated environment. Having said that, I also find it encouraging that our associates across the board are never satisfied. They're continually looking for how we can get better for our customers and our suppliers in the days, weeks and months ahead. Let me now turn the call over to our President, Chris Testa, for his comments on our performance. Chris?

Thanks, Sandy, and good morning, everyone. On today's call, I'll provide further color on key drivers behind UNFI's Q1 results and future growth, the trends that are impacting our industry and some insights on UNFI's operating environment. Let's start with our results for the quarter, where consolidated sales came in at $7 billion, a 4.7% increase over last year's Q1 and nearly a 4% sequential increase from the fourth quarter. It's worth noting that this is only the second time in the company's history that revenue totaled $7 billion in a single quarter. All three major sales channels experienced year-over-year growth, which was driven by two primary factors: new business wins and inflation. Modest market contraction and continued supply chain challenges were also partial offsets to these favorable sales drivers. Our strong supernatural sales were driven by winning new categories and SKUs with our largest customer, which reflects the strength of our relationship and the value we bring to their business. Independent sales channel growth was driven largely by new sales we realized from our Allentown, Pennsylvania facility, which began serving Independence in the New York Metro area in Q1. This new DC has been the largest distribution center startup in UNFI's history, and its run rate volume has quickly made it a top 15 warehouse in terms of revenue. As you'd anticipate, we've had some learnings along the way, but we are pleased with our progress and the greater opportunity to pursue enhanced customer service to existing customers and new customer growth in the New York metro market. Both in the supernatural and independent new business wins have been exceeding volume expectations, and we expect continued strong performance through the balance of this fiscal year. Our sales team also remains focused on cross-selling and we generated over $60 million of incremental cross-selling revenue in the quarter. The majority of the incremental cross-selling revenue occurred in our chains channel, where we have expanded the categories we sell to these large retailers by offering the benefits of consolidating their purchases with UNFI. This includes retailers who operate their own captive distribution networks. Our first quarter cross-selling gains kept us on-track to deliver the $1 billion cumulative cross-selling revenue target by the end of this fiscal year. Across all channels, our top 100 customers realized year-over-year revenue gains of 6.7%, driven by expanding the categories we service with our existing customer base and new business initiatives. Our growth platforms that we previously outlined in our Fuel the Future strategy also expanded in Q1. Our fresh sales team has been working closely with our existing customers to add meat, produce and bakery Deli items in the all-important perimeter of the store. In addition to the fresh categories, we're onboarding in supernatural, we'll now be distributing produce to another large national customer as a result of our expansive DC footprint and category expertise. And every week, we're gaining shelf space with fresh categories at a regional level. Our own brands business continues to roll out new items and push for additional points of distribution with the 30,000 customer outlets UNFI currently services. Our brand portfolio of over 5,000 SKUs allows us to pivot quickly and tap into emerging consumer trends. Accordingly, our revenue from natural and organic brands increased over 6% in the quarter as consumers seek products with these clean label attributes. We've also seen traction with a new Save Everyday pricing program for our value items that are positioned to be attractive, affordable alternatives to national brands. Finally, on the professional services side, we had a strong quarter from retailers seeking solutions to lower their operating costs or expand revenue beyond retail and groceries. We're seeing a 15% increase in the number of remodels being done by our customers compared to last year, as they look to reinvest in their businesses. Our Corn Cloud offering, which enables our customers to bring cryptocurrency to their shoppers, continues to gain traction. We've now placed nearly 500 machines in customer stores and are scheduled for another 200 in the coming months. Regarding inflation. We saw inflation impact our wholesale net sales by 2.5% to 3%, net of volume and mix changes. Due to the cost-plus nature of the majority of our pricing agreements, inflation is typically a positive driver of top line revenue and margin gains. For Q1, our growth can be looked at as roughly half coming from new business wins, net of expected market contraction, and half coming from inflation. At least for the next several months, we don't see inflation easing. Our procurement and merchandising teams are working closely with our suppliers to offset some of these price hikes with increased promotional activity to help our customers manage through this period. Many of the underlying drivers of this inflation, ranging from commodity shortages, to labor shortages, to limited transportation, are also adversely impacting UNFI fill rates. After many months of steady improvement, we, like the broader industry, have seen supplier inbound fill rates deteriorate. Simply put, lower fill rates adversely impact our customers, who may not receive everything they order and rely on UNFI to carry a broad assortment of SKUs that go beyond just the top sellers. At the same time, limited product availability typically reduces vendor new item launches and promotional spend, as suppliers aren't likely to promote products where supply levels are scarce. To do the best job we can for our customers, we continue to diligently work with our suppliers to find and source as much product as possible and to recommend alternative solutions, so our customers can present a complete offering on their shelves. These alternatives include actions like substituting owned brands where national brand availability is low, updating plan agreements to focus on items with higher anticipated in-stock positions and daily contact with suppliers in an effort to make sure UNFI receives its fair share of product and has the critical insight of what's to come, so we can plan accordingly. For the most part, we were successful in helping our customers navigate through fill rate challenges during Thanksgiving, and we are now focused on the December holiday season. We believe we are well positioned from an inventory perspective and have been planning with our customers to secure holiday focus items well in advance. Shifting to operations. I'm pleased to report that our Centralia facility, that experienced a temporary voluntary shutdown in August due to late summer rise in COVID cases, is fully operational. We incurred some higher operational costs during the recovery period, as we did everything possible to leverage the scale of our network to continue to service impact to customers, including temporarily shifting volume to neighboring DCs. Broadly speaking, UNFI is not immune to the challenges facing today's labor market, but we are actively managing our way through these difficult times with innovative employee programs, designed to attract and retain frontline workers. We have made significant investments in wages and are focusing our recruiting efforts on attracting associates into our DCs. Investments in programs like Flex Shift and Early Access, which is a program that allows DC employees to receive pay earlier than traditional weekly paychecks, are helping us attract and retain more employees. These efforts are paying off and have led to a 30% reduction in open headcount in our warehouse operations compared to year-end. We're still not where we need to be, but these programs and others are designed to address worker concerns and lifestyle needs. They are also expected to contribute to long-lasting associate retainment and consistent performance for our customers. Finally, we're encouraged by the performance of our retail stores, as sales were down only slightly against a very strong comparison in fiscal 2021's first quarter when sales increased by more than 15%. On a two-year stack basis, retail sales increased 14.7%. Operationally, we introduced enhancements to our e-commerce and delivery platforms at Cub to better meet the needs of our customers. Online orders at Cub now allow customers to use their My Cub Rewards card to gain access to exclusive promotions and digital coupons, and all orders are shopped locally by a dedicated team of Cub associates. This is another great example of adapting our business model to the changing needs of today's consumer so we can serve them in the best way possible. Although, we expect supply chain challenges to continue, we also believe that strong food and home trends and inflation will help offset some of these headwinds. Against that backdrop, as Sandy said, our energy is focused on making sure we are fully resourced towards customer support as we can be. While there are challenges, we're focused on implementing solutions to minimize supply chain disruptions and delivering for our customers. We also continue to build our pipeline, with customers looking to consolidate purchases with UNFI or potential new customers looking to leverage our scale to provide consistent service in these volatile times. Our new customer pipeline is more robust than any time in my 12 years here at UNFI, and we're optimistic about our prospects. We are pleased with our performance this quarter and optimistic about the balance of fiscal 2022. The environment has been challenging and will likely remain that way, at least in the near-term, but we're confident in our ability to make our customers stronger through all that UNFI can offer them. Now let me 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 comments on our fiscal 2022 outlook. As Sandy and Chris both said, we're encouraged by our operating performance this quarter and the start to fiscal 2022. Sales for the first quarter totaled $7 billion, a 4.7% increase compared to last year's Q1. Adjusted EBITDA increased nearly 19% from $159 million to $189 million. First quarter gross margin rate increased 38 basis points compared to last year's first quarter. Our wholesale margin rate was impacted by this quarter's elevated inflation as well as the continued benefits from our Value Path initiatives. First quarter operating expense rate declined 20 basis points compared to last year, driven by the favorable leverage from higher sales and lower year-over-year costs when comparing last year's cost related to the consolidation in the Pacific Northwest, against this year's start-up costs for our DC, supporting the New York metro area. These were partially offset by higher operating costs in our supply chain, including transportation costs, part of which came in support of our customers during the temporary and voluntary closure of our Centralia, Washington distribution center, the first week of the quarter, as well as investments in adding and retaining labor to better service our customers. As we've stated before, one of our goals is to grow adjusted EBITDA faster than sales. And this quarter's 19% growth in adjusted EBITDA on a 4.7% increase in sales exemplified just that and translated to a 32 basis point year-over-year expansion in our adjusted EBITDA margin. Our GAAP earnings per share totaled $1.25, which included $0.28 in net favorable items. This includes our GAAP tax rate, which benefited from employee stock award vestings as well as the release of various tax reserves. Our adjusted EPS for the quarter totaled $0.97 per share compared to $0.51 last year, an increase of 90%, further demonstrating our P&L leverage. Turning to the balance sheet. We finished the quarter with total outstanding net debt of $2.48 billion, a $194 million increase compared to year-end. This reflects our customary first quarter investment in working capital as we add inventory going into the holiday selling season in support of our customers, as well as the addition of inventory into our newest distribution center. The expected seasonal increase in working capital should convert to a source of cash in the second quarter. As expected, our net debt-to-adjusted EBITDA leverage ratio increased slightly compared to the end of fiscal 2021 to 3.2x, as the higher trailing 12-month adjusted EBITDA was more than offset by higher net debt balance driven by seasonal working capital increases. We still expect full year adjusted EBITDA growth and a lower year-over-year debt level to push our adjusted EBITDA leverage ratio below 3x by year-end. Late in the quarter, both Moody's and S&P upgraded our corporate family credit ratings, as well as the ratings on our secured term loan and unsecured bonds. We subsequently repriced our term loan at a rate of LIBOR plus 3.25%, which is 25 basis points lower than the previous rate. Simultaneously with the repricing, we drew $150 million under our ABL facility and made a prepayment on the term loan, reducing its outstanding balance from $994 million at quarter end to $844 million. These two actions combined are expected to save UNFI nearly $6 million in annual cash interest expense. Let's turn to our outlook for fiscal 2022. We are reaffirming our full year outlook for net sales, which we continue to expect to be in the range of $27.8 billion to $28.3 billion. Our outlook for adjusted EBITDA remains unchanged with a range of $760 million to $790 million. And finally, our outlook for adjusted EPS is also unchanged and expected to finish between $3.90 and $4.20 per share. We now believe that inflation will be above the 1% level we provided on our last call, but that more prolonged challenges across the supply chain will offset potential sales impacts. Our base measure of inflation is the increase to our landed cost of goods, which was approximately 4% for the quarter. However, we believe the inflation impact to our net sales, as Chris discussed, was approximately 2.5% to 3% when we factor in changes in consumer buying habits, including mix shifts in certain fresh categories. Although our sales were impacted by inflation, there are offsets in our P&L that include a higher LIFO charge and an increase in certain operating expenses. Our outlook for debt reduction remains unchanged at $100 million to $150 million, as does our expectation for capital expenditures of approximately $300 million, which as a reminder, excludes the amount for the Riverside purchase and sale leaseback transaction, which we expect to occur in the second half of the fiscal year. As you heard, today's operating backdrop remains challenging, yet we remain confident in our ability to serve our customers and deliver on our full year guidance. Before we open up the call for questions, let me reiterate our commitment to increasing shareholder value and delivering the long-term targets presented at June's Investor Day. Our business model and mission are built to succeed in normal times. as well as those that we've characterized as more challenging. As Sandy stated earlier, our focus on helping our customers succeed remains at the center of everything we do and who we are as a company and we appreciate your continued support. Operator, we're now ready to take questions.

[Operator Instructions] Your first question is from the line of John Heinbockel from Guggenheim.

Thank you, guys. Let me start with, do you have any way of telling relative allocation and fill rates versus various competitors and retailers, right? Because you would think you should have a better allocation than smaller distributors and smaller retailers. Do you have a sense of that? And then can that drive new customer acquisition right in the short run here, because you have product and others don't, or is that too optimistic?

Yes. Hey, John, it's Chris. So it's impossible for us to tell what's going on with CPG allocation of products. What we do is we work with them every day to make sure that we're securing our fair share of supply. And given our scale and given that we're the top one, two, three customer for many of the CPGs, we get more product, right, on a straight allocation basis. So that is what the CPGs are telling us. As far as acquisition of new customers, that is an attractive selling point, in addition to since COVID hit almost 20 months ago, it stressed the supply chain. And what we have found is that, our customers are looking for alternatives in this stressed environment. And what we found is UNFI is an attractive alternative, not only because of the product availability that you asked about, but also just the consistency and the size and the scale of the network. So that’s been helpful for us to attract new customers.

And if you think about the pipeline you referenced, right? So it's the biggest you've had. I don't know if that's a number of folks you're having conversations with or volume that they represent. But if you think about the composition of that, so maybe speak to that, but also the composition, large versus small, conventional versus more specialty or even maybe non-food retail, what does the composition look like?

Sure. So first, to answer your question, it's the volume they represent. So that's how we're measuring that. Look, we are tracking hundreds of opportunities. And if you think about what UNFI sells, with over 300 SKUs with a deep fresh portfolio, with the deep conventional portfolio, with the deep natural portfolio, brand services, there is really no single competitor out there. So the customers -- the potential customers in the pipeline are really ranged from the large national customers. They range from customers with captive distribution, looking for alternatives. There are also a lot in hundreds of local regional customers as well. So it really is the range, John. And we still look at that $38 billion opportunity with existing customers as white space, as well as the $78 billion opportunity with new customers. So it's -- the pipeline represents a fair amount of both.

And one last real quick one. The Key Food will get to the $1 billion run rate win. And I guess in the first quarter, what might Key Food have been running at? $100 million plus or something like that?

So we don't disclose how much we do with each customer, but we won't realize the full volume of the Key Food until fiscal 2023. It has ramped up throughout the year, but we won't get the full volume until 12 months next year.

Okay. Thank you.

Sure.

Your next question is from the line of Scott Mushkin with R5 Capital.

Hey, guys. Thanks for taking my call. Great work given the environment. So I guess that's the first thing I wanted to ask about is, obviously, it's really hard right now operating. We saw in the Campbell's call, and they were talking about how difficult to run some of those plants. So I was wondering if you guys could talk about what your expectation is. I know there's a lot of pressure points in the quarter you just reported. How are you thinking about the next couple of quarters as far as availability of labor, just the challenge of running your network? Is it going to lessen or is it going to remain the same?

Yes, Scott, this is Sandy. I think our outlook is essentially realistic. It's very hard to predict what's around the next corner. As Chris said in his remarks, we've made some improvements in terms of our net openings in our fulfillment system, and we're doing that by intensifying our recruiting, but also working on simplifying the associate experience as well. And we talk to suppliers, they continue to believe that they're going to have constraints around their supply environment. And so our general expectation is that we're going to have to stay agile. We're going to have to stay customer-focused and that the environment will continue to be difficult.

And staffing levels are okay right now. I'm just looking at the cold cases are going through the roof. I mean are you able to staff?

Eric, why don't you take that?

Yes, Scott, we are and we're actively enforcing our protocols around COVID, whether it's mask wearing, social distancing. And we continue -- we've offered incentives for vaccinations. We're encouraging and educating our staff around the benefits of vaccinations. And as Chris referenced, we closed our headcount gap by 30%, and we're continuing to work on that. And associate-friendly programs like Flex Shift is really starting to take hold. We're seeing almost 4% of our total hours with those associates, and it's growing every week. So we are focused on it. We're going to stay focused on it and work our way through it.

Then my follow-up is much more of a longer-term question. I mean, I know the thought process is we're going to do more consolidation of the distribution networks. I don't think you mentioned it, maybe I missed it, but I was wondering where we are in that process? Like how are you guys are thinking maybe out the next couple of years on that item?

Yes. Scott, I'll take this again. It's Eric. We are actively looking at that, but we are focused on meeting our capacity needs for the here and now. So we have looked at expansions that we have underway, obviously, with Allentown coming online and adding 1.3 million square feet to service the New York market, and we continue to invest -- strategically invest in automation. We've got two new automated systems on the West Coast that we've talked about in Richfield and Riverside. We're expanding our Carlyle, PA automation system, and we're looking at other strategic expansions around the network. So I think this is very much a dynamic situation based on our growth and meeting the pipeline that Chris referenced, making sure that we can continue to stay flexible and agile as the business comes on.

That’s perfect, guys. Thanks very much. Appreciate it.

Your next question is from William Reuter with Bank of America.

Good morning. On the Allentown distribution center, have you talked about how much of that capacity is going to be used by Key Foods? And you've been hoping to get additional customers in the New York metro area. How has that process gone so far?

Yes. So, we are focused on that startup. Any start-up that you have for any warehouse, you want to build gradually and work out the kinks. As I said, we've had some expected challenges there, but we're really proud of the progress. And we're just focused on servicing the business we have there. And we will – we do plan to continue to add to serve that very attractive in dense marketplace in the near term.

Okay. And then in the prepared remarks, you talked about limited product availability and how that's reducing promotions. Can you talk a little bit about how the balance of this -- I guess, how this is negatively impacting margins versus the positive of inflation?

Yes. So, I'll say this is, first off, the fill rate, we're still growing over $300 million in the quarter year-over-year and the fill rate was only up slightly. So, there's plenty of product and supply out there. It just might not have the SKUs and everything that our customers want because of the supply restriction. So, we're selling a lot of products. We're doing everything we can to keep our customer shelves filled. Regarding promo, we are seeing it come back as far as activity. Our merchandising team is working closely with suppliers to make sure that we're getting the best promos for our customers, doing everything to mitigate price increases. And we did see a year-over-year increase in promo activity. The fill rate and less new SKUs is a headwind. But overall, we're actually – our promo expectations were in line with what we thought was going to happen for the quarter.

Okay. And then lastly, if I could just sneak one in. With regard to the one facility that was shut down in August, it's now fully operational. Are there any facilities that are getting levels of COVID transmission that you're concerned you may have to shut them down again?

Bill, this is Eric. No, we have not seen that. And again, I'd reinforce the protocols that we have in place. We've been maintaining mask wearing in all facilities, social distancing. We continue to offer incentives for vaccinations and encourage our associates to get vaccinated. So, we're monitoring. We have a really robust program in place to monitor and we're continuing to just see the normal trends across the country. So, nothing alarming that we would communicate.

Great. Thanks a lot and good luck.

Next question is from Bill Kirk with MKM Partners.

Good morning, everyone. More so than normal, it sounds like customers ordered early for the holidays and maybe expanded their inventories. So, I guess how big of a benefit was that, or how abnormal was that inventory load relative to other like periods? And does it reverse out here in later in 2Q? Do their inventories come back down at your customers?

Bill, this is Chris. I think you're talking about for the November and Thanksgiving season and the December season. So, this is always – this quarter, Q2 that we're in right now, always represents our highest inventory build because of the inventory – sorry, because of the holidays. So, it's in line with what we've seen for prior years. Nothing dramatically lower, nothing dramatically bigger. As far as the order early, I mean, we started talking about Thanksgiving in July. And that was just to work really closely with our customers and our suppliers to make sure we had those high-demand items on their shelves. So we feel pretty good about our performance in Thanksgiving. There's always opportunities to do better and we're focused on the December holidays right now.

And kind of as a follow-up. Did you see retailers who normally rely on their own captive distribution? Did you see them lean on your services more in the period? And if they were, because maybe they were having some of their own supply chain restrictions, but if they leaned on you more, do they stay, or do they go back to their normal sourcing systems?

Bill, this is Sandy. I'm going to make a strategic point, and then I'll turn it over to Chris to answer your question. I think one of the things we've been paying attention to is making sure that we take care of our customers that exist while we think about growing new customers. As Chris said, the pipeline is very rich and robust of all types of customers, and you described that. But what matters to us every day is that the customers who trusted us before will get the best possible service. And then we add customers, as we have the capability and capacity to do it. And so, Chris, you can get into the detail. But I think the point I want to reinforce is, how loyal we are to the customers who've been loyal to us.

Yes. Just to add to what Sandy said, we have not seen a retraction from that new business gains from captive customers. That is actually, if anything, it's gone the opposite direction.

Okay. Thank you, everyone.

The next question is from Eric Larson with Seaport Research.

Yes. Thanks, everyone. Thanks for the question. So I would like to dig a little bit more, maybe just a question for Chris, into the promotional environment, obviously, the manufacturers are taking prices up aggressively, looks like they might even need another round due to higher costs. So traditionally, that's been a good profit center for you, as they increase their promotional discount rates during promotional periods. So has that kicked in fully yet here, Chris, or do you still expect increased benefits going forward on that?

So, I will say that it has not kicked in fully. And although, we are getting those promotions, to your point, that behavior is staying consistent. What's preventing it from fully kicking in is the product supply, right? So, I mean, if you think about promotions, promotions are based on transactions and number of transactions. And when you have less SKUs, when you're on allocation, when you're not launching a new product, those transaction levels are lower. The promotions are there, the programs are there, but I would -- to your question directly about fully kicking in, no, I don't think it has. I think there's been some headwinds because of the product availability issues that we're having.

Okay. Thanks. And a little bit more detail kind of on fill rates. Obviously, product availability as part of it has -- any other part of the supply chain been an issue either? I think you mentioned a little bit about transportation. But is it like 90% just product availability on fill rates, or are there other constraints in your supply chain that are restricting that fill rate completion?

No. Our fill rate is a reflection of our inbound fill rate from our suppliers. And there's no surprises there. It is labor, it's availability, transportation, it's raw materials, it's all the macro environment factors that you've been hearing about and actually we spoke at in the last call. So there's really nothing unique to our environment. Our supply chain that's hindering fill rate, it's really about inbound.

Got it. Okay. And then my final question, I think, is for John. John, I think you talked a little bit about this at year-end. Your $300 million of CapEx spending, I think if I recall correctly that, that is still a little bit of an elevated spending rate for this upcoming year. Is that the case, or is $300 million more of kind of what we should expect going forward?

Yes. What we've said -- I appreciate the question, Eric. And what we've talked about on that is being roughly around that 1% of sales, and we put in for our 2022 guidance the $300 million. And just as a reminder, as I said in my script, that's excluding the financial reporting aspect related to how we're going to monetize Riverside, because it will give you the impression that's driving that up much higher. But that $300 million, we're still targeting that $300 million of cash CapEx for FY 2022. We haven't brought that down yet. We're seeing some similar supply chain challenges on some of the projects. But we're continuing to keep that $300 million out there and doing everything we can to make those investments line up with our customer focus.

Okay. Thank you, everyone.

[Operator Instructions] Our next question is from the line of Greg Badishkanian with Wolfe Research.

Good morning. This is Spencer Hanus on for Greg. Can you talk about your expectations for inflation for the full year? Should we expect the 1Q run rate of 2.5% to 3% to be a good proxy for the full year? And then how much of a sales headwind were the lower fill rates in the quarter? And just how does that flow into the full year guidance that you should see a really significant benefit from the higher run rate inflation?

So, Spencer, I’ll take the first part of that as it relates to the inflation. As I mentioned, we did raise our view on that from the 100 bps. And that 250 to 300 bps is how we're thinking about certainly in the near-term. But as I mentioned, there's also some of this corresponding offsets related to the supply chain and other challenges that we're seeing that will keep that sales in line with where we provided our original guidance.

And then just as far as the fill rate impact on sales, so I'll say this, look, fill rate was up slightly year-over-year, and sales were up over 4.5%. So we – we have products, and that we work with our customers to sell when we don't have the products, exact products they want, right? So namely, replacing in-stock SKUs from our brand portfolio, which typically has a 5% to 10% more favorable fill rate than national brands. We look for alternatives for our products that are going to be in stock longer term. So we're generating the sales for those out-of-stock and constricted items. The exact headwinds is -- I can't put a number on that. I don't think anybody can because we work so hard with our customers to control the controllables, right, to find the products, to keep their sales full and make sure that we're getting the revenue from whatever we have in our warehouses.

Got it. That's helpful. And then just a follow-up on the DC consolidation question. Do you still think that the plan laid out by Steve make strategic sense? And how long would you expect the consolidation plans to be pushed out? Is it 6 months, 12 months, 18 months? Any color there would be helpful.

I don't think, Spencer, we would put a time frame on it as we're trying to stay agile here and leverage our capacity to service the customers that we have and that we're acquiring. So, I think that this is very much a dynamic situation, and we're going to continue to leverage our building. And as we add new customers that profile will really change. So, I think more to come on that as we move forward.

Thank you.

The next question is from the line of Peter Saleh with BTIG.

Great. Thanks for taking the question. Congrats on the quarter. I just wanted to come back to the conversation around labor and the changes you guys have made to the employee, I guess, compensation. I think you guys mentioned there was a 30% reduction in – I think it's the GAAP versus headcount gap that you guys are expecting. Maybe can you elaborate there? And then just – have you seen any changes in your turnover rates? Have those come down as you've made changes to the compensation structure? Thank you.

Yes. Peter, this is Eric. The 30% that we referenced is the gap of associates we need to service our business versus what we had. So, we closed that gap by 30% by doing a variety of things, all of which focused on the associate experience, the lifestyle inside the buildings. We're striving after work-life balance, reducing over time, increasing flexibility. So, it's really not just about wages that we've adjusted. We're going after more than that. And other things like early wage access is an innovative program that we've put in throughout the network. We revised our success share plan for inside the DC. And we've also modified our health benefit options to all associates. So, this is more than just wages and we're optimistic on what we're seeing. And again, this is a focus for us moving forward through this challenging time.

Great. Thank you for that. And then just lastly on the leverage. I know it ticked up a little bit here. Can we expect – or what's the timing you guys anticipate to get to call that 2.5x leverage? Can we anticipate that you might get there by the end of FY 2022, or is this more of a sometime in '23 target?

Yes. So what we've put out there, Peter, is we talked about getting to the 2 to 2.5 range as part of our Investor Day, which would be the end of FY 2024 for us. And certainly, we'll be doing it on a gradual basis. We're forecasting being in below 3x at the end of this fiscal year. And we're anticipating, at this point, continuing that trend to get to that 2 to 2.5 range by the end of FY 2024.

Thank you very much.

Appreciate the question.

I think we've answered all the questions in the queue. So -- I guess we had one more come in. Why don't you bring that in for us?

And the next question is from Edward Kelly with Wells Fargo.

Yes, hi guys. Good morning. Could you just talk a little bit about the rate of labor inflation that you are currently seeing and expect going forward, both from like a driver perspective and warehouse perspective? Foodservice has been ramping, hiring. Wondering what's been happening with sort of market pressure there and your expectations around that?

Yes. This is Eric. I'm not sure I'd put a number to it. But as Chris referenced in his script, we've made market adjustments, and we'll continue to make market adjustments as things continue to evolve here. And as far as drivers, specifically, we've put different programs in place for our drivers, whether they're premiums or sign-on bonuses. And we feel very confident with our associate profile here on drivers that we offer a different experience than other players in the market, and we're going continue to leverage that as we move forward.

Ed, this is Sandy. I think what I'd add to that is that market competitive is the key, and then where we're trying to differentiate is through the different lifestyle and employee-friendly programs. There's a whole lot of effort going on across Eric's organization to get closer to our team and to make UNFI a better place to work. And through that, to be able to take market competitive investments, which is all about customer capability, but leverage it to get the most value possible out of every dollar spent.

Okay. And then can you just -- I don't know, is there any update on retail and the strategic outlook for that business? And how it fits within UNFI over the long term?

Yes. No, happy to answer that. This is John. Like we talked about at Investor Day, we are going to continue to optimize retail. We've got an outstanding leadership team that is in place there, spearheaded by Mike Stigers. And he -- that function that, that segment has been performing outstanding, both the Cub banner in the Minneapolis market as well as the Shoppers banners on the East Coast. And our approach to that is that, can continue to optimize, which means we're going to run, we're going to invest, we're going to grow, and we're going to do all the things that you would expect us to do with an asset that we own. And at the same time, what that means is, if an opportunity presents itself to monetize it at an appropriate value, we're happy to consider it. But under the leadership that we have and the results that they're producing, we're going to continue to optimize and grow it.

Yes. And it's Sandy, again. What I'd also add is it's a great place for us to learn. Our retail leadership team gives us really direct feedback about what they need and what programs, services, brands and other things we can do to serve them better. And that visibility is very helpful to us.

Okay. And then, just lastly for you. Related to the change, you mentioned change with captive distribution and making inroads there. Can you just provide a bit more color on that? How much of that is just people are looking for product right now versus you building a more sustained relationship in that area?

Ed, it's Chris. I think it's more than just product supply, I think, there's retailers with captive distribution that are looking long term and considering their own capital investment versus leveraging UNFI's network. And given the scale of our network, we can provide an attractive option to them rather than investing on their own. And I think generally, that's where it's coming from.

And I think also, this is Sandy. Serving captive retailer is not new. I mean, it could be category-specific natural products, different kinds of items that they want to have, innovation, et cetera. And so it's a growing part of the business, but it's not a new part of the business.

Great. Thank you.

Okay. Thank you, guys, for joining us today and for joining us this morning. I hope you've heard and take away from today's call that UNFI is growing and improving within a challenging and unpredictable environment by steadfastly focusing on what we need to do to make our customers successful. As I said on the last call, our job is to help our customers and suppliers compete, grow, serve their customers and add value to their businesses across our network. Our success depends on repeating this day in and day out, and I'm pleased with how well we're doing, while being challenged by significant opportunities for ongoing improvement. For our customers, we thank you for your continued partnership and the business we do together. And for our suppliers and UNFI associates listening today, our thanks to each of you for everything that you do for our business, our customers, our communities and each other. And for our shareholders, thank you for the trust you put in us through your continued investment in UNFI. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.