Operator: Good morning, and welcome to the SpartanNash Company Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Chris Mandeville, Managing Director of Investor Relations at ICR.

Please go ahead.

Chris Mandeville: Good morning and welcome to the SpartanNash Company third quarter fiscal year 2020 earnings conference call. On the call today from the company are Tony Sarsam, President and Chief Executive Officer, and Mark Shamber, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the earnings release, which was issued yesterday at

approximately 4:30 P.M. Eastern Time.

For a copy of the earnings release, please visit SpartanNash's website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company's website for approximately 10 days. Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties, actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include amongst others, disruption associated with the COVID-19 pandemic; competitive pressures amongst food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating operations; and general economic and market conditions.

Additional information about the risk factors and uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's earnings release, most recent Annual Report on Form 10-K and in the Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements. This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the Company's earnings release, which was issued yesterday.

And it’s now my pleasure to turn the call over to Tony.

Tony Sarsam: Thank you, Chris and good morning. And it is a pleasure to be speaking with many of you for the first time as President and CEO with SpartanNash. I’m proud to be part of this organization and I’m energized to address the opportunities we’ve ahead of us. Let me begin by thanking my pleasure to Dennis Edison, who he and his team have done over the past years to step back into CEO role on an interim basis.

His leadership during an extraordinary time in our country and our world has a legacy eye plan to build on. I look forward to working with him and the other members of the Board of Directors as he resumes his role as Chairman. As I reflect on my journey ahead, I realize what a privilege it is to lead a -- and serve our customers. I plan to share more specific objectives for the orientation over the coming months. However, my immediate goal is to ensure that we’re leveraging our existing competencies to have improvements in our operating performance.

Our financial results have underwhelmed in recent years and I’m confident that together we can achieve more. I’ll work to pay over the insight I’ve gained with the operational strategies to unlock the true potential of our organization. Among other areas of focus, I believe that we need to act with recent level of urgency to make meaningful improvements in our supply chain. We’ll make investments in human capital in our facilities and other resources to ensure our supply chain has the supported needs to operate with efficiency and a high level of execution. I’ve had the opportunity to read many fine organizations and similar industries and was dropped on that experience as we work to make the most of the opportunities in front of us.

In my three decades of leadership in the food industry, I’ve deserved the deep understanding of every facet of the consumer package goods and food distribution businesses. Over 35 years, my experiences have ranged from packaging machine operators to plant managers and a great many GM and functional leadership goals. In my most recent role of CEO of both Borden Dairy and Ready Pac Foods, I succeeded in developing people first culture and supporting our teams’ to renew our commitments to innovation and customer service. In both roles I was able to lead our teams to be best-in-class operators in the industry. In short, I’m no stranger to challenges and as CEO of SpartanNash I still maintain to apply my supply chain and organizational development expertise to transform our company into world-class operator and one that can deliver on sustainable growth over the long term.

Let me end by thanking you for your well wishes and support. I’m thrilled to be here and very excited about the journey ahead. With that I’ll now turn the call over to Mark to review our third quarter performance and provide an updated guidance for the remainder of the year.

Mark Shamber: Thanks, Tony and welcome to everyone joining us today on the call. Net sales for the third quarter of fiscal 2020, increased by 3.1% or $61 million to $2.06 billion versus 2019, third quarter sales of $2 billion.

Our adjusted EPS for the third quarter came in at $0.70 per diluted share compared to adjusted EPS of $0.30 per diluted share in the prior year’s third quarter, an increase of 133%. GAAP EPS came in at $0.56 per diluted share in the quarter compared to a loss of $0.01 per share in the third quarter of fiscal 2019. The increase in profitability from the prior year quarter was driven by higher sales volumes, improved gross margin rates and increased leverage of our operating expenses particularly in retail store labor and certain of our fixed costs. Increases in incentive compensation and a higher rate of supply chain expenses served to partial offset our increased profitability. Shifting to our business segments, net sales improved distribution increased by $73 million at 7.8% to $1.01 billion in the third quarter driven by the combination of continued sales growth with existing customers and incremental volume associated with the impacts of COVID-19.

Inflation moderated to 1.12% pre-distribution in Q3, a significant pullback from both the second quarter rate of 4.43% and the third quarter of fiscal 2019 inflation rate of 1.68%, as re-prices were nearly flat in the third quarter following the significant second quarter increases, while produce inflation levels nearly doubled sequentially. Reported operating earnings for food distribution in the third quarter totaled $9.2 million compared to the $11.7 million for the prior year quarter. During the quarter, we made the decision to abandon a tradename to better align our transportation operations and provide a more integrated solution to our customers resulting in a $7 million impairment of the tradename. The decrease in reported operating earnings for Food Distribution was largely due to this asset impairment charge, as well as higher supply chain expenses from both the dollars and rate perspective and a higher allocation of corporate administrative expenses. These increases were partially offset by the incremental profitability from higher sales volume in the quarter.

Adjusted operating income totaled $15.7 million in the quarter versus the prior year’s third quarter adjusted operating income of $15.5 million. Adjusted operating earnings exclude the asset impairment charges and other items detailed in table 3 under the food distribution segment in yesterday’s press release. Retail net sales came in at $597 million for the quarter compared to $562 million in the third quarter of fiscal 2019, an increase of 6.2% or $35 million. Our comparable store sales were 10.6% for the third quarter of fiscal 2020. Comparable store sales benefitted from the shift towards food at home and also reflect our strong customer penetration.

These results also reflect increases of over a 175% in our e-commerce sales for the quarter and continued favorability in our private labor sales particularly compared to competitors. We also continued to benefit from higher EBT sales, although not at the same levels as earlier in the year. Early in the fourth quarter, we had a grand opening for our new modern store in [Indiscernible] Indiana replacing a previously cold store as part of the development of River district increasing our current store count to 156 stores. Third quarter adjusted operating earnings in the retail segment came in at $22.6 million compared to the $7.3 million in 2019’s third quarter. Retail reported GAAP operating income of $22.3 million for the quarter compared to $6.7 million in the prior year’s third quarter.

Our profitability improvement was driven primarily by the sales increased during the quarter, while we also benefited from improvements in our margin rates which include lower inventory shrink as well as favorable variances in labor rates. Partially offsetting these items with higher incentive compensation due to the improved segment performance. Military net sales of $452 million in the third quarter decreased by $47 million or 9.5% compared to prior year quarterly revenues of $499 million. Sales continue to be negatively impacted by commissary restrictions and base closures during the quarter as many bases maintained a higher alert level that either limited or did not allow visitors thereby reducing the number of shoppers who could access the commissaries. Military generated an operating loss of $2.5 million on both a reported and adjusted basis in the third quarter compared to a reported loss of $2.6 million in the third quarter of fiscal 19 and an adjusted operating loss of $2.5 million for that quarter.

Improved margin rates were effectively offset by a combination of the lower sales volumes an increase in allocated corporate overhead expenses and expenses related to hurricane Sally. Interest expense decreased $3.9 million in the third quarter fiscal 2020 to $3.5 million due to the combination of lower interest rates and lower average debt levels resulting from our increased profitability and improvement in working capital compared to the third quarter of fiscal 2019. In the first three quarters of 2020, we generated consolidated operating cash flows of $224 million compared to an increase of $84 million over the same period in fiscal 2019. This increase was largely due to our higher profitability and the improvements in working capital that I mentioned a moment ago. These improvements resulted in a free cash flow generation of $178 million in the year-to-date period compared to $93 million in the same period over the prior year.

During the third quarter we declared $6.9 million in the form of cash dividends and SpartanNash didn't repurchase any shares in the third quarter. Our total net long-term debt decreased by $145 million during the first 40 weeks of 2020, ending the third quarter at $519 million compared to $664 million at the end of fiscal year 2019. Our net long-term debt to adjusted EBITDA leverage ratio fell to 2.3 times as of the end of the third quarter from 3.7 times as of fiscal 2019's year end, driven by the combination of our strong debt pay down as well as our 35% increase in year year-to-date adjusted EBITDA to $190 million. We expect to make further progress on our leverage ratio in the fourth quarter. As covered in yesterday afternoon's press release, we are updating and narrowing our fiscal 2020 earnings guidance.

For fiscal year 2020, we now anticipate adjusted earnings per share from continuing operations of approximately $2.42 to $2.50 per diluted share compared to our prior projections of $2.40 to $2.60. Our updated guidance reflects the continued benefits of sales trends associated with COVID-19 and the related increases in consumer demand that we are experiencing offset by estimated non-cash stock warrant expense of $6 million to $7 million or $0.13 to $0.15 per diluted share in the fourth quarter associated with the issuance of warrants to Amazon as disclosed in our form 8-K filing in October. For accounting purposes this warrant expense will be reported as a reduction in sales and will negatively impact our gross margin rate in the fourth quarter of fiscal 2020. Reported earnings per share from continuing operations are expected to range from $2.09 to $2.17 per diluted share compared to our prior projections of $2.13 to $2.41. We now expect fiscal 2020 adjusted EBITDA to range from $237 million to $242 million compared to our prior guidance of $232 million to $242 million, consistent with our projected increases in operating earnings.

Our guidance reflects capital and IT capital expenditures in the range of $80 million to $85 million for the fiscal year. Depreciation and amortization are expected to be $88 million to $90 million. Interest expense is now expected to range from $18 million to $18.5 million. Also our guidance reflects an adjusted effective tax rate of 23.5% to 24%, while our reported effective tax rate is now expected to be 13% to 13.5%. Before we open up the call for Q&A, I'd like to take a moment to thank Dennis Eidson for his leadership of the company after jumping back into the CEO seat for the last year plus and also to wish him a happy retirement, as he continues as Chairman of the Board.

And finally, I'd like to publicly welcome Tony to SpartanNash and the executive team and I look forward to working with him as he leads us into our next phase of growth. With that I'd like to turn the call back over to the operator and open it up for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chuck Cerankosky Northcoast Research.

Please go ahead.

Charles Cerankosky: Good morning everyone.

Tony Sarsam: Good morning Chuck.

Charles Cerankosky: Tony, you mentioned the sense of urgency around improving the productivity of Spartan supply chain DC any low hanging fruit there or can you talk about some projects you want to get to quickly to improve the operating margin within food distribution?

Tony Sarsam: Well, a great question and I want to, I will caveat this one and many others today with the notion. I've been here six and a half weeks, I don't have absolutely everything figured out yet.

But, as I look at our DCs and our performance overall, it's clear that we have opportunities and at a high level, we have process opportunities the way we run our DCs we have some infrastructure opportunities. We have aging IT systems for example. So I think there's a number of productivity areas, we can go hunt. I don't think there's any one panacea, but there's certainly a number of areas where we can go make improvements and get a turnaround there. So, I am in the knee deep into that exercise right now figuring out which ones to take on first and how we go about them.

Operator: The next question comes from Karen Short from Barclays. Please go ahead.

Unidentified Analyst: Hi, good morning. This is Kate Howard on for Karen. First congratulations Tony.

We look forward to working with you.

Tony Sarsam: Thank you.

Unidentified Analyst: I guess my first question is, can you talk about how much of an impact lapping the exit of fresh production had on the food distribution segment from a year-over-year standpoint?

Tony Sarsam: Yes. So it's a helpful question Kate, and it's a little a little misleading in the way we report the segments as to what that did to food distribution. So from an external standpoint as we've had in the press release, the food distribution segment was up about 7.8% for the quarter.

But if you were to adjust out for the fresh production and some of the business either from the kitchen that went away last year that we're laughing in, as we talked about at the end of the first quarter, we’re exiting the fresh cut business. I would say that the food distribution like the core food distribution without the Kaido impact on it was probably 500 basis points higher. So it was probably closer to a 127, 128 for the quarter. And when we talked last quarter about the 15.5, we probably weren't clear enough that was the food distribution portion and it was not netted with Kaido and the way we would externally report it. So I would say that we did see some moderation during the course of the quarter in order to end up at that 128 in food distribution, but we definitely were next to Kaido production business about 500 basis points higher.

Unidentified Analyst: Okay. That's really helpful and I guess kind of along those lines, can you share what current trends to-date are in both food distribution and at retail?

Tony Sarsam: Yes. I mean I think that we would see, well we would say that we've seen a little bit of moderation further, but it's been choppy and so it's difficult to understand if just the way some of the different states reopening or impacting that or if there are other vectors there at clay. But I would say that from the numbers that we averaged for the third quarter, we're probably as we sit here today maybe 100 to 150 basis points off that certain parts of retail, certain geographies that are maybe more open than others might be off to a greater extent, but we're probably 100 and 150 basis points down.

Unidentified Analyst: Great.

Thank you.

Operator: The next question comes from Scott Mushkin from R5 Capital. Please go ahead.

Scott Mushkin: Hi, guys thanks for taking my questions and Tony welcome. I'm excited to work with you guys to work with you.

So I'm glad Dennis found a great successor. Anyway, I just wanted to clarify what you just said Mark actually. So you said the sales are down about 100, 150 from where they were running?

Mark Shamber: Well from the averages to the quarter, I mean it's little tricky from where they were running per se but from the averages to the quarter we're down a little bit.

Scott Mushkin: Okay. So then Tony maybe you don't have an answer for this yet, but I mean obviously this military business has been a drag on the company for a really long time.

Have you put any thoughts into what to do with it? Is there anything to do with it? Is it something that we need to stick with or how should we think about that?

Tony Sarsam: Yes. It’s a great question. So and it's obviously, as you know, it's a long legacy business and a lot of, there's a lot of history and pride in serving the military, but the military results are not acceptable and so that business will change. It has to change and we're going to look to harkening back my previous question and see how much of that is in operating efficiency. I don't think we'll find all of it there, but I know that's an appropriate place to start and we'll find other ways to improve it.

But my broad commitment here is to grow SpartanNash top line and bottom line and military has to play and it hasn't. So there will be changes there for certain.

Scott Mushkin: So then, this is again more of a strategic question maybe it's not fair because you have 6.5 weeks under your belt, but Spartan's always been acquisitive. I think you obviously signed an incredible contract with Amazon. How are you initially thinking about the growth trajectory of the company? Obviously there's work to be done on the operational side, which I think you framed, but we're kind of looking out a couple years how do you think this business grows well from maybe organically and then also through M&A?

Tony Sarsam: Well, I mean I think it will grow in both those ways and I think we will be as we said in our previous calls, I believe will be opportunistic if we have opportunity to grow in retail.

But the big thrust of our growth will be in distribution and we'll look for ways to expand that and expand it with new customers and growing some old ones and then look for to set up new beachheads to for growth and we have of course great opportunities geographically to do that. So I think we'll be probably more aggressive in looking at acquisitions in the distribution space if that makes sense and probably more opportunistic on the retail space.

Scott Mushkin: That's terrific and do I have time for one more or so should I just get back in the queue.

Tony Sarsam: I think we're okay at the moment. We're doing well in time.

Scott Mushkin: Okay. So then, this is more of a shorter term question. I mean obviously COVID is escalating across the country and so it's kind of a two-part question. Number one, are you seeing in places where it's really starting to surge and they're starting to close down. Are you seeing improvements in the sales trajectory? That's number one and number two is I wonder if you could give us a little look into the independent grocer growth obviously when COVID started up, they were big winners and compared to like maybe a Wal-Mart or something like that as people flocked there.

So it's kind of a two-part question then I'll yield. Thanks.

Tony Sarsam: Yes. So I mean I think on the overall trends and as you've highlighted with some of the COVID cases rising back up, I don't know that we've seen anything really measurable that we could call out through the last few weeks. The trends that we have in certain geographies have been relatively consistent.

There has been maybe a week or two where they were a little outside the norms or outside the trends from that standpoint. But I don't know like let's say if we said in Michigan as an example I don't know that as Michigan suddenly has had an uptick in cases that we've seen anything significantly change, but that may be part of the Governor hasn't moved our protocols further and so that could be driving it or there's aspects where the kids are still in school in many respects and so as more and more schools shut down and go to a hybrid model working remote, we may see a greater impact there. But it hasn't been sustained and/or clear enough to point to anything specific in that regard Scott. And then, as it relates to the second question, look I mean I think the independents they continue to benefit in this environment. We look at their numbers and even in a normal year there are some independents that are doing great and there are some independents that are middling.

I would say that with the tailwind that's come to food at home and benefiting the independent they're all benefiting, but they're not all benefiting to the same degree and so just like we'd have in a normal year where we could point to some folks being up and some folks being down we've got folks being up but up to different degrees. I think the one thing that really hasn't been much in play until maybe the last month or so maybe even the last two months is that there was certainly a pause on competitive openings during the peak of COVID. Folks weren't doing construction. Folks weren't going out and setting new stores, opening new stores. People were focusing on running what they had and now that country's reopened to varying degrees you are seeing that some of the competitive openings against independence in different geographies are now occurring.

They might be months later than they were originally planned. So I think that's maybe the only recent change in dynamic is that competitive openings that have been paused for a significant period of time or either back on the calendar and/or occurring but the independence of all benefit is just varying degrees based on their competition as well as their individual execution.

Scott Mushkin: Terrific. Thanks for the answers. Appreciate it.

Tony Sarsam: You are welcome.

Operator: Next question comes from Greg Badishkanian from Wolfe Research. Please go ahead.

Greg Badishkanian: Good morning. This is Spencer Hann on for Greg.

Congratulations Tony on the new role.

Tony Sarsam: Thank you.

Unidentified Analyst: So, if we look at 2021 how well-positioned do you think you are to just keep the sales and EBITDA gains from 2020? And then when consumers start to split their baskets again what do you see as some of the biggest factors driving where they choose to shop?

Tony Sarsam: Well, I mean it's a little early to be predicting 2021 simply because we're not sure what the sales trends will be coming out of the holidays and going into next year, but I mean I think that to the extent that there's a longer-term shift of food at home, from food away from home and look we all take the news of a possible vaccine as a positive. But you also get sort of a refresher that it's going to be six to nine months before that's widely available and so I mean we've talked before that the northern geographies, we primarily operate it's quite likely that folks are not going to be going out to dinner as much as they were before because they'll need to be indoors and frankly if the number of COVID cases continues to spike occupancy levels that have been returned to 100% or maybe 50% capacity may be cut back further. And so that should help our numbers going to 2021.

I'd like to think that we retain a good portion of the EBITDA and the sales that we've generated but honestly not willing to kind of put anything down into a range until we get through the year end and see what the trends are as we start off with the New Year. So I think you can understand that I mean we've tried to SpartanNash to set some guidance and based on what we've seen for the expectations and we've managed to sort of stay in the range and occasionally it's been a little lighter than what we projected but we're all trying to predict the future in something we've never seen before and then I'm sorry. So the second question was? The second half of the question was about retaining the business?

Unidentified Analyst: Yes. How do you feel the customers split again, yes.

Tony Sarsam: Yes.

I mean, I think that from our consumer perspective we've brought folks into the store that may have previously shopped with us that have been refreshed and getting to see how we've changed over the years and we're working very hard to make sure that those customers retain. We retain those customers. I would tell you that what we've seen on the private label and owned a brand side where we've made some market share gains and we've been able to keep those, I mean our own brand's growth in the third quarter was pretty much consistent with our comp, whereas we saw for a lot of our competitors that they were maybe 200 to 300 basis points lower as national brands return to the store. And so, I think we're doing a good job with that with the quality of the products that we're offering and the price points and I think the consumers are looking at what their bottom line purchases going out the door compared to maybe when they were shopping at the competitor and saying that we're on par or a reasonable difference and so we are able to retain those customers and we will have to keep working at it, but I think we have been pretty successful to-date.

Unidentified Analyst: That's great color.

And then, on your distribution centers, can you talk about how much incremental volume, you could put through your existing facilities before you need to add capacity just as you start to add new customers?

Tony Sarsam: Yes. I mean that's really a function of type of volume and where it comes. I mean there's some distribution centers that can easily handle or has billion of incremental volume based on their size and current capacity and what we've done in the past. There are other distribution centers where incremental $50 million might lead us to go outside either because of the size of the distribution center or the types of orders that we receive there. So it's not one answer fits all kind of response, but I would say that we have built out our infrastructure and we're looking at growing towards the future in a scenario that as we add additional capacity that release capacity of other distribution centers and so we've been at maybe two or three locations as we need space.

So I think it will be incremental builds that would not be significant of an increase on our capital expenditures. Hopefully in many instances, we need to be able to fit in with the normal year-to-year CapEx. But certainly if we have big spike in one year it's not unreasonable to think that capital allocation could go from the roughly 1% we generally have done to maybe one in a quarter, 1.3%, but I think that that's more of a one year scenario versus a need to get into a cycle like that going forward. I think we can manage our growth within the capital plans that we have right now.

Unidentified Analyst: Great.

Thank you.

Tony Sarsam: You are welcome.

Operator: The next question comes from Kelly Bania from BMO Capital markets. Please go ahead.

Kelly Bania: Hi, good morning.

Thanks for taking our questions. And also just want to express the congratulations and welcome to you as well Tony from all of us here.

Tony Sarsam: Thank you.

Kelly Bania: I wanted to just kind of go back to that comment, I think Mark that you made about the 500 bases impact from Kaido and can you just walk us through how that same Dynamic may have impacted the past couple of quarters in the food distribution segment?

Mark Shamber: Yes. I mean I can tell you, I mean, it would take me second just to be able to robustly interpret for the first quarter.

But here is just maybe as a refresher, it was at this time a year ago that we announced, yes we know, it's second quarter last year, I apologize. But in the second quarter of last year, we announced that we were going to exit the fresh kitchen business and that we were considering disposition of fresh kitchen and fresh cut. And at that point in time, we talked about the fresh kitchen business being maybe $50 million on a run rate and we won that down during the course of the third quarter that maybe have been little bit into the fourth quarter. And so that took away a portion of the business. But then as we mentioned on the first quarter earnings call, we were in the process of growing the fresh cut and shifting some volumes around when we lost a significant customers based on that customers volume within the fresh cut business, we just couldn't make the fresh cut business profitable quickly enough to sustain that customers’ loss and try to rebuild.

And so, we made the difficult decision to exit fresh cut. And so, as we look at where we are right now, the numbers earlier in the years are probably that we're down probably 35 million and 40 million on year-over-year basis, involves the second quarter and three quarters and sales from those portions of the Kaido. There is probably a little bit that’s in there on the distribution side because they do some food services and the food service business has been softer. In the first quarter that number may be down 30 million to 35 million because we did operate the fresh cut business for the bulk of the first quarter. We wounded down starting in like the March timeframe.

So almost around the timeframe that COVID started giving a significant sales lift. We started to see that go down. So, when you look at it in the numbers that we're putting up in food distribution in the first quarter, second quarter really didn't had a factor into the callout and we just kind of reported the combined numbers. But as we've talked about there were some questions after we did the earnings release last night not missing it in the third quarter makes it seem as if our ongoing food distribution business has greater weakness than maybe others in the space are reporting, and so I thought be helpful to clarify that particularly when we got the question this morning.

Kelly Bania: Okay.

That's helpful. And I guess Tony, you had mentioned just investments in capital. I think you called out some IT that is a little dated. I guess should we think about maybe Spartans shifting a little bit more into an investment phase here because it feels like there's been some focus on just cost cutting over the last couple years and just curious how you think about that dynamic if you can elaborate on that at all?

Tony Sarsam: Sure. Well, without having to comment on the past investments looking forward just pure cost cutting, I don't think is an appropriate way to think about how we're going to make our investments.

We will make certainly make investments that make us more productive because that productivity gives us the license to go grow our business and that's kind of I think these things are virtuous circle if you will. And so I think we will look to balance those investments and balance them between things that make us more productive and things that make us more capable of serving our customers and things that give us greater capacity as Mark mentioned a moment ago. So I think those things will all work in balance and that's the way I think about our investments going forward.

Kelly Bania: Okay. And I guess with the Amazon announcement last month lots of questions there.

I don't know how much you can say if at all, but how should we think about modeling that in over the next couple years and really what's the driver behind that? I mean what's happening for Amazon that we should think about drives the growth there for you?

Tony Sarsam: Well, I think that last question is probably a better question for Amazon than for us. I'm not sure for any customer that we should sort of be discussing what's driving their growth, but look I think we would be shocked if we didn't get a question about Amazon on this call. And so, given the announcement last month I would say look we've been doing business with Amazon since back in 2016 when Dennis was in the CEO seat, and Dave was in the COO seat and we talked a bit then about how we were doing grocery with them, some chill and some frozen. And we're working with them and within the Amazon Fresh and Prime now parts of the business and that relationship has continued over the last four and a half almost now five years. And I think that the announcement certainly indicates that we're going to continue to work with them and there's an opportunity for Amazon, which we hope they fully take advantage of to purchase up to 8 billion over the course of seven years or less in order to get the warrants to be able to exercise in our stock and the cadence of that we wouldn't necessarily discuss.

We wouldn't share if Amazon ever becomes significant enough of a customer where they'd be north of 10% of sales we'd obviously disclose that. We haven't disclosed that previously. But if you do the math, if there's 8 billion in purchases over seven years to fully invest the exercise ability of all the warrants that would average out to north of a billion one in sales over that seven year period. So we hope they do that over that timeframe and if they'd like to get that done even sooner that would be a welcome benefit on our end. So we've worked with them for a number of years, continue to work with them.

They've been a great customer and we look forward to continuing the partnership.

Kelly Bania: Thank you.

Tony Sarsam: You're welcome.

Operator: The next question comes from Damon Polistina from Deutsche Bank. Please go ahead.

Damon Polistina: Good morning. Congratulations Tony.

Tony Sarsam: Thank you.

Damon Polistina: Yes. So can you just speak to kind of the promotional environment you're seeing in retail, how it's changed over the last couple months compared to kind of the height of the epidemic? Have you seen competitors become more promotional?

Tony Sarsam: I don't know that we've seen.

I think a couple of things there Damon. I would say that over the last few months we've seen, there was a period of time where some competitors stopped running print ads and only went digital. I would say that looking at the space promotions are down overall. I don't know that competitors have gotten say more promotional than maybe where they were pre-COVID, but I think that the promotional levels are slowly inching their way back to normal levels and at what point or what date we get there remains to be seen. There are some challenges, which is why you just won't be back to normal levels because there's some products that you can't even secure still and if you were to secure and put it on promotion would be gone in a flash and in that regard folks need to make sure they have an ample supply if they're going to try and put it on promotion and if you can sell it all at full cost you're some of the things like the cleaning supplies and disinfectants those don't need to be promotional environments.

So I don't know that there's been any significant change there but I would say that the levels have risen from where they were during the spring, but they're still below where they were in the beginning of the first quarter of 2020.

Damon Polistina: And then one more for me just on e-commerce, it was up 175% this quarter. Can you just speak to kind of the consumer’s response to your offerings and then kind of where you see that business coming out to as far as percentage of the mix and then the kind of profitability levels of that business?

Tony Sarsam: Yes I mean, I'll answer the last question first. I mean, we've spoken that our e-commerce business is profitable, but it's not as profitable as a consumer going into the store and shopping on their own. So I mean, we've made great inroads over the last couple of years to increase the profitability of that business, but a customer going into the store and shopping versus us having a personal shopper, the savings you get from not having the cashier does not equate to the time it takes the personal shopper.

So that's for sure. As a percentage of our business, I would say that in the case of the stores that have e-commerce, it's running a little bit north of 4% of sales in the third quarter and so pre-COVID that was closer to like 2 and two and a quarter so that does kind of match up with the north of 175% that we referenced. And we would say that those consumers, we certainly are down from the peaks where people weren't willing to go into the stores, but we've certainly seen that a great deal of the incremental volume that we've picked up has been pretty sticky and that new customers that we got during that time frame continue to utilize the fast lane offerings that we have and the other e-commerce offerings. And then, as we've always seen with some of the fast lane business that they basically fill in during the week or they go into the stores for certain offerings in addition to what they're buying for e-commerce and so we're getting an overall greater percentage of that consumer's basket by virtue of the e-commerce offering that we have you.

Damon Polistina: Thank you.

Operator: The next question comes from Peter Saleh from BTIG. Please go ahead.

Peter Saleh: Great. Thanks and congrats Tony on the position, on the role. I just wanted to come back to the conversation around capital investment.

Tony, when you think about next year do you think you'll be making more changes in terms that will need more capital investment or more operational investments next year as you maybe plan for increased volume from some new customers?

Tony Sarsam: To clarify your question so you're saying will the investments as we prepare for bringing our new customers to be more capital or process oriented is that the essence of it?

Peter Saleh: Right. I'm trying to understand if you'll be making a little bit more capital investments next year versus prior couple of years?

Tony Sarsam: I mean, I don't think that it'll be measurable. I mean again I mean any given year we can be as little as 90 points of sale and maybe is maybe as high as 1.1%. So I think, we'll probably be in that range. So I don't know that it's a big shift and honestly this year more than any other year with all the delays associated with COVID, it is quite possible that some of the capital doesn't get spent just because of the way the timing plays out and I'll give a very perfect example is that we're looking to do some work in a distribution center right now and we're having trouble getting permitting and the permit's been in for a number of weeks.

But we haven't gotten it approved because there's only a handful of people that handle that in the office and it needs to go through two or three levels and more and in that particular municipal office three of the folks that would be associated with getting us approval are currently out with COVID. And so that's a scenario where we're going to be delayed spending the capital simply because of world events not that we would otherwise not spend the money. So I mean, I could say next year being a little bit higher but it's more likely going to be because of things like that than by virtue of customer growth that we suddenly need to spend an extra $30 million.

Peter Saleh: All right. Thank you very much.

Operator: The next question is a follow-up from Chuck Charles Cerankosky from Northcoast Research. Please go ahead.

Charles Cerankosky: Thanks for follow-up and looking at the Amazon relationship, I'm sort of focusing here on the share count going forward. It's up to them when they hit certain spending thresholds with you, which in turn allows them to exercise the warrant. Is that tied to any particular part of the year? Is there any predictability in that process so that we can have a better idea on where the share count is going to be? And I understand you're going to be using the treasury method.

So if you could comment on that a little bit Mark would be helpful.

Mark Shamber: Yes. So that's a very complicated question. Let me try to explain it as simply as I can. So the agreement allows for Amazon to have the ability to purchase up to 5.4 million shares subject to certain investing conditions.

Approximately 20% or about 1.8 million of those warrants vested upon execution of the agreement. Those warrants could be exercised today or any day from now to the remaining six plus years on the agreement. Additional investing occur with some requirements, which are not public and won't be public but will certainly reflect warrant expense over time as the conditions of those investing are met and that'll be in our numbers and be in our guidance. As it relates specifically Chuck, then to your question about the shares, yes I mean, without going into all the accounting it'll be the treasury stock method which basically takes says that for the proceeds you would get from the exercise of the warrants, you would take that cash and apply that against buying back the stock on the open market. And so, in a very simple example if the stock doubled you would only get a dilution of 1.75% versus 2.5% simply because you could buy back half the shares on the open market because they would be double the price.

So all the folks with your models are the information's out there publicly kind of do the math and see what the dilution would be but is the dilution varies based on where the stock's trading at that point. But it would be a fraction of what's currently exercisable simply based on where the stock is currently trading. And if any further questions I can walk someone through offline, but that's probably the most accounting talk anybody wants on an earnings call.

Charles Cerankosky: And then, the timing of additional vesting is not tied to anything, but how much Amazon purchases going forward after this?

Mark Shamber: Yes. I'm not going to comment on what the vesting criteria are but there are different investing criteria to how they achieve that.

That was redacted from the document so we're going to keep that appropriately confidential.

Charles Cerankosky: All right. Thank you.

Operator: The next question is a follow-up from Scott Mushkin from R5 Capital. Please go ahead.

Scott Mushkin: Hi guys thanks for taking my follow-up questions. So I just want to get some clarifications on a couple things. If you guys are fully engaged with a retailer both dry and fresh, how much of the store do you think you control or distribute controls the wrong word. Is it 60% - 70% is it 80? What would you put that?

Tony Sarsam: Yes. I mean I guess I would say it's a function of what they're doing DSD, but I mean I would say like a good penetration for us some retailers north of 50% would be a strong penetration but probably a max penetration would be closer to 70% maybe 65 I mean again it's all mixed driven by how much shelf space, how much center store how they've got that broken out but north of 70% would be unusual 60 to 65 might be a normal max and there's some retailers depending upon what they're carrying and where they're devoting their space it could be lower.

Scott Mushkin: And your expectation with Ais that they're going to be a full partner utilizing everything you guys do?

Tony Sarsam: I wouldn't want to comment on that because I know I don't know that I know enough about their relationships that I should comment as to whether or not that would be our penetration with them whether in any of the different areas that we serve them.

Scott Mushkin: But Mark, maybe I think you probably answered are you going to service them with fresh and dry grocery or just dry?

Mark Shamber: No, we continue to do fresh and dry yes. I mean we've done that would be some of the some of the perishable product that we referenced in chill.

Scott Mushkin: So kind of taking a step back and looking at the relationship and Amazon's plans, I'm struggling to understand why it's not in their interest to go way beyond if they're growing their store base and their other capabilities in consumables? Why they wouldn't want to blow through these targets? I mean it's clearly with healthier equity a ton and so if they're growing this business I'm just trying to understand why it wouldn't be in their vested interest to exceed these targets?

Mark Shamber: Well again, I mean that's probably a better question for them, I wouldn’t say that we would welcome that as long as it's not some crazy level of growth that would be difficult for us to support. But yes, I mean, it's a question for them, I mean we're certainly here ready to support them as a customer and all of our customers in any of their efforts to grow their business and that's we help our customers succeed with growth and we all succeed and so that's a win-win on fronts friends and that's no different from the single store independent to our largest customers.

So I mean, I would not disagree but I mean it's the individual customers have the different reasons for making their decisions and we're there to support them as much as they want to work with us and we always would like it to be more.

Scott Mushkin: And you can support them nationally?

Mark Shamber: I think yes, I think we feel comfortable, I mean, we're supporting some other customers on a national basis and as we continue to grow depending on where our growth comes our footprint may expand and I think we can still fit it within our capital expenditures that we've been asked about a couple of times. But I mean, we were able to support folks nationally now we do that and we've been doing that for a number of years for a handful of customers.

Scott Mushkin: Great. Thank you for letting me follow up.

Tony Sarsam: Sure.

Operator: [Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Tony Sarsam for any closing remarks.

Tony Sarsam: Great.

Well thanks so much and I just want to thank all of you for participating in today's call. It was great to get a chance to meet you within this fashion and looking forward to working with you in the future. Certainly appreciate the opportunity to share a little bit of my personal background as well as give you this update on the third quarter performance and again looking forward to the next time you get a chance to speak. So with that I wish you all a great day.

Operator: The conference has now concluded.

Thank you for attending today's presentation. You may now disconnect.