Good morning, my name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the UNFI Fiscal 2022 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Steve Bloomquist, Vice President of Investor Relations. You may begin your conference.

Good morning, everyone. Thank you for joining us on UNFI's second 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. 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. And good morning, everyone, and thank you for joining us on our fiscal 2022 second quarter earnings call. As you saw in this morning's press release, UNFI delivered the highest sales quarter in company history as we continue to build upon the key elements of our strategy. Despite the environment remain challenging the six pillars of our Fuel The Future strategy all contributed to our results this quarter. At its core, Fuel The Future focuses on servicing customers and adding value to their businesses, which leads to profitable growth for our company and increased value for UNFI shareholders. We bring value to our customers in many ways and we're continuously looking for new opportunities to do so. Consolidating purchases of natural, conventional, fresh and specialty items with you and advice simplifies their business. Our own brands allow customers to offer a broad array of unique and innovative items that bring desired product attributes and affordability to their shoppers. Professional services deliver solutions to our customers that solve a variety of needs and allow them to take advantage of UNFI scale to reduce costs or increase sales. And as consumers seek out healthier and fresher products, we're investing resources to drive growth across these categories. Chris will provide more details on each momentarily as well as the growth drivers of our retail stores. The opportunity to add value also applies to what we can do to help our suppliers grow their businesses. After seven months in numerous conversations with CPG companies, I believe that we have significant opportunity to help our suppliers learn more about our diverse customer base and there are many different go-to-market strategies and to tap into the knowledge we possess from servicing 30,000 locations across all 50 states and Canada. By providing insights not available…

Thanks, Sandy. And good morning, everyone. On today's call, I'll provide further color on key drivers behind UNFI second quarter results, future growth, the trends and operating environment Sandy touched on that are impacting our business and industry. Sales for the quarter were $7.4 billion, a 7.5% increase over last year's Q2, bringing the two year stack to 14.6% and a 6% sequential increase over the year's first quarter. All sales channels experienced year-over-year growth while modest anticipated market contraction and continued deterioration and fill rates partially offset these gains. We're confident that our customer centric approach is driving results and are pleased that the growth in the quarter came from both selling more to existing customers, as well as from business we're now doing with new customers. Each a key growth component in our Fuel The Future strategy. Let's start with gains made with our existing customers. Looking at our top 25 customers and excluding the anchor customer and our new Allentown D.C. revenue grew nearly 7% in the quarter compared to last year's second quarter and over 5% sequentially compared to Q1. A portion of these gains were the result of continued success with cross selling as we added an incremental $100 million of total revenue in the quarter. As customers consolidate their purchases with UNFI their operations become more efficient in multiple areas, including receiving, stocking and back office functions. Our year-to-date performance keeps us on pace to achieve $1 billion in cross selling revenue by the end of fiscal 2022. Our Fuel The Future strategy also looks to increase sales in our fresh portfolio which includes meat, bakery, deli and produce. We're pleased with the steady progress and growth we're seeing as we continue to invest in people, technology and infrastructure to win in the important…

Thank you, Chris. And good morning, everyone. On today's call, I'll cover our second quarter financial performance, balance sheet, capital structure and our fiscal 2022 outlook. As Sandy said second quarter sales of $7.4 billion was a new high for UNFI surpassing the previous high in the third quarter of fiscal 2020 when the pandemic first began. Second quarter gross margin rate increased 8 basis points compared to last year second quarter. Our wholesale margin rate was again favorably impacted by our elevated level of cost inflation as our business model and customer contracts generally pass through product cost inflation, which leads to both revenue and margin gains. The continued benefits from our transformational value path initiatives also contributed to our gross margin expansion in the quarter, which was partly offset by higher non-cash LIFO charge. Excluding a benefit related to an adjustment to prior [mep] withdrawal charge estimates, second quarter operating expense rate increased to 23 basis points. As Sandy and Chris discussed, this quarter's results included greater levels of overtime and third party labor to service our customers as well as higher fuel costs. Last year second quarter included lower health and welfare costs, which amounted to about 17 basis points and the cycling of that benefit was anticipated as part of our initial full year outlook. Adjusted EBITDA totaled $201 million, which included a $19 million LIFO charge compared to a $7 million LIFO charge in Q2 of last year. Our GAAP earnings per share total $1.08, which included $0.05 in net charges. Adjusted EPS for the second quarter totaled a $1.13 per share compared to $1.25 last year. Turning to the balance sheet, we finished the quarter with total outstanding net debt of $2.42 billion, a nearly $70 million decrease compared to the first quarter. Our…

[Operator Instructions] And your first question comes from a line of John Heinbockel from Guggenheim. Your line is open.

Hey, first guys, can you quantify a little bit or speak to the deterioration in fill rates sort of what's what has been the magnitude of that slowdown? And do you think that we see a continued deterioration in the near term? And I guess other than flexing scale is there anything else you can do to mitigate that?

Hey, John, this is Chris. I'll start off with the answer on that one. So we saw improving fill rates right up until the end of the summer, right up until basically halfway through our fourth quarter last year and then deteriorated sequentially since then. We did not expect that. We definitely anticipated fill rates to improve. The impact of it is really, really hard to measure on net sales. I'll put it to you this way there are some cases where we're actually shipping more units of a particular SKU than last year. But fill rates been cut in half because demand is higher. And that's demand coming from new and existing customer base. So from a net sales impact, really tough to measure. I mean, you saw the sales growth over 5 billion, sorry, 500 million in the quarter, 7.5%. So we're still growing sales despite the fill rate. Where it is impactful is the customer experience and we're doing everything we can to mitigate that with our merchandising teams to replace items with products that are in stock, including our own brands. And the second impact is on promotional dollars, although promotional dollars have increased year-over-year and it's behind where we thought they would be. And that's because there just isn't the demands. Sorry, there's just not the supply to put those promotional dollars against.

Okay, then maybe follow that up, right. If you have fill rates that are better than the industry that would help you on the pipeline side attracting new customers. But is there a reticence on your part, to bring in a lot of new customers in a fill rate environment like this for fear of sort of execution or service nothing where you'd like it in the short run or you think that's manageable?

Yes, not at all. And what we're dealing with here is an industry wide thing. So the advantage that we have is for many suppliers, we're a top five customer to them. So from an allocation standpoint we tend to get a fair share a lot of that allocated inventory. So no, it's an industry wide event and it certainly does not at all, prevent us from adding on new customers.

Okay, thank you.

Your next question comes from the line of Bill Kirk from MKM Partners. Your line is open.

Hey, good morning, everybody. So Sandy, I think you called out the reliance on third party labor in the quarter. From here absenteeism is likely way down. I think Chris gave a stat on that. And then peak seasonality, peak demand seasonality is also behind you. So I guess my question would be with seasonality and absenteeism down. Have you have you seen some cost improvements already in the first half of the third quarter here?

Well, obviously, we'll talk about that third quarter when third quarter is over on our call. But I think a couple of facts just to understand the second quarter is that about two thirds of our year-over-year operating expense increase was a function of what we had to invest over the holidays in third party labor and overtime. And we did that because we're strategically and mission focused on helping our customers to the extent that we continue to make progress filling jobs, which Chris outlined some of the numbers of our improvement there. And to the extent that absenteeism from COVID or any other cause continues to go down, you can expect that that we would see that improve, and that's certainly why we're working to accomplish.

Okay, perfect. And then how does cash use change with the new lower leverage expectation? I know it had been a goal to get under three. And your flexibility with cash opens up as you meet certain thresholds. So how does it change it at 27?

Yes. Great question Bill. This is John. We always look at how to best utilize our cash to the benefit of our shareholders. Certainly getting below three times, opens up the ability for us to consider returns to shareholders. That door I'd said before that door cracks open a little bit below three, and it's kick wide open when we get below 2.5. And then it just becomes the returns to shareholders becomes one of many opportunities, we have to use cash along with M&A opportunities, additional CapEx automation expansion as we optimize retail and we look at all of those opportunities within that portfolio to use our cash and we'll continue to assess those as we move forward.

Awesome, thank you, everyone.

Thanks, Bill.

Your next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.

Yes. Hey guys, Anthony on for Ed. Thanks for taking my questions. I just wanted to ask about fuel prices. Can you just walk -- talk through how we should be thinking about higher fuel prices going through the financials? To what extent are the hedges in place and what is baked into customer contracts with surcharges? And then is there any leg for us to think about in passing that through?

Anthony, this is Eric, our fuel prices, as John mentioned are up 40%, year-over-year for the second quarter. And we are anticipating that trend, given what's going on in the world here to continue. We do have a program in place where we can hedge against certain inbound or backhauling fuel that has been in place and will continue to be in place. And then we have a fuel surcharge program with our customers that we pass through some of the increases, but we recognized basically a four week lag in doing so. So what you're seeing is that 40% increase and we're anticipating that that will continue.

Got it. That's helpful. And then just on independence. Looks like it was pretty impressive growth in the segment in the quarter in excess of 10% on a three year geometric average basis. I was just hoping you could give us a little more color on what's driving that. How much did Omicron play a part in the exploration versus what we saw in Q1? And how sustainable do you think that is in the coming quarters?

Are you talking about the revenue growth Anthony?

Yes sir.

Yes. So we'll start with the consumer. Certainly we're seeing food at home trends remain elevated by most estimates, it's around 52% of total food spend. That's above pre-COVID levels, and it seems to have plateaued there. In other words, it remains really really strong and you have a work from home dynamic going on where folks it's been, there's been a fundamental shift there that we believe is going to continue. And now with inflation, what the consumer saying is they're going to spend less on discretionary categories and more on the essentials and of course, that's good for the food category. Regarding the revenue it is strong because of the demand we're seeing from our existing customers as long in addition to new business wins and as I pointed out, those new business wins are counting for almost half of the revenue growth. If you look at the units, we estimate somewhere around 40% of the growth is coming from just pure shipping more units, with the balance coming from inflationary left.

Got it. That’s really helpful. Thanks, guys.

Your next question comes from the line of Eric Larson from Seaport Research Partners. Your line is open.

Yes, thank you. Thanks for taking the question, everybody. So my question is on your revenue guidance. And I think, Chris, you may have touched base on this right now. So the increase in your revenue guidance, is this still kind of bit is it a 40:60 blend of unit growth versus inflation. Is that still kind of the mix for how your new guidance is looking?

It's, Hi Eric. It's a good question. We don’t split it out that way. We look at the revenue growth coming from not only the inflation but the sustainability of servicing the customers that we have today and the customers that we see in the pipeline.

Okay. And so, if you achieved your goal in fiscal '22 of a $1 billion of kind of new customer sale, what is that delta on a year-over-year basis. I know you had some big sales last year. What is the incremental increase this year if you achieve that $1 billion of new customer revenue?

I'm sorry, I don’t quite understand the question.

So I think the $1 billion of new customer revenue is a cumulative number for the last year or two?

Okay, you're talking about cross-selling. You're talking about the cross-selling number that I referenced?

Yes, correct. Yes, that's correct.

Okay, I'm sorry. I got confused with the new customers. So cross-selling is existing customers, right?

Right, correct.

Primarily, existing customers. And that's -- yes. Yes, so that is in the year and if you look at our guidance for the year, if you we can attribute about a $1 billion. We think we're landing about a $1 billion as the direct result of the aggregation and the combination of bringing together the two companies. That wouldn’t have existed otherwise. That's what that cross-selling number is.

Right.

As far as going forward, we will continue to maintain that and add-on to it with incremental cross-selling wins. So for example, on the second quarter we added a $100 million of incremental cross-selling wins but in aggregate, cross-selling will contribute about a $1 billion for fiscal '22. Does that answer your question, Eric?

Okay. Yes, it's that. Thank you, again.

Okay.

Your next question comes from the line of William Reuter from Bank of America. Your line is open.

Hi, good morning. Just following-up on one of the questions about your fuel and the ability to pass it through. You mentioned you passed through some of this on a four week lag. Just when you say some, is that the majority of those costs or is it some small component of those fuel costs?

Okay. It's we passed through less than 50% of the costs. But what we're anticipating is we think about fuel costs and increases and the internal math that we've done, even in the back half of the year, some of those increases that we're anticipating won't be dramatically material to our financial results. Between the hedging programs and the fuel surcharge that we're able to pass on.

Okay, that's helpful. Is there any way to think about in general, what your annual fuel costs were last year so we can get some context about the magnitude of what an increase represents?

Yes. We haven’t provided that information before. So is it's not something we will start providing now.

Okay. And then my last question is with regard to the lower fill rates that you experienced, I expect the majority of customers are seeing this from suppliers and are they expected they would see it if they had as if while other than yourselves. Do you anticipate that this will have any impact in terms of customer retention, I would expect the answer's no?

Yes, the answer is "no." I mean if our customer base if they're buying from a wholesaler, there is a big benefit to buy from a wholesaler scale. And this is an area where scale is a benefit to help improve our ability and access to high demand items. So they're -- this is an industry dynamic and in this industry dynamic you find that scale wins. In other words, we have access to these high demand products because like I said earlier, we're typically the top one, two, three, four, five, customer for a lot of these suppliers.

Makes sense. I'll pass it to others. Thank you.

[Operator Instructions] Your next question comes from the line of Kelly Bania from BMO. Your line is open.

Hi, good morning. Thanks for taking our questions. I just wanted to ask about the market contraction that you are planning for this year. And particularly if you look at your volume trends across channels, if you are seeing or expect to see any divergences in volume by channel or retailer type as customers react to these higher levels of inflation?

Good morning, Kelly. This is Chris, I'll take that one. So I would call the market contraction above what we anticipated. And when I look at that, it's less on a per unit basis and how many units we're shipping but more on like looking at share shifts that happening with the industry. And we've seen some shift happening, that seems to have plateaued. In other words that it's stopped. I mean, actually seeing some share come back to our customers in the third period of the quarter. So it seems that we're stabilizing. And look, we have a strategy in place and there's always been our strategy in place to outpace the market contraction with cross-selling and new business wins. In addition to developing custom programs by channel and we're committed to helping each channel to maintain success.

Okay, that's helpful. And question, another question on just the fill rates, just helpful commentary about the trends and the challenges there. But could that at all be a benefit to your cross-selling initiative as other suppliers deal with fill rate challenges and does that maybe open up the doors for you in terms of cross-selling and items that maybe you have better at stock?

Well, I think it's a great question. The short answer is "Yes." And I'll point to an example and that's our brands group. Our brands portfolio does over a $1 billion at wholesale, in other words it's a very large portfolio and our fill rates on our brands are 500 bips to a 1000 bips better than the national brands. So when we anticipate or we see a long-term out-of-stock skew, we quickly try to pivot the customer to a skew that isn’t higher in stock. And in many cases, that is our brands business. So look, it's a difficult environment and the winners in this environment are the ones that can navigate quickly and we have a sales team, and a merchandizing team, and a procurement team that's doing that. We've had to change our behavior to be quick and nimble to secure high demand skews. And again, this is where having a very big team that is in constant daily contact with suppliers, helps a lot.

Okay, thank you. And then, maybe just a last one on Key Food. Is there any color you can help us model with the contribution that was to the quarter and as the timing of that ramping as expected and any startup costs we should be thinking about?

Yes, we're not going to talk about any specific customer or the margin or revenue associated with them. But we're happy with the Key Food startup. We're happy with the Allentown Distribution Center, that's just seven months into its start. We've on boarded a steady workforce there, we're making progress every day. And I will just tell you that that Allentown we see has met our expectations.

Great. Thank you.

Sure.

And your last question comes from the line of Carla Casella from JPMorgan. Your line is open.

Good morning. I have one follow-up on the prior question and remind us of. That when you're selling more of your own brand business brand, is it there a significant margin differential or a price point differential?

Hey Carla, this is Chris. Our brands business are margin accretive.

Okay, this might be it. Okay, great. And then, I know you get and exits for some of your multi-employer pension. Is there any liability remaining and have you heard anything or are your plans eligible for any of the ARPA assistance that we should be hearing about and if there will be a timing there?

Yes Carla, this is John. We are aware of that and we do have a team that monitors that and we do look for opportunities to recapitalize on strategic plans to exit. We did that in Q4 of last year. We're monitoring the litigation and we will continue to do so to look for those opportunities.

Okay. Have you disclosed the amount of multi-employer off-balance sheet liability you have, has in this quarter or hasn’t looked yet?

No, I think well, we disclosed the appropriate amount in our K. so, nothing that would disclose for the quarter.

Okay, right. Thank you.

Thank you, Carla.

And there are no further questions at this time. I'd turn the call back over to UNFI management for some closing remarks.

I want to thank everybody for joining us this morning. I hope what you've heard and take away from today's call is that UNFI is growing and performing within the challenging environment by steadfastly focusing on the most important thing in our business which is our customers. Our Fuel the Future strategy is driving our performance in many ways adding value to our customers businesses remained at the heart of everything we do. And we're pleased with our performance while acknowledging that we can continue to get better in almost every facet of the business. Our customers are the long and short term focus of our company. And maintaining our flexibility to serve them in a challenging environment is the top priority. For our customers listening today, we thank you for your continued partnership and the business we do together and for our suppliers in UNFI's associates listening today, my thanks to each of you for everything that you do for our business, our customers, our communities, and each other. And for our shareholders, thank you for the trust you put in us through your continued investment in UNFI. Thanks, everybody.

This concludes today's conference call. Thank you, for your participation. You may now disconnect.