United Pure Meals (UNFI) Q3 2022 Earnings Name Transcript

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United Pure Meals (UNFI -3.21%)
Q3 2022 Earnings Name
Jun 07, 2022, 8:30 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Members

Ready Remarks:

Operator

Good morning. My title is Chris, and I will be your convention operator right now. Right now, I would wish to welcome everybody to the UNFI fiscal 2022 third quarter earnings name. [Operator instructions] Steve Bloomquist, VP of investor relations, you could start.

Steve BloomquistVice President, Investor Relations

Good morning, everybody. Thanks for becoming a member of us in UNFI’s third quarter fiscal 2022 earnings convention name. By now, you must have obtained a duplicate of the earnings launch issued this morning. The press launch and a supplemental slide deck can be found below the buyers part of the corporate’s web site at www.unfi.com.

Becoming a member of me for right now’s name are Sandy Douglas, our chief govt officer; John Howard, our chief monetary officer; Chris Testa, president of UNFI; and Eric Dorne, our chief working officer. Sandy, Chris, and John will present a enterprise replace. After which, we’ll take your questions. Earlier than we start, I would wish to remind everybody that feedback made by administration throughout right now’s name could comprise forward-looking statements.

These forward-looking statements embody plans, expectations, estimates, and projections which may contain vital dangers and uncertainties. These dangers are mentioned within the firm’s earnings launch and SEC filings. Precise outcomes could differ materially from the outcomes mentioned in these forward-looking statements. And lastly, I would wish to level out that in right now’s name, administration will seek advice from sure non-GAAP monetary measures.

Definitions and reconciliations to essentially the most comparable GAAP monetary measures are included in our press launch. I will now flip the decision over to Sandy.

Sandy DouglasChief Govt Officer

Thanks, Steve, and good morning, everybody. We respect everybody becoming a member of us for right now’s name. Our third quarter outcomes once more validate our group’s skill to efficiently carry out within the face of a difficult and unpredictable atmosphere, with capabilities that we imagine will proceed to create worth for our varied stakeholders. Throughout the quarter, we proceed to navigate industrywide challenges, together with inflation, the place the most recent food-at-home studying was 10.8% larger than final 12 months, record-high gasoline prices, low however bettering fill charges, and difficult labor shortages.

All of which proceed to affect our enterprise and our prospects. Whereas we anticipate many of those points to persist by way of the fiscal 12 months, we’re inspired by the enhancements we’re starting to see. Provide ranges for a lot of merchandise are growing, which led to our ending the quarter with the second highest fill fee month of the fiscal 12 months. As well as, we proceed to make strides in stabilizing our workforce even in opposition to a constrained labor backdrop.

These enhancements are largely as a result of actions that we’re taking to proactively safe product on behalf of our prospects and bettering the affiliate expertise, most of the associate-friendly packages we have spoken about earlier than, together with scheduling flexibility and accelerated pay choices. They usually’re now positively affecting our driver emptiness fee, which decreased to 9% at quarter’s finish. As well as, we proceed to make progress in decreasing our DC emptiness fee, which improved to lower than 7% on the finish of the third quarter. Whereas shopper mobility has undoubtedly improved from the early days of the pandemic, the very fact is that extra folks proceed to do business from home and reap the benefits of extra versatile methods of working.

Coupled with tighter administration of family budgets within the face of excessive ranges of meals inflation, we anticipate food-at-home gross sales to stay robust. Our various buyer base, paired with our expansive portfolio, positions us favorably to serve prospects and shoppers as they react to inflationary pressures and the macroeconomic tendencies. Whether or not shoppers keep upstream with extra premium choices, or downstream within the worth section in a downturn, we’re there to serve each markets. Briefly, now we have the breadth and agility to win and to assist our prospects achieve quite a lot of macro environments, together with one with shifting buyer preferences.

We’re happy that our efficiency displays continued gross sales positive aspects from each current and new prospects, and permits us to extend our full 12 months gross sales and earnings steerage below what we imagine to be a extra clear and significant definition of adjusted EBITDA and adjusted EPS, which John will handle shortly. Our Gasoline the Future technique is working and is setting us up for long-term sustainable development and positioning us to develop our share of $140 billion addressable market that we outlined final summer time. As we enhance our execution and transfer additional alongside the spectrum from distributor to value-added companion for our prospects and suppliers, we proceed to see the advantages of a number of clear differentiators that we’re working to construct upon: our core customer support capabilities and the over 30,000 impartial, progressive, and segmented retail meals places we service; the dimensions and functionality of our North American provide chain; the breadth of our product and providers assortment; and eventually, our proficient, skilled and extremely devoted associates. By leveraging these aggressive benefits to raised serve our prospects and suppliers, we see vital alternative to speed up development, increase margins, and create incremental worth for shareholders.

To that finish, we have recognized 4 focus areas to information our execution of the Gasoline the Future technique that we imagine will allow us to efficiently ship the three-year fiscal 12 months ’24 monetary targets that we outlined ultimately summer time’s investor day. These 4 priorities are: one, to ship vital worth to our prospects; second, to enhance the best way we companion with our suppliers; third, to offer our associates with unmatched profession alternatives; and fourth, to help our communities and the planet by way of our wide-ranging and bold ESG initiatives. To ship extra worth to our prospects, we’re centered on bettering all elements of our gross sales and provide chain execution to offer our prospects the services and products they want once they want them in order that they will compete and win within the market. We’re implementing a variety of enchancment initiatives to reinforce our buyer worth proposition by making it simpler to do enterprise with us.

A cornerstone of this effort is our One UNFI initiative, which goals to create a single level of contact for our prospects, one ordering system for all purchases, a single supply of all merchandise on one truck, and a single bill. As well as, we’re bringing prospects new and progressive concepts and options that go properly past promoting them conventional grocery merchandise. Bringing extra worth to new and current prospects will drive future success with cross-selling and assist us convert our sturdy new enterprise pipeline into precise gross sales. We have spoken earlier than about the important thing development platforms that sit on the coronary heart of our skill to reinforce our buyer worth proposition, contemporary, owned model, {and professional} providers.

We’re actively investing in folks, know-how, and infrastructure to ship brisker produce and continued model innovation at a time when prospects and consumers are more and more seeing the worth in these merchandise and in providers starting from information analytics to income development administration that place us as extra of a marketing consultant to our prospects. These platforms are a crucial element of our plan to drive continued earnings enchancment and are anticipated to ship 25% of UNFI’s adjusted EBITDA by the tip of fiscal 2024. Chris will converse to those platforms in additional element shortly. To enhance the worth we ship to suppliers, now we have an actual alternative to offer value-added insights to strengthen their segmented advertising and marketing efforts by serving to our prospects turn out to be extra seen to our suppliers.

One instance of that is the high-volume ethnic shops we service that will not report scanner info to conventional information analytic corporations. The broad insights we will present on an aggregated foundation make UNFI a extra useful companion to the provider neighborhood, as corporations are in a position to develop incremental packages to construct their manufacturers and, within the course of, convey extra funding and development to our whole ecosystem. Our clear focus is to be the perfect companion we might be to our prospects and our suppliers by way of higher execution and increasing our capabilities. Our dedication to offering unmatched alternatives for our associates stems from the popularity that they’re what really units us aside.

Our associates are the important thing to our tradition of innovation, our skill to execute, and our skill to ship on our mission of serving to make our prospects and suppliers stronger, our provide chain higher, and our meals options extra impressed. As a testomony to how instrumental our associates are to our enterprise, lots of our prospects that I go to with speak about our folks as our best energy. And their dedication is clear in every part they do. We’re due to this fact intensely centered on our folks plan, which has been designed to make sure that UNFI is a most popular employer that gives distinctive alternatives for profession development.

On the identical time, our folks plan goals to equip workers with the instruments that they should assist the corporate obtain its targets. And at last, our efforts to help our communities and the planet builds on our long-standing dedication to doing what’s proper and the popularity that higher meals can solely come from a wholesome planet and that clear air and water are essential to a secure and nutritious meals provide. We view this as a crucial alternative to innovate and leverage our scale to handle the affect that our firm and our companions have on our folks, our communities, and our world. Below our Higher for All plan, now we have bold targets to cut back waste, decrease greenhouse fuel emissions, and advance sustainable agriculture to make sure an enduring provide of high-quality, healthful, and nutritious meals.

This plan helps us keep laser-focused on the problems the place we will transfer the needle essentially the most over the following decade. We’re happy that UNFI is the primary public meals distributor and wholesaler to have its local weather targets, which have been introduced final month, validated by the Science Based mostly Targets initiative. I’m pleased with the numerous initiatives we’re endeavor and urge you to learn our 2021 ESG report that we issued this spring. Because the report outlines, we at the moment are in our second 12 months of integrating each SASB and TCFD beneficial disclosures, and we’re persevering with to evolve and enhance our reporting.

For instance, we reported that in fiscal ’21, we noticed a 2% enchancment in gasoline effectivity, which was largely the results of working with our prospects to consolidate orders so we might additional optimize deliveries and cut back gasoline consumption and proceed to make further progress in fiscal 2022. Earlier than I flip it over to Chris, let me underscore a typical thread throughout my feedback, which is to simplify and talk the working focus underpinning our Gasoline the Future technique. As I discussed earlier, now we have a really massive and enticing addressable market alternative. Our technique to seize the chance is easy.

We’re centered on getting higher at what we do. We’re working towards enhancing our capabilities and bettering our end-to-end execution for the advantage of our prospects, suppliers, associates, and, by doing so, importantly, our shareholders. We will likely be taking a really disciplined strategy to worth creation by way of specializing in these strategic areas that can drive financial revenue as a substitute of development merely for development sake. We imagine this can contribute most to shareholder worth creation.

And as we get higher, we anticipate this to create a flywheel impact wherein the enterprise will develop, will acquire market share, and, in flip, improve shareholder worth. In abstract, as happy as I’m with the progress we’re making and our confidence in assembly or surpassing our three fiscal 2024 monetary KPIs for development in gross sales, adjusted EBITDA, and adjusted EPS, I am much more excited by the advance alternatives that we see forward. Chris?

Chris TestaPresident of UNFI

Thanks, Sandy. Good morning, everybody. On right now’s name, I will present additional colour on our gross sales for the quarter and our gross sales pipeline that we anticipate will ship future development. I may even spotlight the efficiency of our development platforms and our wholesale operations, and touch upon the working atmosphere and efficiency of our retail shops.

Whole internet gross sales for the quarter have been $7.2 billion, a 9.2% improve over final 12 months’s Q3, with widespread development throughout all channels. We proceed to imagine that our customer-centric strategy is driving outcomes, and we’re happy that development within the quarter once more got here from each promoting extra to our current prospects, in addition to the acceleration in enterprise we’re now doing with new prospects, every a key development element of our Gasoline the Future technique. Cross-selling positive aspects with current prospects added an incremental $95 million of income within the quarter, bringing our year-to-date incremental complete to $260 million. This retains us on tempo to attain practically $1 billion in cross-selling income in fiscal 2022, quantity that might haven’t occurred with out the SUPERVALU acquisition.

Our continued success in promoting extra to current prospects, coupled with new buyer wins, contributed to quantity positive aspects of roughly 2.5%, with the steadiness coming from inflation. Trying forward, we stay optimistic about our skill to develop our enterprise additional based mostly on our unmatched product and providers portfolio. Our new enterprise pipeline stays sturdy, with alternatives that vary from increasing class and product penetration with current prospects to new enterprise wins with retailers who function captive distribution facilities. For each smaller quantity wins in addition to bigger new buyer enterprise, we imagine our customer-centric strategy to development will assist us earn new enterprise and permit us to assist make our prospects stronger.

A key a part of our mission that lies on the coronary heart of every part we do. The energy of our pipeline is essentially attributable to the breadth of our assortment, in addition to the expansion platforms we have spoken about on previous calls, together with owned manufacturers, contemporary, and our skilled providers. I’ve spoken earlier than in regards to the scale of our owned manufacturers portfolio, which incorporates over 5,000 SKUs throughout a number of classes and worth factors that give our prospects a aggressive benefit within the market. We’re happy that owned manufacturers are gaining momentum, as gross sales will increase accelerated all through the quarter.

We imagine this displays the strengthening of our program and growing shopper demand in gentle of upper meals and fuel costs. We’re additionally speaking to our buyer alternatives to drive enterprise the place nationwide manufacturers are in allocation or fill charges into UNFI are challenged. Inbound service degree on owned manufacturers have been once more larger than these of nationwide manufacturers this quarter by roughly 700 foundation factors. On the product aspect, we have up to date the packaging of our Wild Harvest free-from line.

Our new plant-based meats have been the primary class to roll out that includes the brand new model refresh, and we’re excited for added classes launching this summer time. As for contemporary, UNFI’s produce gross sales within the third quarter outpaced the U.S. produce market by greater than 300 foundation factors, which we imagine displays the continued investments we’re making in folks, processes, and infrastructure to enhance the standard and freshness of the produce we promote. This consists of the addition of a number of new skilled leaders with backgrounds in massive produce operations.

Leveraging the expansion of the perimeter to personal label, we have lately expanded our Wild Harvest natural produce providing to incorporate natural bananas. And now we have over 110 extra non-public label SKUs and course of, all packaged with our new look and clear natural communication. Lastly, is our skilled providers enterprise that we have spoken about earlier than and which we imagine is a key differentiator for UNFI. The expansion fee and adjusted EBITDA from our providers enterprise was greater than double that of our wholesale enterprise, as increasingly prospects acknowledge the worth we convey to their operations by leveraging our scale and experience.

Among the many broad number of providers and options we provide, our retail shelf providers continues to be one of the extensively used. UNFI has over 1,000 associates who handle quite a lot of in-store providers on behalf of our prospects. These providers embody ordering, merchandise assortment, and packing out cabinets. As well as, we repeatedly replace a big quantity of planograms throughout our community and, final 12 months, accomplished over 1,100 retailer resets that hold retailer choices present and related to the patron.

These providers are in excessive demand for each prospects and suppliers, particularly contemplating right now’s labor market challenges. Retailers find it irresistible as a result of UNFI consultants handle their cabinets, which permits them to focus extra strategically on retailer operations, competitors, and different elements of their enterprise. We proceed so as to add providers to our portfolio based mostly on buyer suggestions and the evolution of the business. Our skilled providers enterprise is consistently evolving, constructing upon UNFI’s tradition of innovation and embracing what’s subsequent to assist our prospects drive worthwhile, sustainable development and acquire market share.

Touching briefly on operations, our third quarter working prices once more mirrored the investments made to make sure we will service our prospects in the perfect means doable, in addition to the continued enchancment being made on the labor entrance. As Sandy said, our distribution heart emptiness fee improved once more this quarter, transferring from 9% on the finish of Q2 to 7% on the finish of Q3. After stabilizing our driver pool in Q2, we’re happy that the emptiness fee improved to 9%, a three-point acquire that we view as a transparent sign that the packages we have described earlier than are taking maintain. Our outcomes additionally included a modest internet affect from larger gasoline costs Sandy spoke to regardless of the portion of the rise shared by our prospects, in addition to the gasoline hedges now we have in place.

Lastly, our retail shops proceed to carry out in a difficult atmosphere. Gross sales have been up over final 12 months, though margin investments led to decrease adjusted EBITA in comparison with final 12 months’s third quarter. Our technique continues to be optimizing our retail community, which incorporates acceptable ranges of funding in amenities and know-how. We’re happy with the efficiency of our lately transformed shops, whose gross sales positive aspects have considerably outpaced complete retail, and know-how investments have helped simplify the enterprise and enhance efficiency.

Trying ahead, we’ll open our thirty first Cub Wine & Spirits retailer earlier than the 4th of July and have authorized the substitute of an older, outdated retailer that we anticipate will enhance its already robust market place. We’re additionally planning to put money into enhanced promotional planning instruments that can convey us further capabilities round customer-specific promotions based mostly on particular person shopping for habits. One of many advantages of getting working shops in two markets is we’re in a position to check and refine merchandising and operational concepts that we will then share with our wholesale prospects to assist make them stronger. As Sandy stated, we’re happy with our efficiency this quarter and optimistic in regards to the end to fiscal ’22.

The atmosphere stays unpredictable in a number of methods, however we’re assured in our agility and our resilience as we assist our prospects succeed by way of all that UNFI has to supply. Let me now flip the decision over to John.

John HowardChief Monetary Officer

Thanks, Chris, and good morning, everybody. On right now’s name, I will cowl our third quarter monetary efficiency, steadiness sheet capital construction, and our fiscal 2022 outlook. As Chris said, third quarter gross sales have been $7.2 billion, a rise of 9.2% from final 12 months’s third quarter, which brings our year-to-date gross sales to $21.7 billion, a 7.1% improve in comparison with final 12 months. As said on this morning’s press launch, we have revised our definition of each adjusted EBITDA and adjusted EPS to exclude the affect of LIFO expense.

LIFO is a noncash merchandise which impacts gross revenue, in addition to adjusted EBITDA and adjusted EPS as beforehand calculated. Traditionally, the efficient LIFO has been comparatively small, secure, and predictable, however the current inflationary atmosphere has pushed it meaningfully larger as a result of we imagine the volatility on this 12 months’s noncash label expense meaningfully distorts our underlying working efficiency. Starting with this quarter, we are going to regulate LIFO expense out of GAAP internet revenue and the GAAP EPS in computing adjusted EBITDA and adjusted EPS. This revision has no affect on the economics, money flows, or GAAP outcomes of our enterprise, and extra intently aligns UNFI with how our business friends deal with LIFO and, we imagine, higher displays the corporate’s underlying working efficiency.

We additionally imagine it would assist buyers assess our underlying efficiency in a way per how we make enterprise selections. On this revised foundation, adjusted EBITDA for the third quarter totaled $196 million, a 5.9% improve in comparison with the $185 million in final 12 months’s third quarter when computed on the identical foundation. On a year-to-date foundation, adjusted EBITDA totaled $616 million in comparison with $564 million final 12 months, a 9.2% improve in comparison with final 12 months. Our third quarter GAAP earnings per share totaled $1.10, together with the affect of a noncash labor cost described above and a acquire on sale from our Riverside Distribution Heart buy and sale leaseback transaction that we have mentioned earlier than.

Together with a number of smaller objects and the tax affect of the changes, adjusted EPS on the revised foundation additionally totaled $1.10 for the third quarter in comparison with $1 in final 12 months’s third quarter on a revised foundation, a rise of 10%. On a year-to-date foundation. Adjusted EPS totaled $3.56 per share, a 22% improve over fiscal 2021 year-to-date complete of $2.93 per share. Inside the P&L, our gross revenue fee, excluding LIFO, elevated roughly 30 foundation factors in comparison with final 12 months’s third quarter, pushed by the affect from inflation and the continued advantages from our ValuePath initiatives.

Retail gross revenue fee declined modestly within the quarter in comparison with final 12 months. Third quarter working expense fee elevated roughly 30 foundation factors over final 12 months’s third quarter. As Chris mentioned, our elevated working bills proceed to mirror investments we’re making to make sure the very best service to our prospects in a quickly altering atmosphere and the affect of inflation. Turning to the steadiness sheet, we completed the quarter with excellent internet debt of $2.38 billion, a $34 million discount in comparison with the second quarter.

Our adjusted EBITDA internet leverage ratio, which now additionally excludes the affect of LIFO within the denominator improved to 2.9 instances. Our supplemental slides current the adjusted EBITDA internet leverage ratio for beforehand reported intervals below the revised definition. We have efficiently refinanced and prolonged the maturity on our $2.1 billion asset-based revolver by over three and a half years, which brings its maturity to June 2027. We’re happy to have accomplished this transaction, which leaves our secured time period mortgage as the following materials scheduled maturity in October 2025, over three years from now.

We have additionally upsized the ABL to $2.6 billion, instantly growing accessible liquidity by $500 million. We have diminished the charges on borrowings and the unused parts below the ability, and we have transitioned from LIBOR to SOFR because the benchmark fee for the borrowings below the ABL within the time period mortgage amenities. Let’s flip to our outlook for fiscal 2022. As outlined in our press launch, we’re elevating our full 12 months outlook for internet gross sales to a brand new vary of $28.8 billion to $29.1 billion, a 7% improve over fiscal 2021, reflecting the underlying efficiency of our enterprise.

As for adjusted EBITDA and adjusted EPS, our authentic ranges have been $760 million to $790 million and $3.90 to $4.20 per share, respectively. These included a LIFO cost of $25 million, or $0.30 per share. Below the revised definition I spoke to earlier, which excludes the LIFO cost, our authentic steerage for full 12 months adjusted EBITDA would have been inside a spread of $785 million to $815 million and adjusted EPS inside the vary of $4.20 to $4.50 per share. In gentle of our efficiency 12 months thus far, improved internet gross sales outlook, and a cautious evaluation of the present working atmosphere, we’re growing our steerage for each adjusted EBITDA and adjusted EPS.

We now anticipate adjusted EBITDA to be within the vary of $810 million to $830 million and adjusted EPS to be within the vary of $4.65 to $4.90 per share. For comparability functions, the tables in our press launch and Slides 10 and 11 of our supplemental slides illustrate these adjustments. Our outlook for full 12 months capital spending stays unchanged at $250 million, as does our outlook for full 12 months debt discount, which continues to be within the vary of $150 million to $200 million. Utilizing our revised definition for adjusted EBITDA, we now anticipate the yearend leverage to be roughly 2.6 instances.

As for the longer-term fiscal 2024 targets we supplied ultimately June’s investor day, we’re affirming the typical annual development charges supplied for internet gross sales of three% to five%, adjusted EBITDA of 6 to% 10% and, adjusted EPS of 12% to 18%. Below our revised definitions for adjusted EBITDA and adjusted EPS, which exclude LIFO, our fiscal 2024 goal for adjusted EBITDA could be not less than $950 million and adjusted EPS could be not less than $6. As Sandy said, we stay assured in our skill to attain these targets. As you have heard, right now’s working backdrop continues to be each difficult and unpredictable, but we stay optimistic about serving our prospects and delivering on our up to date outlook for the 12 months.

Operator, we’re now able to take questions.

Questions & Solutions:

Operator

[Operator instructions] Our first query is from Andrew Wolf with C.L. King. Your line is open.

Andrew WolfC.L. King and Associates — Analyst

Thanks. Good morning. I do know you do not information on particular quarters, however is it truthful to imagine that, you recognize, the quarter you simply reported, you beat your inside expectations decently? And will you remark, you recognize, how that’s carrying by way of within the fourth quarter and your sense of the quarter on a profitability foundation? And, you recognize, any colour you may give as we begin to consider fiscal 2023 as properly. Thanks.

John HowardChief Monetary Officer

Certain. No, I respect the query, Andy. That is John. I will begin.

I feel along with your questions there, I feel I’d say we have been according to what we’re anticipating for Q3 internally. Because it pertains to This autumn steerage, you are completely proper, we usually do not present quarterly steerage. However that is the one quarter of the 12 months the place it really is not directly supplied with our full 12 months steerage change. And by growing our full-year steerage, I feel you may get into — again into the This autumn quantity for you.

After which — and say it once more. What was the third query, Andy? I forgot. Oh, for FY ’23. Yeah.

Clearly, for FY ’23 at this stage, we’re not going to offer any steerage apart from what we supplied with the — the long-range plan on the investor day that we did final 12 months, exhibiting what our three-year CAGRs could be for ’22, ’23, and ’24. And as I feel, all three of us stated in our ready remarks, we’re on observe to attain these.

Andrew WolfC.L. King and Associates — Analyst

All proper. On the LIFO cost itself at $72 million, I imply the primary half was $30 million. So, clearly, I assume the accrual fee went up lots. Might you touch upon that how that pertains to — is it inflation jumped that a lot? Or have been you — needed to improve the — did you improve your accrual fee? Or is there catch-up in there? Simply give us some colour on why the precise quantity is so excessive in comparison with what you have been accruing at.

And in addition, I assume tie that to what is going on on with inflation.

John HowardChief Monetary Officer

Yeah. And also you’re completely proper, Andy. It’s all tied to the inflation that we noticed — that uptick that we noticed in Q3. That is what’s driving that quantity.

There is no different dramatic or elementary change within the calculation or within the underlying enterprise. Our stock balances are considerably the place we thought they might be. It is all being pushed by that uptick in inflation that began in Q3 for that noncash improve that you simply’re seeing. And also you’re completely proper, the best way the mathematics works on LIFO, there is a full 12 months catch up as that inflation fee adjustments all year long.

We now have to seize the total fee affect each time we undergo the calculation and our quarterly outcomes, and that does signify slightly little bit of a catch up in Q3 on the noncash. Sandy?

Sandy DouglasChief Govt Officer

Sure. I used to be simply going to touch upon the second a part of Andy’s query concerning inflation. Clearly inflation continues to be elevated, and it is a sophisticated matter by way of the P&L, drives topline and margin, but it surely has a unfavorable affect on gross sales elasticity. It is actually a direct results of persevering with fill fee points and you then’ve bought the entire dynamic with promotions.

Our focus is basically on how we might help our prospects by way of it, assist them keep aggressive by working to make sure that they’ve essentially the most doable lead time on worth will increase, after which, particularly, by way of the summer time, working with our suppliers to offer our prospects good sharp promotional worth factors, notably in key worth objects. I would additionally point out owned manufacturers. Chris talked about the patron power round owned manufacturers and our concentrate on offering the very best supply there. After which, lastly, because it pertains to any margin that is transferring round, now we have our ValuePath initiative, which the corporate fielded to yield a gross quantity of $70 million to $100 million of financial savings by 2023, in order that we will make all of it work because the completely different elements of the exterior atmosphere transfer round.

Andrew WolfC.L. King and Associates — Analyst

Thanks. And I will simply ask a fast follow-up as a substitute of my third query. Sandy, you talked about, attempting to get promotions and KVAs to your shoppers — your prospects. How difficult is that when the product is principally quick and there is a lot inflation? I imply, are you dipping into your individual pocket to assist out your prospects in a way?

Sandy DouglasChief Govt Officer

Nicely, it is really a strategy of working with our prospects and our suppliers. Our buyer base is a very essential supply of development for our suppliers. And as I discussed, one in every of our initiatives is to assist make them extra seen and to attach the dots. And so, we’re having, I feel, good success with quite a lot of our merchandising packages.

And, for instance, now we have a really massive gross sales present that begins this afternoon in Connecticut, the place now we have actually hundreds of shoppers coming in to satisfy with suppliers to place in place packages, to purchase merchandise, set in place promotional plans for the remainder of the 12 months. And by working laborious to make them seen to one another and join the dots, I feel we’re having fairly good success by way of doing every part we will to assist them be as aggressive as doable.

Andrew WolfC.L. King and Associates — Analyst

Nice. Thanks. I will get again in line.

Operator

The subsequent query is from Scott Mushkin with R5 Capital. Your line is open.

Scott MushkinR5 Capital — Analyst

Hey, guys. Thanks for taking my query. So, I needed to discover slightly bit extra, the higher, I assume, providing that you simply guys should your prospects and perceive how shortly you suppose you’ll be able to acquire some market share. What I am particularly referencing is the only truck, single bill accompanying the providers.

As we have written, these are — you guys appear to have a reasonably significant aggressive benefit. How shortly can you progress to perhaps acquire extra market share with that?

Sandy DouglasChief Govt Officer

Yeah. Thanks, Scott. That is Sandy. One UNFI is mostly a multi-year course of.

It began and was made doable by the acquisition that the corporate made at Supervalu a number of years in the past. Actions have already been taken to align the salesforce to align how we present up for suppliers, however there are incremental alternatives that contain our provide chain that contain our community of distribution and the way our IT is ready up invoicing, and so forth. And I described it as a roadmap of steady enchancment. The market share positive aspects actually come, and Chris talked about it, by advantage of the fast affect, which is that now we have a very broad assortment.

And prospects want completely different sorts of merchandise for various sorts of methods and completely different sorts of codecs. And we have seen within the cross-selling outcomes, that Chris described, affect, affect to market share, affect to offer buyer flexibility. After which, lastly, I’d say that — and this has been notably essential within the final couple years and when the community is as confused as it’s having backup and the flexibility to maneuver distribution from one heart to a different has been useful in instances of stress. So, you recognize, as you have a look at our gross sales outcomes and take into consideration the business, we’re gaining share.

However I feel the share alternative is basically extra about serving a broader vary of buyer wants. And because the firm talked about, we expect that complete alternative is round $140 billion of which we have captured a small a part of it.

Scott MushkinR5 Capital — Analyst

So, as a follow-up — thanks, Sandy. There is a follow-up to that although. What number of prospects even have the flexibility to have one truck, one bill? I imply, how far alongside is it? I imply, is it like handful, or is that one thing you’ll be able to supply to extra? That is my first follow-up. And my second follow-up is that if that is profitable, how ought to we take into consideration capex spending in your capability should you begin grabbing a number of share, should you’re in a position to execute this — the One UNFI.

Sandy DouglasChief Govt Officer

Nicely, I’d describe the transformation as early stage on a few of the provide chain and distribution adjustments. From a capital standpoint and Eric is right here, and you may remark, Eric, I feel it gives us a possibility to get each efficient and extra environment friendly as we redesign the provision chain. We now have a giant initiative proper now to know the community design and to plot that plan. After which, lastly, because it pertains to capital, to the extent that we’re in a position to drive the capability of the provision chain, that is clearly capital pleasant, but it surely additionally creates the chance for us to make progressive estimates and know-how and doubtlessly automation.

That’ll drive up our high quality degree and clearly with every funding a really disciplined fee of return. However, Eric, do you wish to discuss slightly bit about your plans there?

Eric DorneChief Working Officer

Yeah. I imply, Scott, thanks for that query. As Sandy talked about, we’re taking a look at unbelievable choices throughout the nation to maximise the usage of our present capability, in addition to capability that we have to add to maintain development. And so far as automation goes, we’re actively pursuing choices the place it is smart.

As a reminder, we simply added automation in Southern California and the Pacific Northwest, and we’re increasing our automation functionality within the Mid-Atlantic states within the coming months. So, I feel we’re making the suitable decisions, and we’re protecting tempo with the choices now we have to help our development.

Scott MushkinR5 Capital — Analyst

Good. Thanks guys.

Operator

The subsequent query is from John Heinbockel with Guggenheim. Your line is open.

John HeinbockelGuggenheim Companions — Analyst

So, very first thing, guys, perhaps you’ll be able to handle the ability of scale on this atmosphere, proper, with inflation as excessive as it’s, must be extra useful than ever. Clearly, however then you have to get the product, proper? So, perhaps discuss in regards to the skill to lean into scale. And is the profit to return extra down the street, proper, when provide is a bit more available? That is kind of primary. After which, two, proper, if you consider the alternatives, proper, versus new prospects approaching to your platform versus selecting up new objects, proper, from a few of the current gamers.

The place is the chance greater proper now?

Sandy DouglasChief Govt Officer

Hello. That is Sandy, and I will cross this over to Chris in a second. However scale exhibits up for the corporate in a number of methods. It exhibits up, as I discussed, in flexibility, after we want to have the ability to transfer distribution round.

Clearly, we’re an essential buyer to our suppliers, so we’re in a position to present our suppliers a big alternative and make an essential case to them that they need to take excellent care of 32,000 prospects that now we have. And because the fill charges have, I feel we talked about within the script, began to stabilize and barely enhance right here towards the tip of the third quarter, what we hope will occur is that we’ll begin to see additional acceleration and promotional exercise from our prospects — sorry, from suppliers. And that, in flip will, drive worth for our prospects, and the flywheel that I discussed will likely be began. However Chris, why do not you drill into a number of extra specifics?

Chris TestaPresident of UNFI

Yeah. Hey, John. So, completely our scale, should you have a look at our non-public manufacturers enterprise, we’re in a position to have a really massive non-public manufacturers portfolio that we will cross on to our prospects. We now have shopping for energy in our skilled providers enterprise, the place we’re in a position to purchase providers at charges of our scale that we will cross on to our prospects.

After which should you have a look at simply our purchasing energy on our contemporary enterprise, you recognize, we’re very, very massive contemporary nationwide contemporary participant. And there is not many if any nationwide contemporary gamers. And now we have some buying energy with that as properly. So far as the scale of the chance, as we laid out, that is a $140 billion addressable market.

The biggest portion of that $78 billion lays with new prospects. However the actuality is that the $38 billion alternative with current prospects, these are the wins that we’re placing on the board each week. If you consider a standard buyer that desires to get into pure merchandise, we will flip the change on that, a standard buyer that desires to increase its meat and produce with us. We are able to flip the change on that in a short time as a result of we have already set them up as an account, we have already got the truck going from the warehouse.

And so, I’d say we get extra frequent wins by way of our current prospects, and we’re very enthusiastic about greater than doubling the enterprise, the chance to greater than double the enterprise with current prospects. However from a pure scale standpoint, after all, there’s extra white house of shoppers that we’re not presently serving.

Sandy DouglasChief Govt Officer

John, Sandy right here. One different remark about scale. The opposite factor is the flip of the coin. A pair weeks in the past, I used to be on a Northern Midwest tour of native buyer conferences, one in Minneapolis, one in Inexperienced Bay.

And in these conferences, our retailers have been engaged on native product provider alternatives, promotional plans for the summer time. I noticed our deli and specialty group convey collectively a cheese merchandising alternative that leverages native cheeses in these markets. And so, there’s a number of very, very native conversations happening between our regionally based mostly gross sales and merchandising group. And clearly, provide chain could be very native as properly.

So, on the one hand, there’s scale, however the flip aspect is to remain actually near the impartial prospects in markets across the nation, which is core to our tradition.

John HeinbockelGuggenheim Companions — Analyst

And perhaps a fast follow-up. You talked about quantity up 2.5%, proper, which would come with new prospects. Is there any solution to inform on a comp foundation what quantity or circumstances are doing? And, you recognize, is it doable if inflation stays elevated that quantity might be, I do not know, flat to down on a comp foundation? And I assume so long as drop sizes up, it will actually affect the economics proper off the drop.

Sandy DouglasChief Govt Officer

Sure. We’re not going to speak on a ahead foundation about that, John. However what I’d say is I feel our quantity development has stayed fairly constant by way of the second and third quarter that we simply reported. And our focus, you recognize, as I discussed, round inflation is to work actually laborious with suppliers to offer our prospects the correct of merchandising alternatives and worth factors to help their unit quantity as they compete.

So, we’ll proceed to observe that and report out every quarter, but it surely’s been pretty constant for the previous couple quarters.

John HeinbockelGuggenheim Companions — Analyst

OK. Thanks.

Operator

The subsequent query is from Eric Larson with Seaport Analysis Companions. Your line is open.

Eric LarsonSeaport Analysis Companions — Analyst

Sure. Thanks, everybody. Thanks for the query. Good quarter.

John, perhaps — both John or Sandy, you recognize, on this atmosphere that we’re in, clearly it is fairly fluid, you have bought excessive inflation, you have bought shoppers scrambling to in all probability, you recognize, pay their payments and meet their — and get their groceries at an affordable worth. Are you seeing any significant shifts from branded to personal label to completely different options? After which if you put that into perspective, are the CPGs really doing extra merchandising right here? Are the values of the merchandising packages larger? And that is the place you usually have a reasonably good revenue heart is when you’ve gotten excessive ranges of merchandising. Are you able to give me an replace on what these two questions, you recognize, type of what I am asking there?

Sandy DouglasChief Govt Officer

Certain. And I will make a remark, that is Sandy, after which I will give it over to Chris. I feel we talked about that we noticed some acceleration within the quarter, robust acceleration in non-public label manufacturers. I feel the fascinating factor about our buyer base and our product line is that we really present up wherever the client and the patron is positioned.

And so, you have actually bought each, you have bought high-end prospects who’re nonetheless spending cash on high-end issues. After which there’s an acceleration in personal label. After which because it pertains to suppliers, it is nonetheless type of dynamic as a result of fill charges are nonetheless confused, however they’re getting slightly bit higher. And the dialog with our suppliers that we had at varied business conferences, and I sat by way of about 30 conferences, is all in regards to the alternative that our prospects convey them.

Numerous channel buildings are actually essential to CPGs, and UNFI’s buyer base is nothing however that. And so, whereas there’s nonetheless a dampening and promotional efforts versus the place we needed to be and the place we anticipate it to be, we’re I feel being profitable with our retailers that working with distributors, and we proceed to concentrate on enchancment to get promotional {dollars} to the correct locations with our prospects to allow them to achieve success. Chris, do you wish to add any extra element?

Chris TestaPresident of UNFI

Yeah. Only a fast addition is, look, we noticed the fill charges decline from This autumn to Q1 after which once more, Q1 to Q2, however they stabilized in Q3, really slight uptick sequentially. The promo {dollars} have a lag behind fill fee. So, it is not fast to the fill fee enchancment and we absolutely anticipate as fill fee continues to approve and we’re listening to from producers there’s much less momentary unavailable.

They’re feeling optimistic about get wholesome dates and the promo {dollars} will observe, however there is a lag known as a three-month lag between the fill fee enchancment and the promo greenback enchancment. Within the meantime, as Sandy talked about, we’re seeing a shift towards non-public manufacturers, and we had non-public manufacturers acceleration, and we’re working with our suppliers to get these key worth objects and all of the promo {dollars} we might safe by way of our shareholders, for our prospects to assist them get by way of this era.

Eric LarsonSeaport Analysis Companions — Analyst

So, with out — and thanks for these feedback. So, with out really speaking a lot about any type of fiscal 2023 steerage or something, it sounds just like the promo atmosphere might be an even bigger tailwind for you in F ’23 than in F ’22. And may you shortly evaluate F ’22 to F ’21 on the promo charges and the packages? Has it been a giant profit this 12 months or no?

Chris TestaPresident of UNFI

Nicely, no. Our promo {dollars} are barely above flat 12 months over 12 months. And that frankly wasn’t two expectations, proper? We anticipate that fill charges to proceed to enhance like they have been doing by way of the tip of the final 12 months at the moment. However they’re roughly flat 12 months over 12 months.

Eric LarsonSeaport Analysis Companions — Analyst

Bought it. OK. Thanks.

Operator

The subsequent query is from Mark Carden with UBS. Your line is open.

Mark CardenUBS — Analyst

Good morning. Thanks lots for taking my questions. I needed to dig into the market contraction you talked about that continued into 3Q. So, we have heard from a few of the massive pronounced retailers, they’ve seen some pockets share shift from discretionary classes into consumables.

Is that this including up with what you are seeing? And the way does it affect your view on market contraction over the following few quarters? Might the diploma of contraction ease greater than you have been anticipating? Thanks.

Sandy DouglasChief Govt Officer

Yeah, I imply, as we talked about, the amount that we noticed within the quarter actually was constant from Q2 to Q3. And, the truth is, we noticed independence really begin to acquire share slightly bit in February and March and April. And I am unsure whether or not the dynamic is that gasoline costs are going up and due to this fact the drive to away from house is stored folks nearer, or simply that independents are persevering with to do a very good job of staying near their prospects with meal substitute and different distinctive gives. As I’ve traveled across the nation, I’ve seen some terribly agile and really, very artistic approaches to buyer consideration within the impartial buyer base.

And so, the overall outlook that we might have is that the winners are going to proceed to win. And our job is to be entrance and heart to attempt to assist them, whether or not it is core execution or worth added programming or connecting with suppliers. And that is precisely what we will do.

Mark CardenUBS — Analyst

Nice. After which one other follow-up on inflation. I do know there is a ton of variability, however should you plan out your online business, how lengthy are you now anticipating for these sorts of elevated charges to final? After which if we do begin to, a 12 months from now, see deflation, how a lot of an affect might which have in your margin construction?

Sandy DouglasChief Govt Officer

Yeah. We spend 100% of our billable hours taking a look at how we will get higher for our prospects and little or no at taking part in newbie economist. They definitely are elevated proper now, and we do not see an actual change. Having stated that, as you’d anticipate, we state of affairs plan a number of potential situations.

And curiously sufficient, the actions that we might soak up just about each state of affairs are roughly the identical. We now have to make it possible for we’re exhibiting up for our prospects and shopping for proper and protecting them aggressive. We now have to work laborious on our execution in order that we’re a companion of alternative. After which we have got to maintain our value construction tight in order that we keep agile within the face of regardless of the state of affairs is.

And that is been our focus as we put together for subsequent 12 months. And I feel we’ll be in robust form whatever the state of affairs.

Mark CardenUBS — Analyst

Nice. Thanks a lot guys, and good luck.

Sandy DouglasChief Govt Officer

Thanks.

Operator

Our closing query comes from Kelly Bania with BMO. Your line is open. Kelly Bania, your line is open. Please go forward.

Kelly BaniaBMO Capital Markets — Analyst

Hello. Thanks for taking our questions. I needed to ask a pair about retail. First, the retail development of about 2% was just a bit decrease than the remainder of your segments.

And I used to be questioning should you might simply assist us unpack that slightly bit and perceive the elements driving that, perhaps cross-selling might clarify a few of that as that advantages your different segments. However any colour you’ll be able to touch upon there?

Sandy DouglasChief Govt Officer

Certain. I imply, our retail enterprise has been performing rather well because the acquisition and has held and I feel in some circumstances grown share, notably in Twin Cities. Gross sales within the quarter have been stable from a market perspective. It was very aggressive up there.

We invested in promotional {dollars}. However extra importantly, for that enterprise, we invested in functionality, in digital functionality to craft extra customized promotions to know pricing and income administration functionality and several other working initiatives. So, the net-net is we’re happy with our retail enterprise. The quantity within the quarter was market-competitive, however quite a lot of initiatives that give us confidence that the outlook for our retail enterprise is robust.

Kelly BaniaBMO Capital Markets — Analyst

OK. And may you additionally simply increase on the elements driving the EBITDA margin fee decline there? You talked about a few of these investments, however might you assist unpack that between gross margin, SG&A? Have been these deliberate? Or how reactionary have been these two — the necessity to perhaps do some extra promotions?

Sandy DouglasChief Govt Officer

Yeah. I feel generally, one in every of our KPIs is to increase EBITDA margin, and we anticipate to do this and have really year-to-date. Within the quarter, we invested in provide chain as we proceed to make it possible for we’re giving our prospects the very best service in what continues to be a reasonably dynamic working atmosphere. And the working margin contraction was actually minor.

That stated, now we have quite a lot of initiatives by way of ValuePath, and we anticipate as we glance ahead. And there is a little little bit of a crystal ball, however our technique to proceed to make our working expense extra environment friendly must be again on observe as we go forward.

John HowardChief Monetary Officer

And, Sandy, if I can construct on that slightly bit, there have been some particular objects that have been biking in ’22 that we have talked about earlier than, together with that monetization of Riverside, which creates a lease expense, which did not exist final 12 months. We knew well being and wellness expense was going to return again on us in ’22 as extra persons are going again for medical procedures. And we have been open in regards to the Save A Lot transaction that that service charge that we have been offering them for the previous 5 years that additionally led to FY2022.

Sandy DouglasChief Govt Officer

Yeah. John, thanks. And importantly, I assume the final level to share with all people is that because the enterprise is proceeded, it’s carried out according to the expectations that we had in that regard.

Kelly BaniaBMO Capital Markets — Analyst

OK. That is very useful. And I assume, I am sorry if I missed this, however did you simply present the inflation charges? And any colour you’re seeing throughout the completely different buyer segments, and should you can, are keen to simply assist us perceive slightly bit extra what you are listening to out of your provider panorama by way of extra worth will increase on the horizon?

John HowardChief Monetary Officer

Yeah. So, I will begin with the quantity on the inflation. So, as we talked about for Q3, our 9.2% development, roughly 2.5% of that was volume-driven. So, when you consider inflation making up the remainder of that and that is internet of elasticity and different elements associated to our pricing and enterprise mannequin, however quantity was roughly 2.5%.

After which the remainder of it will be attributed to the inflation. Because it pertains to a few of the provider info, I am unsure if now we have, or if we disclosed that earlier than.

Chris TestaPresident of UNFI

No, we have not all. Hey, Kelly, that is Chris. It isn’t — inflation is not actually a channel factor. It is a product section factor, proper.

So, it is based mostly on the suppliers. Within the contemporary enterprise you are seeing, you recognize, adjustments occur every day, because the commodity costs go up and down, relying if we’re speaking about produce or proteins or so forth. With the middle retailer, the factor that we’re centered on is ensuring now we have sufficient lead time to tell and adapt to our prospects and ensuring we’re doing every part we will to get corresponding promo {dollars} to maintain our prospects — hold the amount and our prospects going. I am unable to pinpoint any single class within the heart retailer grocery the place inflation is larger than the opposite.

As you have learn and we have all heard, it is actually throughout the whole section. Definitely, there’s been some sure classes, sunflower oil, for instance, which were impacted by the warfare. However these are kind of actually, actually small focused segments. However generally, it has been throughout the whole heart retailer.

Kelly BaniaBMO Capital Markets — Analyst

Okay. That is useful. And I assume, as you look throughout your buyer base between the completely different retail methods that you’ve — that they’ve between worth or mainstream or premium, are you seeing some shifts by way of tendencies, notably on the amount standpoint or promotional standpoint, as you simply talk along with your retailers?

Sandy DouglasChief Govt Officer

Sure. Kelly, that is Sandy. I feel, once more, we’re seeing some macro tendencies on classes. We’re seeing acceleration in owned manufacturers specifically as virtually in parallel to the spike up in inflation.

Relative to retailers, they’re actually working the place they’re positioned. And as I discussed earlier, the state of affairs with the client base is bifurcated. Higher-end shoppers are nonetheless spending cash, and so they’re spending cash on upper-end issues. Now, there perhaps slightly shifting between eating places, and there is dynamism between eating places and meal substitute methods with retailers after which as kind of mainstream retailers.

After which these which might be extra worth oriented are definitely seeing that aspect of the client base emphasize worth for cash. And there is a number of worth sensitivity and time-to-month sensitivity as people transfer away from their snap cost. So, the online impact of all that’s, is that now we have to point out up the place the retail technique — retailer technique is. And we’re seeing the winners win.

And we’re lucky sufficient to be doing enterprise with a number of winners.

Kelly BaniaBMO Capital Markets — Analyst

Thanks.

Operator

That concludes the Q&A portion of right now’s name. And I will now flip the decision again to CEO, Sandy Douglas, for any closing remarks.

Sandy DouglasChief Govt Officer

Thanks, operator, and due to all people for becoming a member of us this morning. I hope you have heard and take away from right now’s name that UNFI is rising and performing inside a altering atmosphere by steadfastly specializing in our 4 working rules that underpin our execution of the Gasoline the Future technique, bringing worth to our prospects, bettering the best way we companion with suppliers, creating unmatched profession alternatives for our associates, and supporting our communities and the planet. And thru all of this, our final focus is on including vital worth for you, our shareholders. For our prospects, we thanks to your continued partnership and the enterprise we do collectively.

And for our suppliers and UNFI associates listening right now, my thanks to every of you for every part that you simply do for our enterprise, our prospects, our communities, and one another. And for our shareholders, thanks for the belief you set in us by way of your continued funding in UNFI. Thanks, all people.

Operator

[Operator signoff]

Period: 62 minutes

Name individuals:

Steve BloomquistVice President, Investor Relations

Sandy DouglasChief Govt Officer

Chris TestaPresident of UNFI

John HowardChief Monetary Officer

Andrew WolfC.L. King and Associates — Analyst

Scott MushkinR5 Capital — Analyst

Eric DorneChief Working Officer

John HeinbockelGuggenheim Companions — Analyst

Eric LarsonSeaport Analysis Companions — Analyst

Mark CardenUBS — Analyst

Kelly BaniaBMO Capital Markets — Analyst

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