Operator: Ladies and gentlemen, thank you for standing by. And welcome to the UNFI Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] It is now my pleasure to turn the call over to Mr. Steve Bloomquist, Vice President of Investor Relations. Sir, the floor is yours. Please go ahead.

Steve Bloomquist: Good morning, everyone.

And thank you for joining us on UNFI’s second quarter fiscal 2021 earnings conference call. By now, you should have received a copy of the earnings release issued earlier this morning. The press release, webcast and the 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 Steve Spinner, our Chairman and Chief Executive Officer; John Howard, our Chief Financial Officer; Chris Testa, President of UNFI; and Eric Dorne, our Chief Operating Officer. Steve, 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. With that, I’ll turn the call over to Steve.

Steve Spinner: Thanks, Steve. Good morning, everyone. And thank you for joining us on our fiscal 2021 second quarter earnings call.

As you saw in this morning’s press release, we delivered another quarter of outstanding financial results. Second quarter sales grew 7.1%, second quarter adjusted EBITDA grew 57% or $74 million and second quarter adjusted EBITDA margin expanded 95 basis points. This quarters’ $206 million of adjusted EBITDA was the second highest in UNFI’s history, behind only last year’s third quarter that benefited from the significant jump in demand, as consumers began loading their pantries heading into the pandemic. This quarter also represented the fourth consecutive quarter, where we’ve grown adjusted EBITDA and adjusted EPS at a significantly higher rate than we’ve grown sales. We continue to make great progress in our debt reduction efforts this quarter and improved our net debt to adjusted EBITDA leverage ratio to 3.2 times a full two-turn improvement since last year’s second quarter.

As a reminder, we have paid down almost $1 billion of debt since fiscal 2019 and are well on our way towards less than 3 times leverage. Momentum continues to build throughout our business and we are delivering strong results as we execute on our strategies. This quarter’s results are a clear validation of the great work we are doing to increase shareholder value. Our cross-selling strategy is resonating with both existing and new customers who are looking to aggregate volume. Our award winning brands business, an important differentiator for UNFI continues to grow, as does our professional services business, both of which help our customers succeed in today’s evolving retail landscape.

Looking forward, we continue to believe that UNFI is well-positioned for continued growth and that food-at-home consumption will remain elevated for the next several years. Companies continue to push office return dates further into the future, as they evaluate return to work strategies in light of increased productivity and work flexibility that come with working from home. At the same time, many Americans continue to manage their household budgets closely with dining in providing a more affordable meal option and a great opportunity to connect as a family. Consumers also continue to look for better food options with ingredient transparency and UNFI continues to lead the way forward in this important segment. We expect this backdrop will continue to provide a tailwind for us, as we pursue growth within the $140 billion addressable wholesale market, of which $38 billion comes from gaining share of wallet with our current customers and an additional $78 billion from adding new customers.

In addition, we continue to move forward on optimizing our distribution network, generating additional operating benefits to the Value Path initiative and investing in technologies that provide valuable insights into our future business growth and lower our cost structure. Finally, I’m pleased that we’ve extended the contract with our largest customer through late 2027, almost seven years from now. We believe this reflects the strong working relationship between the two companies and the benefit UNFI brings to their operations and growth. Let me now turn the call over to Chris to provide more contexts on our business performance. Chris?

Chris Testa: Thanks, Steve, and good morning, everyone.

On today’s call, I’ll provide additional color on our fiscal 2021 second quarter performance and discuss the key trends we’re currently seeing in our business. I will also highlight the drivers that continue to differentiate UNFI, giving us confidence in our ability to drive long-term market share growth. As you saw in this morning’s press release, total sales for the quarter increased 7.1% or $450 million compared to last year second quarter. Excluding retail, our wholesale growth rate was 6.5%. For perspective, we believe UNFI’s growth was about 200 basis points higher than Nielsen’s retail syndicated data when accounting for the 400 basis points difference in retail versus wholesale inflation and our 80 basis points foodservice channel headwind.

Our second quarter sales growth also accelerated 110 basis points compared to the 6% sales growth in our first quarter. We believe there are several reasons for this sales growth expansion. The first is UNFI’s unique ability to cross-sell. Our cross-selling efforts generated approximately $90 million in incremental sales for the quarter, bringing our total incremental revenue from cross-selling to nearly $500 million since the SUPERVALU acquisition. Looking forward, we see a path to delivering a cumulative $1 billion in cross-selling revenue by the end of our fiscal 2022, as we continue to gain traction with larger wins.

As we mentioned, on the last call, we believe that there’s $140 billion adjustable market for UNFI, including $38 billion of upside opportunity by cross-selling and gaining further penetration with our existing customers. We are gaining momentum and cross-selling remains an exciting key benefit for our customers and UNFI. The second reason for our Q2 sales growth was revenue gained from new customers. Our sales teams have been aggressively capitalizing on our opportunities to drive sales gains across all parts of the store and we’re winning business every week across all categories, including fresh and general merchandise, center store grocery, frozen and others. UNFI has the portfolio and distribution footprint to compete with the local and national wholesalers, and provide customers with the advantage of our scale.

We also continue to invest in our people and expertise. To that end, we’ve hired Dorn Wenninger as our SVP of Produce. Dorn comes from us from Walmart, Mexico, and he’s already hit the ground running. He’s another great example of a talent we’ve added over the past year to accelerate growth for our customers and UNFI. The third reason driving our outsized growth is the change in consumer behavior at retail.

Mackenzie has reported that roughly 10% of people have changed their primary grocery store during the pandemic, largely based on proximity to home. UNFI customers have benefited from this especially are independents who tap into an additional growing consumer preference to shop smaller footprint stores. We have and will continue to support all of our customers, particularly as the future of work remains uncertain, but likely does not entail everyone returning to work in the same fashion they did pre pandemic. Also, the rising importance of e-commerce is changing how consumers interact with our stores. We estimate that 70% of independence and a larger percent of chains now offer e-commerce solutions to their customers.

And UNFI provides the digital platforms and necessary support to help our customers succeed. By point in fact, we have on boarded hundreds of new customers onto our e-commerce platform solution since the start of the pandemic and have many more in the pipeline. Moving forward, we believe these consumer trends will continue and UNFI is uniquely positioned to adapt to changing consumer behavior by servicing a diverse customer base through an unmatched portfolio of products, programs and services. Turning to our sales performance by channel. Second quarter sales to chains were up 6.5% and to independent retailers were up 9%.

Both channels were ahead of the syndicated data, I cited earlier, when adjusting for inflation and both experienced accelerated growth versus Q1 2021. Our continued growth with customers in these sales channels is the result of the factors I just mentioned. Specifically with chains, we have had cross-selling games with natural customers that had begun to use UNFI to support their captive conventional distribution. And we have one new business with many independents that are now UNFI customers. Wholesale sales in the Supernatural channel were up 7.2% compared to last year’s second quarter, which was the combination of greater sales to existing stores, as well as sales to stores open less than one year.

And finally our other channel grew slightly strong gains in our e-commerce business more than offset the softness in foodservice and military. Second quarter e-commerce sales increased 97% led by new business and sales growth to the largest e-commerce player who is now a top 25 customer for UNFI. Speaking of e-commerce, we will soon be introducing a new platform called Community Marketplace. This will be an exciting extension of our easy options B2B e-commerce solution that will provide UNFI customers additional access to growing on trend local brands. Similar to other e-commerce marketplaces, sales on UNFI’s proprietary Community Marketplace will bypass their traditional distribution through our DC network and allow for smaller emerging brands to be ordered and shipped directly to retail customers throughout the U.S.

This will give our customers access to an even broader assortment of items, with flexible order sizes and convenience to order from multiple sources online in one place. For existing UNFI suppliers interested in expanding their portfolios or for newer brands and suppliers looking for a gateway into UNFI, they gain immediate opportunity to access UNFI’s more than 30,000 unique customer locations, and benefit from a fast and easy onboarding that could eventually lead to broader distribution in our DC network. In short, we believe Community Marketplace is the disruptive digital innovation needed to connect growing brands with our customers to ultimately bring end consumers more freedom of food choice. We’re finalizing the details and I look forward to sharing more on our next call. Our strong topline results include another quarter of growth in our retail business, where same-store sales increased 15.3%.

E-commerce at retail continues its robust growth trajectory, increasing by nearly 190% a Cub. Last month, one of the two Cubs stores that were damaged during last year’s civil unrest in Minneapolis reopened and included several new offerings and departments based on input from the community. Club maintains its long held number one market share position in the Minneapolis market and we’re very proud of our commitment to serving communities that depend on us. We expect the second store to reopen in the next 30 days. Another sales growth driver was our Brands+ private brands business, which grew 7.3% in the second quarter.

Within the portfolio, our largest brand essentially every day grew double digits driven by gains with larger customers and better in stock levels to many of the national brand alternatives. Our inbound fill rates for our own brands have been averaging 1000 basis points higher than national brands. Our Field Day brand exclusively distributed via our natural independent customers has seen over 30% growth this fiscal year, fueled by supporting core grocery categories and new items. Across the entire Brands+ portfolio innovation continues to be the focus with approximately 200 new item launches planned for this fiscal year. To this end, we’ve seen tremendous growth from products like Woodstock’s organic frozen avocados, which quickly became the number two ranked new item in the frozen fruit category in the U.S.

natural enhanced channel. We have a strong long-term plan for this portfolio that capitalizes on the upside opportunity with existing, as well as new customers and leading into Brands+ as a point of difference for UNFI and our customers. Moving beyond our product offerings, we continue to expand our professional services portfolio to offer customers unique solutions beyond selling groceries to them. One recent example involves bringing digital currencies such as Bitcoin to our customer’s stores through relationship with Coin Cloud. Coin Cloud is a small footprint kiosk that empowers consumers to buy, sell or trade digital currency with cash without the need for a bank account or debit card.

To-date, we’ve signed 80 contracts and see this potential to grow to 4m000 plus UNFI locations. This is just one example of new services we’re adding to our current portfolio, including more traditional services like store design, merchandizing and payment processing. In total UNFI offers 150 types of services to keep our customers stores relevant, to drive the retail sales and to help them lower their costs. Lastly, on the operation side, we continue to move forward with optimizing expanding our distribution center network to better service our customers and deliver operating efficiencies. In Pennsylvania, our work is well underway on our new Allentown campus, which will be operational in time to ship Key Food early next fiscal year.

Our new Riverside California facility and a major expansion in Ridgefield, Washington are complete and fully operational. We introduced automation in portions of both of these distribution centers, where we expect to experience 100% increase in throughput as measured by units pick per hour, which will yield expense savings in addition to improving our order accuracy and lowering operational credits. Given the truly differentiated business model, which includes aggressively growing our wholesale business, while monetizing our unique assets like brands, e-comm and services, we’re optimistic about the rest of the year and our prospects beyond fiscal 2021. As Steve said, we’re running on all cylinders and we truly are. With that, I’ll turn the call over to John.

John Howard: Thank you, Chris. Good morning, everyone. On today’s call, I’ll provide additional context on our quarterly financial performance, balance sheet, capital structure and full year outlook for fiscal 2021. As Steve and Chris said, we’re very pleased with our operating momentum in this quarter strong performance. We said second quarter records for net sales, which totaled $6.9 billion, adjusted EBITDA which came in at $206 million and adjusted EPS of $1.25 per share.

Second quarter gross margin rate expanded 12 basis points versus last year’s second quarter, driven by a margin mix benefit from greater retail sales growth relative to wholesale sales growth, as well as lower levels of promotional spending on our retail operations. Gross margin rate for our wholesale and other businesses was approximately flat as a decrease in shrink expense, which last year included about 7 basis points of expenses associated with customer bankruptcies was offset by lower levels of supplier related income. Second quarter operating expense rate declined 82 basis points to 12.59% of sales, including 45 basis points associated with the reduction in bad debt expense versus last year’s second quarter that included three customer bankruptcies. The remaining improvement was driven by our Value Path productivity initiatives and strong leverage of the fixed and semi-fixed portions of our cost structure. Our second quarter results also included the benefit of lower health and welfare costs based on lower usage levels during the pandemic.

As COVID vaccination levels increase and doctor visits and medical procedures returned to pre-pandemic levels, we expect our benefit cost to return to pre-pandemic levels as well. Our 57% growth in second quarter adjusted EBITDA on a 7% increase in sales translated to a 95 basis point year-over-year expansion in our adjusted EBITDA margin, the fourth consecutive quarter we grew year-over-year adjusted EBITDA at a significantly higher rate than sales. Excluding the impact of last year’s customer bankruptcies, second quarter adjusted EBITDA margin grew approximately 45 basis points. These results again demonstrate our ability to translate topline performance into even stronger bottomline growth, which we believe will continue to generate significant shareholder value. On a GAAP basis, we reported $1 in earnings per share, which included $0.25 per share an after-tax charges, primarily related to advisory fees for our transformational Value Path initiatives and the acceleration of unamortized debt issuance costs and original issue discount tied to the $150 million term loan prepayment made early in the quarter.

Our adjusted EPS, which excludes the impact of these items and several smaller adjustments totaled to $25. Turning to the balance sheet, our total outstanding net debt finished the quarter at just under $2.5 billion, the lowest quarter ending levels since the SUPERVALU acquisition. We generated $265 million in net cash from operating activities in the quarter, which led to a reduction in total outstanding net debt of nearly $250 million. Free cash flow in the second quarter included the anticipated working capital recapture as we sold through inventory that had increased for the holiday selling season. Our year-to-date net debt reduction now totals approximately $115 million.

Our net debt to adjusted EBITDA leverage improved to 3.2 times and benefited from both lower debt levels and higher trailing 12 months adjusted EBITDA compared to the first quarter. As Steve mentioned, this leverage ratio has improved by two-full turns since the second quarter of fiscal 2020. In addition to lower debt levels, we recently took two other steps to lower our annual interest expense. Early in the second quarter, we borrowed $150 million on our asset base revolving credit facility and reduce the balance on our term loan by an equal amount. Then following the end of the second quarter, we took advantage of favorable credit markets and successfully re-priced the term loan, lowering the interest rate by 75 basis points.

Based on the second quarter ending balances, these two actions will reduce annual interest expense by approximately $11 million, which equates to about a $0.13 annual increase in earnings per share. We believe the operating environment will continue to benefit from food-at-home consumption, which combined with our year-to-date results and the anticipated continued build of benefits from our acquisition synergies and Value Path, gives us a high degree of confidence in our ability to achieve our fiscal year 2021 operating guidance. We are reaffirming our full year guidance for net sales, which we continue to expect to be in the range of $27 billion to $27.8 billion. And now expect to finish towards the upper end of the previously provided ranges of $690 million to $730 million for adjusted EBITDA and $3.05 per share to $3.55 per share for adjusted EPS. We’re maintaining our previous guidance of $250 million to $300 million for capital expenditures and approximately $250 million of net debt reduction, both of which include this year’s investments in our new Allentown distribution center to support Key Food.

Last, we now expect to finish the year with a net debt to adjusted EBITDA leverage ratio of approximately 3.3 times. Although, we don’t provide quarterly earnings guidance, I do want to comment briefly on our expectation for the third quarter. As a reminder, our third quarter results in fiscal 2020 benefited from the unprecedented stock upsurge as COVID driven demand began to spread. While we expect continued elevated demand and strong absolute levels of performance in the back half of fiscal 2021, we do expect our fiscal 2021 third quarter sales, adjusted EBITDA and adjusted EPS to be below prior year levels. However, we remain confident and optimistic in our full year outlook as reflected in our expectation to finish the year towards the upper end of our ranges for adjusted EBITDA and adjusted EPS.

Increasing value for our shareholders remains a priority and focus of UNFI. With our differentiated business model and large addressable market, we remain confident in our ability to grow our business and generate meaningful free cash flow. In the near-term, we will continue to use our free cash flow to further reduce debt and improve our leverage. Thank you for your time this morning and for your interest in you. And with that, let me turn the call back to Steve.

Steve Spinner: Thanks, John. As John discussed, we remain laser focused on driving our business forward and are committed to increasing shareholder value. We’re pleased with our year-to-date performance and remain confident we’ll deliver on our full year outlook. Since our last call, we released our 2020 ESG report. We’re proud of the progress we’re making and have launched an ambitious 2030 agenda built around the theme, Better for All.

This past year, UNFI has improved its CDP Climate Change response score to an A- through purposeful actions and enhanced disclosures. We’ve announced new paid parental leave benefits. We’ve delivered the equivalent of 19 million meals to those in need and achieved a 7% year-over-year improvement in food waste diverted from landfills. Just to name a few longer term, we’ve challenged ourselves to reduce food waste by 50% by 2025, achieved zero waste to landfills from DCs by 2030. Reduce our distribution center energy intensity by 30% by 2030 and donate the equivalent of over 200 million meals to those in need by 2030.

Corporate citizenship is very important to us and part of what makes UNFI a special company. We’re dedicated to serving our customers, while doing right for those in need, all while being sensitive to our impact on the planet and the environment. To that end, we’ve expanded a zero emissions all electric trailer pilot with 53 new trailers that will operate in California. We also remain focused on succession and continue to evaluate candidates to serve as UNFI’s next CEO. COVID has made the process a bit more complicated and the Board has asked me to extend my timeline in order to ensure that we continue to have a comprehensive process.

And I’m committed to staying until I can turn the reins over to our new CEO. Our business is strong, our future is bright and I’m confident UNFI will have a new and exciting leader later this year. Our associates deliver results every day, safely and efficiently, and I want to thank them for all their hard work during the quarter. In conclusion, I’m very pleased that fiscal 2021 is unfold largely as we had originally anticipated. Our optimistic full year outlook demonstrates the confidence we have in our people and business.

And as I stated on our last call, I continue to believe that UNFI’s best days lie ahead. With that, we’re ready to take your questions. Thank you.

Operator: [Operator Instructions] Your first question comes from the line of Edward Kelly from Wells Fargo.

Edward Kelly: Yeah.

Hi, guys. Good morning.

Steve Spinner: Ed, good morning.

Edward Kelly: Steve, my first question was -- is on the Whole Foods contract. Any more details you can provide.

I think the economics were the same, which I’m not so sure what’s the case the last time you extended it? And then it’s been extended for two years, I thought last time maybe it was extended longer. So just any additional thoughts you can provide there?

Steve Spinner: Sure. Sure. Thanks. I am unbelievably proud of what we’ve accomplished in this negotiation, because it really demonstrated to us and it demonstrated to Amazon and Whole Foods, how important the programs are and how important the companies are to each other.

And if you remember, those of you who have been around for a while, we typically had negotiated with Whole Foods every five years and now we’ve got a whole new process, because Whole Foods is no longer independent. So we’re dealing with two parties. And so really one way to look at is in the old world, even though we had a 10-year contract, we were really negotiating a brand new one every five years, which to me meant we had a five-year contract and now we have a seven-year or almost seven-year and so that’s a spectacular result. For those who follow Amazon, you know that those kinds of contracts are really unusual and so we were -- we feel really fortunate to be able to get that done. As far as the economics, you’re 100% right.

They’re essentially the same as the agreement that we currently have in place. And just for perspective, seven years is a long, long time. It’s -- I think one of the longest contracts that we have throughout the entire company. And just for perspective, Amazon in 2014 was $80 billion. I think they did $386 billion last year, so 6 times growth.

So to be able to have a customer that exhibits that kind of growth I think it’s something that is really good for our shareholders.

Edward Kelly: Great. And then just the second question for you on, you see consumer products or vendor promotions and kind of what you’re seeing out there in the marketplace today. Has that picked up at all?

Steve Spinner: Yeah.

Edward Kelly: Remind us what a normalization in that sort of means for your P&L and then as we look at the gross margins, I know shrink helps, but I guess the vendor stuff hurts.

As we sort of think about the world normalizing, can you sustain sort of flat wholesale gross margins when we net all this out?

Steve Spinner: Well, I mean, we don’t guide to gross margin, number one. But number two is, what I would tell you, there’s far more tailwinds than there are headwinds as it relates generally to gross margin. Because if you think about general service level is still lagging where it was pre-pandemic pretty significantly and when you’re in a situation where suppliers are having a hard time, still compelling the demand, there would -- there is obviously a lack of promotional activity as well. So the retailers are seeing that in their gross margin, right, because since there’s no promotional activity, they have a higher retail margin. But because we do have margin that we earn in promotional periods, when we start to get the fill rate back, when the manufacturer start promoting again, when the retailer start promoting again, that’s going to be an opportunity for UNFI to be able to jump back in in a big way to that marginal income.

Now we don’t disclose the value associated with it. But it’s a good number and it’s a pretty significant tailwind for us. The other thing is inflation. Inflation still runs in 100-basis-point range and we all have an expectation that, again once we come out of COVID, once products start returning to the shelves, once retailers start bringing back all the items that the manufacturers discontinued, we’re going to start seeing some of those input costs pass-through and that’s a really good thing for us as well.

Edward Kelly: All right.

Thank you.

Operator: Your next question comes from the line of Rupesh Parikh from Oppenheimer.

Rupesh Parikh: Good morning. Thanks for taking my question and congrats on the nice quarter. So I guess…

Steve Spinner: Thanks.

Rupesh Parikh: …just starting with the guidance, so you guys now expect EBITDA and EPS to be at the higher end of the range, but you didn’t change your sales expectation. So just curious why you still believe in a current sales range and you haven’t adjusted that. And also the Key Foods contract, I was just curious in terms of what are the contributions you expect related to Key Foods this year and then what percent of impacts next year?

Steve Spinner: Well, I can start with the Key Food…

John Howard: [Inaudible]

Steve Spinner: I’ll start with the Key Food. Key Food is not going to start till our next fiscal year into 2022. Yeah.

Go ahead, John.

John Howard: Yeah. No. Appreciate it. That’s going to be part of the comments.

So there’s -- the Key Food would be in FY ‘22, as we continue to invest in the Allentown facility. As we think about the sales and EBITDA numbers that we’re seeing right now, we feel comfortable from a topline perspective with the range that we provided. What we’re seeing is we think about the first half of FY ‘21 and what we are forecasting the back half. We’re seeing the continued improvement and value coming from the leverage and the scale that comes from UNFI and we’re seeing the continued value from our Value Path and productivity initiatives that are flowing through our margin and SG&A, OpEx. We’re seeing all of that flow through our P&L.

So that’s why we’re thinking about from holding that sales in that range, but guiding towards the upper end on the EBITDA and EPS. And of course, UNFI is…

Steve Spinner: Okay. We…

John Howard: … getting the benefit of the interest as well.

Steve Spinner: Rupesh, what I would tell you is, good management teams look out two years in advance, and I would tell you, this is a really good management team. Because, as you know, we made a lot of big strategic decisions a couple of years ago.

And what’s proving out is pretty close to what we hope to do and that was to be able to grow our bottomline EBITDA at a rate that was considerably faster than our topline. And that’s exactly what -- what’s happening as a result of a lot of initiatives to increase productivity, to optimize the network and to provide a higher level of service to our customers and that’s what we’re doing. From a revenue perspective, I think, Chris gave some just terrific analogies in his script that essentially tried to explain wholesale revenue growth versus retail revenue growth and I think that’s where a lot of people get confused. Because the retail revenue growth has retail margin embedded in it. I think the important note is that UNFI on a net basis is growing considerably faster than the market itself.

Rupesh Parikh: Okay. Great. And then…

John Howard: Yeah. And I think, Rupesh, just to build on a lot of that is just the idea that, number one, we are so confident in the guidance that we provided that we’re actually providing that guidance. I mean, it’s something where we feel good about our numbers, we feel good about our outlook for FY ‘21 that we are putting the guidance out there.

So we feel really, really good about that.

Rupesh Parikh: Okay. Great. And then just one follow-up question, so since we don’t have comparable financials for the prior for Q3, so you look at the expense -- operating expense this quarter is around $860 million or so. Is that the right baseline to think about going forward? I don’t know if you can provide any color there? And then you also called out a reduction in benefit expense this quarter.

So I don’t know if you can quantify what that temporary benefit was for the quarter?

John Howard: Yeah. So we generally don’t provide any information or any guidance by quarter. If I think about -- I know you want to think about your model in the back half. I think the part that we would focus on is the upper end of that EBITDA range and the upper end of the EPS range. I think that that’s what we’re focused on.

We manage, of course, the entire P&L, but we wouldn’t provide that information by quarter, Rupesh.

Rupesh Parikh: Okay. Great. Thank you. I will pass it on.

John Howard: Appreciate it. Thanks.

Operator: Your next question comes from the line of John Heinbockel from Guggenheim.

John Heinbockel: Hey, Steve. I am curious you talked about the $90 million of cross-sell revenue.

Roughly speaking of what was the contribution from new accounts, right, as part of that $450 million? And then what does the pipeline look like and is it predominantly you think about independence versus I imagined there is not too many Key Foods out there. But -- so predominantly the independent pipeline is robust and larger account maybe a little less or no?

Steve Spinner: Chris is going to…

Chris Testa: Hey, John. This…

Steve Spinner: … take this one, John. Yeah.

Chris Testa: Hey, John.

It’s Chris. So the $90 million, so that is incremental…

John Heinbockel: Yeah.

Chris Testa: … on a rolling basis since the acquisition, it’s close to $500 million.

John Heinbockel: Okay.

Chris Testa: The pipeline literally has 1000 different opportunities in it ranging from all categories, all sizes.

And what we saw on the quarter was the wins were not concentrated in any category or any channel. So what we’re experiencing is exactly what, Steve, laid out two years ago, when we talked about the strategic decisions we made to build out the store. The wins are happening in independence, they’re happening in chains, they’re happening in e-comm and across produce, meet, general merchandise, center store, natural, conventional. So, Key Food, you’re right, there’s not a lot of Key Foods out there and we announced Key Food, because it is significant new win. However, every day, every week, there’s a lot of smaller wins coming in across all channels, across all categories.

Steve Spinner: And John, what I would add is, two things. One, one of the really interesting outcomes is that, some of our fastest growth is in conventional distribution with retailers that have captive facilities, either because we’re closer to those stores or we can do it more efficiently But more importantly, is the whole world has changed. Retailers think about supply chain differently today than they did a year ago and the focus is on aggregating volume to few. It drives down their cost. It makes it easier.

It lets them focus on what they really need to concentrate on, which is keeping consumers either in their store or on their site. And again, if you think about the strategic acquisition of SUPERVALU and the migration towards being a wholesaler of scale that can provide everything that a retailer needs, that’s going to benefit UNFI for years to come.

John Heinbockel: And then just a follow-up on the cross-sell, right, so going from $500 million to $1 billion. I think that’s by the end of fiscal ‘22, correct me if I’m wrong. And so that’s 500 million over six quarters, which seem to be a little bit less than what you’ve had this last quarter.

Is that conservatism do you think that for whatever reason maybe cross-sell slows down a little bit and then picks up again, curious that $500 million?

Chris Testa: Yeah. John, it wasn’t meant to be strict financial guidance for the next fiscal year. It’s just what we think we’re doing for as a run rate basis on our cross rate. We don’t expect it to slow down. The number was over $1 billion and I think that is a fair estimate based on what we’re seeing and what we’re adding each quarter.

Steve Spinner: And I would tell you, John, we’re just starting to get really, really spectacular at fresh. We’ve made some additions to our leadership team that Chris mentioned. We’re building out the infrastructure. I think we’re now the largest in protein and produce across the country. There are some holes that we need to fill.

But that could be the lead that the leading driver towards cross-selling over the next couple of years.

John Heinbockel: Okay. Thank you.

Operator: Your next question comes from the line of Greg Badishkanian from Wolfe Research.

Spencer Hanus: Good morning.

This is Spencer Hanus on for Greg. The industry is based in pretty tough compares over the next few weeks, any color on how much of the sales growth you’re expecting the industry to retain? And then, I guess, post-COVID, how are you thinking about what your customer mix is going to look like?

Chris Testa: Yeah. Good questions. It has been a really volatile environment and just to lay out the guidance like we did in the beginning of the year and reaffirming of this call. It basically what we’re looking at is, what we thought was going to happen for the year was, grocery was going to remain elevated throughout the fiscal year.

We still believe in that. As we head into a post-pandemic world, we still think the work-from-home is going to be a tailwind for us. So we’ll continue to have elevated levels. We think that shopping closer to home is going to remain, as a consumer behave that’s going to remain, that’s going to help our independent and chains business that is out in suburbs. Greg, what -- Spencer, what was the other part of your question?

Steve Spinner: Just in the next couple of weeks, I don’t think we could comment on kind of what’s going to happen over the next couple of weeks.

But what I -- I think what I would tell you is, first of all, our revenue did kick up quarter-to-quarter, 1 to 2. And we’ve seen some real consistency in our overall revenue since we got past, let’s call it, May of last year. And so since then, we think the revenue, it’s been pretty consistent and will likely be pretty consistent, albeit leaving the next month or two out?

Spencer Hanus: Got it. That’s really helpful. And then just to follow up on the cross-selling commentary.

I think you mentioned that one of the biggest sources of the cross-selling lifts you’re seeing is opportunities for retailers with captive distribution centers. So if you think out longer term, do you think that retailers with those type of distribution systems, do they move to a more capital light model? How are you thinking about that longer term?

Steve Spinner: I mean, I think, that people are doing the work, maybe 20 years ago retail -- certain large retailers of scale, said, look, we just need to own our own captive network. Now, remember that some of our largest customers on the natural side are retailers with a captive network. It’s just that they couldn’t replicate and they can’t replicate what we did on the natural side. But, I think, retailers today are very sophisticated, especially retailers with captive networks and they’re taking a look at what’s the most efficient route to market.

And if that means using a third-party like UNFI then that’s what they’re going to do and that’s exactly what’s happening.

Spencer Hanus: Got it. Thank you. Your next question comes from the line of Jim Salera from Northcoast Research.

Jim Salera: Hi, guys.

Thanks for taking my question. I wanted to drill down a little bit on operating margin line. You guys have done really impressive improvements both year-over-year and quarter-over-quarter. I just wanted to see how much of that is just benefit from not having some of the COVID related issues at the warehouse and how much of that is sustainable from the investments in the consolidation and the automation across the distribution network?

Eric Dorne: So this is Eric. I’ll start out and then, John, maybe you can jump in.

I mean, I would start by just acknowledging our team’s efforts around COVID and our safety protocols and all the tireless efforts that they put forward keeping each other safe. I think what you saw was a reflection of our consolidation stabilization in the Pacific Northwest we mentioned it on the first quarter call. And our DCs have really become fully operational in those markets, which were reflected in the overall reduction in OpEx expense. We’ve also introduced our Operations Excellence Program as part of our Value Path initiative, which is also starting to show out some results. So I think we’re very confident in going forward on where we are and part of our guidance, obviously, is maintaining.

John, I will turn to you.

John Howard: Yeah. Yeah. Eric, I think you’re spot on with that. When we think sequentially, we saw 3.2% increase in sales from Q1 to Q2, but a 30% increase in EBITDA.

Some of that is driven by those Q1 challenges that we’ve talked about before, particularly in the Pacific Northwest that have substantially subsided at this point and we’ve much more sustainability in those. And the rest of it comes down to some of the additional productivity we talked about earlier, the Value Path initiatives, as well as some of the timing of those benefit costs that will come back towards the end of FY ‘21. So I think it’s really a great quarter and a great year from that perspective to show that sequential improvement in EBITDA even with the anticipated one-time Pacific Northwest consolidation issues.

Spencer Hanus: Great. And so looking forward, do you think that there’s any room for improvement? I know, historically, wholesalers have been able to have that EBIT margin level above 2%.

I mean, do you guys think that as you work through some of the order distribution centers that can add some of these efficiency gains, do you think it’s possible to get to a sustainable level or your EBIT margin maybe 2% or 2.5%, somewhere in that range?

John Howard: Yeah. I’ll tell you how I think about it and Eric can chime in as well. Without providing any type of forward looking guidance on numbers or anything else, I think, it is comfortable to tell you that, we are still working through productivity initiatives. We still have upside related to Value Path that we know we’re still going after between now and FY ‘23. We know we still have a large final component of the synergies related to the system standardization, that’s going to be a big tailwind for us as we get on the other side of that aspect.

So I think we still have lots of opportunities in front of us to continue to improve our EBITDA margin.

Steve Spinner: And we have only really optimized two networks, Pacific Northwest and Southern California and there is still quite a few to go.

Eric Dorne: Yeah. And we’re also continuing our investment in automation which is really starting to settle in and we’ll continue to throw up productivity improvements.

Spencer Hanus: Perfect.

Thanks, guys.

Steve Spinner: Yeah. Thanks for the question.

Operator: Your next question comes from the line of Matt Fishbein from Jefferies.

Matt Fishbein: Hi.

Good morning. Thanks for the question. Just really a clarification question for me and I apologize if I missed it or I misunderstood here. But the SG&A stepped down sequentially from Q4, Q1 levels, but even though you have higher sales this quarter. I think you’re talking the Pacific Northwest stabilization combined with productivity initiatives.

Just want to make sure I understand correctly, is it some trapped costs coming offline in the Pacific Northwest or I think you just said, maybe its route consolidation, just trying to get a sense of what inning we’re in with the pressures you saw in Q1 going away? And then if you can just clarify, I guess, on the Value Path end, what so far has been done for you to include Value Path in the explanation of the operating margin improvement this quarter? And kind of what inning are we in with hitting those targets, I know those were much longer term targets and I’m surprised that we are already seeing some of that play through in Q2? Thanks.

Eric Dorne: Yeah. So this is Eric. So I’ll start in the Pacific Northwest. I would say, we’re in the middle innings on our optimization.

Those -- one of the DCs was brand new, came out of the ground. So we had to start up and settle-in another experienced large remodel and expansion and I can tell you that the staffs in the buildings have become fully productive. We’ve eliminated most of our third-party labor support. So I think we are well on our way, but we still have room to continue. As far as Value Path goes, we’ve experienced a lot of progress on our initiatives from private brand sourcing to working with our customers on delivery frequency, our distribution center productivity initiative that we call our Operational Excellence, as well as working on our administrative footprint across the network.

As Steve mentioned, our distribution center network footprint and then we’re also tackling our organizational effectiveness and looking at all of the components for all the support functions. So, yes, we are seeing value, but there too we’re probably in the middle innings and we have a line of sight over the next couple of years of where that will shake out. But really solid progress, given the pandemic and other -- all the other challenges we’ve been dealing with. But the momentum is there and the team is really in a different mindset, it’s all about our evolving as an organization.

Operator: Your next question comes from the line of Karen Short from Barclays.

Cait Howard: Hi. Good morning. This is Cait Howard on for Karen. Just one question from me, I don’t know if I missed it. But can you share any update on what you’re seeing with fill rates currently and where you think that will go over the next few quarters?

Chris Testa: Yeah.

Hey, Cait. This is Chris. So they still remain behind historical fill rates pre-pandemic. We did see sequential improvement by about 400 basis points across the business, largely from the larger CPG suppliers that are catching up to demands. But we are still seeing we’re still lower than we expected and as Steve mentioned, that’s a headwind as it relates to promotional dollars.

We are getting get healthy rates from all of our suppliers. We have hundreds of calls every day about get healthy rates. And most of the sentiment is that it’s going to come back over the course of the summer and we’ll start to see a little bit better fill rates -- historical fill rates as we go through the summer months.

Cait Howard: Great. Thanks.

Chris Testa: Sure.

Operator: Your next question comes from Eric Larson from Seaport Global Securities.

Eric Larson: Yeah. Thanks, everybody, and congratulations on a good quarter. Steve, I may have heard this right or wrong.

Just it seems the near-term comment that I think you said inflation was 100 basis points this quarter. We obviously the industry have quite a bit more inflation and it seems like many of the CPG companies are now taking pricing up fairly aggressively, obviously there is a lag to how that comes in? But could you comment more on how you might see inflation maybe later in this fiscal year, maybe it’s more -- it really accelerates in your next fiscal year, but how that might translate into your inflation rates? And then would that maybe possibly increase the promotional activity or how would you view that?

Steve Spinner: Yeah. So you’re 100% right and we have very marginal inflation right now. But we do expect that the inflation rate will start to ramp up, I think, pretty dramatically. I mean, I don’t have any facts that, I would say, it’s going to happen other than we’ve been doing it a long time and based upon what we see.

In the pipeline, I think, one could make the assumption that inflation will start to ramp up pretty dramatically in our fiscal ‘22, not in the current year, but in fiscal ‘22. And what will also happen at the same time, is a pretty significant increase in the promotional rates, as the CPGs really work hard to get the products back on the shelf, product that was discontinued and so we’ll start to see a lot of that promotional activity return. And so that will be a pretty significant tailwind for us as we go into ‘22, because, obviously, we do make a profit on retailer promotions and the math of inflation just works in our favor in a really good way.

Eric Larson: Yeah. That’s exactly what I was getting to.

Thank you for that answer. And then let me just ask a little longer term question and I -- you did -- you’ve already touched on it, where you have optimized some of your distribution systems, obviously, in the Pacific Northwest. You’ve only hit really in Southern California and you’ve got a whole bunch more. I think of the center of the country like Iowa, except where you have concentration now of three or four DCs. Number one is, will that require a lot more capital, number one? And number two is, what is really truly the upside for that, have you given any guidance or any kind of notion of what EBITDA benefits or margin benefits might be as you gradually get through those optimization programs?

Eric Dorne: So, this is Eric.

I’ll try to fill in those blanks. I mean, we are still very much in the process of evaluating our network, both conventional and natural, given cross-selling, given the additional demand and protecting our capacity for growth. So I think we’re very early on that planning besides the markets we’ve already talked about. We also have utilization of automation that’s across the network that we’re also very focused on and I think over the coming months, we’ll have a little bit more detail to share, but we’re not just quite there yet.

Eric Larson: Okay.

Thank you.

Steve Spinner: But just from a commonsense perspective, if you have multiple DCs, you have multiple inventory, you have multiple overhead and so -- and multiple trucks and multiple material handling equipment and so on and so forth. So, obviously, we can improve our service level, we can improve our -- the capital nature of a market by operating out of fewer DCs. And one thing that is a big part of our strategy is the power and scale. In a distribution business, the more volume you can flow through a singular DC, the more EBITDA you’re going to create.

Eric Larson: Correct. So on the capital side of that, is it more of consolidating existing facilities and eliminating maybe the less efficient…

Steve Spinner: Yeah.

Eric Larson: …or does it require build-up…

Steve Spinner: Yeah.

Eric Larson: … around Greenfield?

Steve Spinner: Yeah. No.

It’s not -- this is not a CapEx play. It’s not a Greenfield. I mean, it’s possible that could happen within the next five years. But we don’t see that near-term. We’re still comfortable.

We’re still operating in that kind of 1% of revenue from a CapEx perspective and we’ve been pretty disciplined with that number.

Eric Larson: Perfect. Thank you.

Operator: Your final question comes from the line of Kelly Bania from BMO Capital Market.

Kelly Bania: Hi.

Good morning. Thanks. This is Kelly Bania from BMO.

Steve Spinner: Hi.

Kelly Bania: Hi.

Just wanted to follow up on inflation again and what you’re seeing at wholesale versus retail? And if there’s any differences maybe between what you’re seeing across channels at retail in terms of inflation?

Chris Testa: Hi, Kelly. So the biggest driver of the gap between wholesale and retail is the promotional dollars. So the lack of promos happening at retail. I get a little bit of echo. The lack of promo happening in retail, that’s where the inflation is happening.

So that’s the biggest driver. Again, we expect those promo dollars to come back and...

Steve Spinner: Yeah. We lost Chris. Hold on a second.

Chris Testa: Okay. Sorry. I’m on back.

Steve Spinner: There you go.

Chris Testa: Can you hear me? Is the echo gone?

Steve Spinner: Yeah.

Chris Testa: Sorry about that, Kelly.

Kelly Bania: Yeah.

Chris Testa: So I’ll start from the top. The biggest driver of the retail inflation is the lack of promo dollars spend, right? So that’s the CPG dollars that are going against the retail dollars and they’re just not spending those promos. And we’ve mentioned a few times those promo dollars also flow through us and impact our margin, but it doesn’t impact our inflation and that’s where you’re seeing the biggest gap.

It’s not in any specific channel. At least we’re not seeing any specific channel. We look at inflation across all of retail and the number that I mentioned earlier, the 400 basis points difference was across all channels. So that’s the biggest reason. It’s just promo dollar spend that’s not happening.

Steve Spinner: Yeah. There is also, Kelly, many retailers have also taken price and so that’s also embedded in the number as well. So that’s the gap. The gap is -- the gap between what you’re seeing at retail and wholesale is what Chris just said. It’s retailers taking price and the lack of promo, which should get you about 300-basis-point, 400-basis-point difference.

Kelly Bania: Okay. So you’re saying your wholesale inflation was 100 basis points and you’re estimating...

Steve Spinner: I don’t remember exactly what it was…

Kelly Bania: Okay.

Steve Spinner: But it was in the 100 basis point range, which has been what it’s running, what it’s been running for the past year and a half, two years. But I find it hard to believe that coming out of COVID, where so many products have been discontinued, fill rates have been so poor that.

And by the way, manufacturers to a large degree have held their pricing relatively flat despite increasing input costs. We know some -- we know that there has been a lot of increasing input costs through a lot of the commodities. So I really believe that once we get into late summer, fall, we’re going to start to see our inflation rate ramp up pretty materially, which is good for us, because remember, we get the benefit of the math on the inflation and then we get the benefit of running the promos through our systems.

Kelly Bania: Great. Okay.

That’s helpful. And I just had to ask another question on Whole Foods and the contract. I guess, I was looking at it as if it were a shorter duration than historically given that it’s seven years versus 10 years. I guess are you expecting that you would renegotiate halfway through that contract…

Steve Spinner: No.

Kelly Bania: … as you did historically or this have to be…

Steve Spinner: No.

Kelly Bania: …renegotiated in seven years, is that?

Steve Spinner: This will be renegotiated in seven years. So that’s one of the major changes in the contract. In the old world, when we were just negotiating with Whole Foods, it was -- we had a 10-year agreement. We negotiated every five years. We all decided that was not in the best interest of either company.

We’re -- they are focused on growth, we’re focused on growth and so now we have a full seven-year contract without renewal periods in between.

Kelly Bania: I see. And just last very basic question on the DC optimization. As you look back to what you laid out to us at the Investor Day in terms of the DCs and how the inventory would flow between slow moving and fast turning. Is that -- how does that compare to what you are doing or what has changed and when will we get products going on one truck? Is that part of the vision or can you just really…

Steve Spinner: Yeah.

Kelly Bania: … help us understand logistically what is happening and what is changing?

Steve Spinner: Yeah. Yeah. So that is still the vision. The vision is to get the product on to one -- on one truck. That obviously is what drives real economies both for us and for the customers.

We are doing that in some markets. It’s still a little clunky. But obviously we have gone through a network optimization in the Pacific Northwest and in Southern California. We’ve added automation to those facilities, which is handling a lot of the slower moving and each pick inventory. But the strategy is still the same and that is to have fast-moving warehouse, slower moving warehouse and a general merchandise regional facility to supply all those types of products.

Again this is a multiyear journey. We’re migrating onto singular IT platforms, because that obviously is a precursor to getting on to that one invoice, one truck and we’ve made a lot of progress. The strategy hasn’t changed. COVID did delay us a little bit, because obviously we had to ramp up to demand, but we will get there, that is still the strategy.

Kelly Bania: Thank you.

Steve Spinner: Well, thanks everybody for joining us. It was a great quarter. I really want to thank our team of over 30,000 associates around the U.S. and Canada. The work that they did to get product delivered every single day through weather and COVID and so many other things was just amazing.

The strategy that we’ve put in place is working. Our customers are telling us its working and they are showing us that it’s working with what they’re buying from us and what they continue to buy from us. So terrific quarter, we anticipate having a really good year and thank you for being with us today.

Operator: Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation.

You may now all disconnect.