United Natural Foods Inc (UNFI) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the UNFI's Fourth Quarter Fiscal 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Steve Bloomquist, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us on UNFI's Fourth Quarter Fiscal 2021 Earnings Conference Call. By now, you should have received a copy of the earnings release issued this morning. The press release, webcast and a supplemental slide deck are available under the Investors section of the company's website at www.unfi.com under the Events tab.

Joining me for today's call are Sandy Douglas, our Chief Executive Officer; John Howard, our Chief Financial Officer; Chris Testa, President of UNFI; and Eric Dorne, our Chief Operating Officer. Sandy, Chris and John will provide a business update, after which we'll take your questions.

Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements.

And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release. I will now turn the call over to Sandy.

Thank you, Steve, and good morning, everyone, and thank you for joining us on our fiscal 2021 fourth quarter earnings call. Let me begin by saying how happy I am to join UNFI and how excited I am to be back in the food business. Over my career, I've had the opportunity to meet and work with many of our customers, and I look forward to renewing and carrying forward those relationships.

I also look forward to meeting customers that I've not met and learning how UNFI can help make all of them even more successful. I've been on the job for about 7 weeks now and I've spent the majority of my time meeting with customers, our senior team and with associates across the organization, focusing on growth opportunities for customers and how we can all work together to capture these opportunities in a very complex operating environment.

Several things have become apparent to me about this company. First, I've been impressed with the leadership team, both on an individual level as well as how they work together collectively to solve problems, serve our customers and our associates and move the business forward. They brought me up to speed and gave me the support I've needed to successfully onboard during these interesting times. They also embodied the values and culture that were a key part of what attracted me to UNFI.

Second, my early take is that there are significant opportunities to improve the way we serve existing and new customers and the opportunity to partner with suppliers to bring customers the highest quality, differentiated products and services that they want and need. Importantly, as the COVID pandemic lingers, our operating environment remains challenging. From our suppliers to UNFI to our customers, we are all facing challenges making, moving and delivering products through our interdependent supply chains. So my focus will continue to be learning the full extent of this business and assisting our team as we manage through the challenges and execute our plans for the benefit of our incredible community of customers. In doing so, I'm confident that we will continue to find ways to help our customers create value, which will benefit all of our stakeholders.

The final point I'd make is despite the challenges that we're managing, we have momentum in our business and it is accelerating. And I believe our plans for the new fiscal year will carry that momentum forward. Under the leadership of my predecessor, Steve Spinner, and our senior team, we delivered a solid fiscal 2021, and we expect this new fiscal year to be even better. We start fiscal '22 with less debt and an improved leverage ratio and plans for further growth, driven by a sincere focus on doing everything we can do to serve our customers.

John will go over the details of our fiscal '22 outlook shortly, and I'm genuinely excited for the year to come. Let me now turn the call over to our President, Chris Testa, for his comments on our performance. Chris?

Thanks, Sandy, and good morning, everyone. On today's call, I'll provide color on our fourth quarter performance and commentary on how these results and our Fuel The Future strategy will help drive growth for UNFI moving forward. We're pleased with our results this quarter and for fiscal 2021 in total. Sales for the full year came in above where we expected, while adjusted EBITDA and adjusted EPS were both above our previous outlook. We believe our fourth quarter results reflect the work underway as we begin to implement our Fuel the Future strategy.

Focusing on the fourth quarter, sales totaled slightly more than $6.7 billion. This was down slightly from last year's fourth quarter as we're now cycling the months in calendar 2020 with the elevated levels of early COVID-19 consumer demand. Anticipated sales decline in our retail, independent and chain channels, which are the largest gainers a year ago, were partially offset by growth in the supernatural and other channels.

On a sequential basis, our business is growing, as sales in the fourth quarter increased about 1.6% from the third quarter. Part of this, about 80 of the 160 basis point increase, was the result of accelerating inflation within our business, which increased to approximately 2.4% in the fourth quarter. The remaining 80 basis points was the result of the underlying strength of our customers' retail business and our committed success with cross-selling and the addition of new customers.

A meaningful portion of sequential increase came from our top 100 customers, where sales increased 2.2% from Q3 to Q4. The fourth quarter also included an incremental $80 million in cross-selling revenue as customers continue to benefit from UNFI's unmatched product variety and the value only we can add from consolidating purchases.

In fiscal '21, over $700 million of our total revenue came from cross-selling that was made possible by the merger of our conventional and natural businesses. Selling more to existing customers represents a $38 billion addressable opportunity and we believe is UNFI's unique advantage.

With over 18,000 unique customers representing over 30,000 locations, UNFI has significant growth potential with customers we already service. New customers will also play an important role for our future growth, and our sales pipeline includes hundreds of opportunities to help us grow share within the $140 billion addressable market opportunity we previously discussed.

Let's turn to the growth platforms we spoke to at our Investor Day under our keys for the Future pillar, namely owned brands, professional services and Fresh. Starting with our own brands business. Our three-pronged strategy for growth is built around increasing penetration with our existing customers, bringing own brands to new customers and channels that presently don't carry them and introducing innovative items that meet the evolving needs of today's consumers.

We're making progress across all 3 fronts as we're now selling our own brands products to nearly an additional 500 stores that were onboarded during fiscal '21, and we realized significant top line growth on key brands like Woodstock, Tomorrow's and Field Day. We've also introduced about 100 new items to our portfolio of products this year and plan to introduce another 150 in fiscal '22, including more plant-based and functional ingredient SKUs. This combination of larger customer base and relevant new product offerings is expected to be part of our growth in fiscal 2022.

Professional services remains another key differentiator for UNFI. In fiscal 2021, our Services business grew 12%, and we're looking for our fiscal 2022 to be another year of double-digit growth. Our optimism is based on customer feedback that our portfolio of services adds value to their businesses and a robust pipeline of opportunities that our sales organization is actively pursuing.

In fiscal 2021, we introduced 17 new services, and we expect to launch similar number this coming year driven by current industry trends, as well as feedback from customers on what problems we can help them solve. Two noteworthy services coming this year include an advanced retail pricing platform that allow customers to manage gross margins across the entire store in more sophisticated ways than were previously available from any wholesaler and an offering that tracks scan data against product code dates and provide a store real-time information on unsold products that may be going past their code dates and allows them to better manage inventory and reduce shrink.

Finally is fresh, where we continue to invest in people, infrastructure and technology to strengthen our foundation and the platform for future growth as consumer demand continues to be strong for products sold around the perimeter of the store. Our bullish outlook includes growing produce sales at a rate several hundred basis points above total company growth rate. In addition to improving our infrastructure across the network, we've staffed many of our facilities with produce specialists that have a strong working knowledge of this category, which gives us further confidence in our ability to better support our customers and accelerate growth.

We've also restructured our sourcing team to take full advantage of UNFI's purchasing scale. Deeper relationships with growers are expected to improve our supply consistency, take days out of the supply chain and ultimately improve product quality across the network to help drive sales.

Finally, our bakery Deli category experienced double-digit growth in the fourth quarter. Consumer demand has increased since the height of the pandemic and UNFI is uniquely positioned with a broad portfolio of specialty items, including a majority of the SKUs we sell through our Tony's Fine Foods portfolio.

Turning now to operations. Our fulfillment network is facing the same labor shortages, supply shortages and ongoing pandemic challenges being felt throughout the U.S. supply chain. We continue to take innovative and meaningful steps to mitigate each of these headwinds, allowing us to provide the best possible service to our customers. Starting with labor. We have and we'll continue to modify distribution center associate wage grips as necessary to maintain competitive compensation programs. We're also taking steps beyond wage increases to focus on the work-life experience of our associates, including implementation of new incentives, daily pay, enhanced health benefits and flextime programs. These wage and lifestyle programs are part of our ongoing efforts to attract and retain talent. We have also refocused our entire organization on the recruiting and onboarding and training of new associates in our DCs. So we are prepared for the upcoming holiday season and future growth.

Suppliers face many of the same challenges we see in our network, and the retailer community is growing fatigued with the limited assortments and increasing out-of-stocks across several key categories.

These supply challenges caused our inbound supplier service levels to begin to deteriorate in the fourth quarter. To offset these challenges, we continue to proactively meet with our vendor partners to get our deserved share of supply and get in front of the upcoming holiday demand, so we can provide the best possible experience for our customers.

Safety and the well-being of our associates is our top priority. As a result, we did voluntarily and temporarily suspend full operations at our Centralia, Washington distribution center in the first week of August due to an increase of COVID-19 cases at that facility. During the shutdown, we continued to service our customers to the greatest extent possible despite increased costs by leveraging contingency plans to meet essential customer needs and through moderating shipments and shifting the volume to other distribution centers. While we do expect this voluntary temporary shutdown to be a headwind to our fiscal 2022 first quarter financial results, the impact is incorporated into the full year financial guidance that John will review with you shortly.

We continue to maintain our strong COVID safety protocols that are in line or greater than CDC guidance, including mandatory mask wearing, enhanced sanitation protocols, on-site vaccine clinics and strict social distancing enforcement throughout our entire fulfillment network.

Now turning to retail. Our Cub and Shoppers banners had another solid quarter. The 6% decline in sales, was largely the result of cycling last year's 21% year-over-year increase, putting the 2-year stack at 15.2%, which is in line or ahead of many food retailers. As you heard during our Investor Day, we are investing in our retail business to enhance the shopping experience for our consumers. Through efforts like an enhanced e-commerce platform, expanded delivery offerings and improved data analytics and merchandising concepts, we are striving to make our stores more appealing and easier to shop.

Finally, we're proud to have been recently awarded a Progressive Grocer Impact award in the category of sustainability and resource conservation. This award recognizes our ambitious goals and progress under the better-for-all platform and is a great reflection of the strategic direction and outstanding efforts of our people. We'll be releasing our next ESG report in early 2022 and are excited to share all the great work being done at UNFI to make our world, our communities and our people better. Let me now turn the call over to John.

Thank you, Chris, and good morning, everyone. On today's call, I'll cover our fourth quarter financial performance, balance sheet, capital structure and outlook for next year, our fiscal 2022. As Sandy and Chris both said, we're very pleased with our operating performance this quarter and the finish we had to fiscal 2021. Sales for the fourth quarter totaled $6.7 billion, slightly below last year given the prior comparisons Chris mentioned, while adjusted EBITDA of $201 million and adjusted EPS of $1.18 per share were both higher than last year and contributed to our finishing above our fiscal '21 full year outlook.

Fourth quarter gross margin rate increased 7 basis points compared to last year's fourth quarter, driven by the benefits from our Value Path initiatives, partially offset by a higher year-over-year LIFO charge. Gross margin rate in our Retail business was approximately flat to last year.

Fourth quarter operating expense rate increased slightly compared to last year's fourth quarter, driven by higher employee-related costs, as well as $9 million in start-up costs related to Allentown that I mentioned on our last call. These 2 items were partially offset by lower levels of pandemic-related costs and incentive compensation expense, as well as the benefits from Value Path on our ongoing operating expense.

We are pleased with the fourth quarter's adjusted EBITDA rate of 3% of net sales, the second highest quarterly rate during the last 3 years. We also experienced leverage in our P&L for fiscal 2021 as we increased adjusted EBITDA by nearly 11% on a 1.5% sales increase. Our GAAP earnings per share totaled $0.69, which included $0.49 in net after-tax charges. Our adjusted EPS for the fourth quarter totaled $1.18 per share, further demonstrating our P&L leverage.

As you know, UNFI contributes to various multiemployer pension plans across our wholesale and retail operations. Across these plans, we look for opportunities to maintain benefits for our associates, while also reducing risk around retirement benefit obligations. During the fourth quarter, we elected to withdraw from 3 multi-employer retail pension plans covering certain associates in our Cub banner. These defined benefit plans have been replaced with defined contribution plans going forward. This action resulted in a $63 million pension withdrawal charge in the fourth quarter, which is recorded in the operating expense line of our P&L. To satisfy our withdrawal liability, we'll make cumulative annual after-tax cash payments of $3 million, which will have a nominal impact on our annual free cash flow. Across our multiemployer pension plans, we will continue to look for opportunities to maintain benefits for our associates, while also reducing risk around future retirement benefit obligations. We may have another transaction before the end of the calendar year, and we will consider additional transactions that further decouple our retail operations from its remaining met plans.

Turning to the balance sheet. We finished the year with total outstanding net debt of $2.29 billion and total liquidity of over $1.3 billion. The combination of cash provided by operations and asset sale proceeds led to a $317 million reduction in our net debt level compared to the end of fiscal 2020 and a nearly $1.1 billion reduction since the SUPERVALU acquisition.

Our lower net debt balance and Q4 operating performance drove our leverage down to 3.1x, an improvement from 3.9x leverage at the end of fiscal 2020. And these figures included a $310 million capital investment backed into our business, including nearly $80 million towards the Allentown distribution center, as well as additional investments across the business to enable growth, deliver automation, maintain our physical assets and help us deliver synergies and cost savings, all with the goal of better serving our customers.

Let's turn to our outlook for fiscal 2022. Today's operating backdrop continues to evolve and change quickly, so our guidance for fiscal 2022 reflects our current expectations. Starting with net sales. We expect fiscal 2022's full year net sales to be in the range of $27.8 billion to $28.3 billion, which represents more than a $1 billion increase over fiscal 2021 or about 4% at the midpoint. Net new business, including the phased onboarding of new business in the Northeast and with our largest customer, as well as continued cross-selling and new customer wins are expected to contribute 4 to 5 percentage points of growth. We're also assuming a modest amount of inflation, which adds roughly another 1 percentage point. These gains are expected to be partially offset by an expected modest contraction in overall industry growth.

We're expecting adjusted EBITDA for fiscal 2022 to be in the range of $760 million to $790 million, also about a 4% increase at the midpoint. From a puts and takes perspective, fiscal 2022 will benefit from the higher level of sales and the continued benefits from our Value Path initiatives, net of dollars reinvested in the business.

Temporary year-over-year headwinds include the return to higher benefit costs compared to fiscal 2021 as associates are assumed to make more frequent visits to the health care providers, the ending of our transition services agreement with Save-A-Lot and added rent expense from the strategic value maximizing sale leaseback at our Riverside, California distribution center, where we've exercised an option to monetize that asset.

These costs as we transition from fiscal '21 to fiscal '22 are all included in our outlook. And at this point, we don't foresee items of a similar magnitude impacting the transition into fiscal '23 or '24. Adjusted EPS is expected to be in the range of $3.90 to $4.20 per share, an increase of about 4% at the midpoint. This reflects our expectations for an increase in adjusted EBITDA, lower interest expense tied to lower debt levels and an adjusted effective tax rate of approximately 26%. It also includes lower net noncash pension income based on the improved funded status of our corporate pension and other postretirement plans, which are now slightly overfunded on a net basis compared to last year's $294 million net underfunded position.

This favorable change in the funded status has allowed us to further derisk these liabilities by migrating to a more conservative asset allocation, which in turn leads to lower assumed return on assets. The year-over-year decrease in noncash pension income amounts to about $0.34 in lost earnings per share. Given the cadence of onboarding new business and the timing of the temporary voluntary shutdown of our Centralia distribution center and new distribution center start-up expenses, we expect our sales and profit growth to be weighted to the back half of fiscal 2022. The timing and impact of these items was anticipated as we built our plans for the current fiscal year and we remain highly confident in our ability to deliver the sales, adjusted EBITDA and adjusted EPS targets I've outlined for you today.

We expect to reduce net outstanding debt by $100 million to $150 million in fiscal 2022. This includes the investment we expect to make in the working capital to support our new DC investments and growth across the business. In addition, we expect taxes to be a use of cash in fiscal 2022, unlike fiscal 2021, when we received an overall net refund driven by provisions within the CARES Act, which required us to utilize prior year net operating losses at a 35% rate.

Capital expenditures are expected to be approximately $300 million, which excludes the amount for the Riverside sale-leaseback transaction, which will be supported by a third party.

Finally, we expect our net leverage to be less than 3x by the end of fiscal '22, driven by higher adjusted EBITDA and further debt reduction, including applying the proceeds of our Riverside monetization to reducing debt.

The fundamental growth drivers we outlined in June remain unchanged, and we believe they will be the catalyst that delivers the fiscal 2024 targets provided at Investor Day.

Except for the Centralia temporary closure, all of the fiscal '22 headwinds I spoke to were considered when we established our fiscal 2024 CAGR figures provided at Investor Day. Therefore, we continue to feel confident in our ability to meet or exceed those targets.

Increasing value for our shareholders remains a priority and focus of UNFI. We remain confident in our ability to grow our business and generate meaningful free cash flow.

Operator, we're now ready to take questions.

(Operator Instructions) Our first question is from the line of Bill Kirk from MKM Partners.

My first question is for Sandy. Back in June, the company gave the goals for fiscal 2024. And I guess my question is, what areas do you envision as maybe the most challenging and the heaviest lifting? And which areas toward those goals are more of the lower-hanging fruit in your mind?

Thanks, Bill. 7 weeks in, I'm still very much on a steep learning curve, learning about all facets of the business. And I'm learning from the senior team about the details of the strategic plan. And I have to tell you, I like what I'm seeing. The plan is customer-focused and growth oriented with an estimated $140 billion addressable opportunity that we talked about with existing and also potential new customers. In parallel, our customers are counting on us to do the very best job possible to meet their product service needs in a complicated environment. So for at least the foreseeable short term, my focus continues to be on learning about our business, listening to our customers and UNFI teammates and accelerating the quality of our execution on behalf of our customers.

And then maybe one for Chris. How much promotional activity has returned so far? And I guess how much of it has been manufacturer-led activity versus retailer-led? And what do you expect that to look like going forward?

Yes. I'm not going to speak to the retailer-led because that's really for the retailers to speak about. But the manufacturing-led promotions are starting to come back. We are seeing more activity in our promotions. The thing that is still sort of a headwind for us, Bill, is the fill rate. So those 2 things go hand-in-hand, promotions come as the fill rate improves. And we did see steady improvement on our inbound supplier fill rate up until the summer. And in the summer months, it started to decline for all the macro issues that I'm sure everybody is aware of; raw material shortages, especially in bottled beverages; labor, freight and so forth. So we -- from a percentage basis, we're happy with what we're seeing for the promotions. But in aggregate, the fill rate is going to continue to be a headwind on the promotional activity.

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

Welcome, Sandy. I'm looking forward to working together. The supernatural channel, obviously, is growing pretty rapidly, even though it's cycling. Wondering if you could give us any thoughts on what's going on there? How sustainable that is?

Scott, this is Chris. Well, yes, there's a couple of reasons for that growth. One, it was the slower growth in the fourth quarter last year. So it's cycling that number from last year. So that's why we're seeing the bigger year-over-year growth in the fourth quarter. And then two, as we announced earlier in fiscal '21, we got the extension with our largest customer there. That's opened the door for additional categories and growth. So we see that continuing at least for the fiscal '22 year and hopefully beyond that.

Perfect. That's obviously good news. And the second question is a little bit more short term. I mean obviously, you've got a facility closed down because of COVID. How should we -- thing is you kind of said back half later, but how should we specifically think about the first quarter revenues, kind of costs, just so we can kind of get the models right here?

Yes. No, I appreciate that. This is John. As you know, we generally don't provide quarterly guidance. I think the comment that I made in the script as it relates to some of the headwinds we're seeing in Q1, Centralia, et cetera. I think that can help guide how you guys think about the quarter. We look at it as a full year. We know the year has various degrees of uncertainty, but we feel good about the numbers that we put out there for the full year.

And then my final one is just you guys talked about labor. Obviously, labor is a challenge. You talked about some of the things you're doing to mitigate it. Are you worried about some other distribution centers being either short labor or COVID? Or is that really not a concern that you put into the model at this stage?

Scott, it's Eric. I would just start out by saying that Centralia was our first significant disruption we've had in our network since the pandemic began. And that's largely because of the proactive and robust protocols we've implemented across the network by our teams. We also are very focused on our workforce and, as Chris referenced, we've taken a lot of proactive and innovative steps to not only address wage challenges, but also workforce availability and workforce lifestyle. So we remain very focused. We've seen some pockets of improvement while we are also experiencing the challenges that we've described in other DCs across the network. But we're continuing to stay on it. It's our #1 focus, and we have the entire organization supporting our supply chain teams as we work through this.

Our next question is from Jim Salera from Northcoast Research.

Great quarter, good guidance for the year. I guess first of all, I wanted to drill down a little bit on the net sales guidance for the next year. So if I'm looking kind of back of the envelope math, there's $800 million-ish in there from Key Food, which leads about $500 million upside. Could you maybe break down where you see the opportunity? Is that going to come from cross-sell wins, from new account wins, new products? Any granularity on that would be awesome.

Jim, it's Chris. So on the Key Food win, that -- we won't realize the full $1 billion a year that we talked about in a fiscal year until fiscal '23. So that will be phased in across fiscal '22. But again, we're not going to see that full benefit in a single fiscal year until next year. And the rest of it is going to be coming from weekly wins, daily wins of all sizes. If you think about what UNFI has to offer, there is no single competitor that we compete against. So every day, we're seeing wins with produce, we're seeing wins that are helping our customers with their captive distribution, we're seeing natural to conventional, conventional to natural. So in that total fiscal '22 guidance, it's all of those on top of the Key Food's onboarding that we're going to have throughout the year.

Okay. Great. And actually to build off something you mentioned there with the captive distribution. We've all heard about some of the supply chain and logistics challenges. Does that end up benefiting you guys if some of these captive retailers don't have the capacity to scale up or if they get some -- whether it's COVID outbreak or any issues they might have? Do they kind of lean on you guys more to support their existing network? Do you guys view that as a tailwind if some of these supply chain headwinds for the broader industry keep going moving forward?

The short answer to your question is yes. The supply chain is stressed right now, and it's been stressed for 17 months. And that level -- that environment has been an opportunity for UNFI. We're uniquely positioned because we have the full portfolio of conventional and natural. So if you think about some of those large natural retailers -- I'm sorry, conventional retailers that we were previously just selling natural, they can now come to UNFI and leverage our network to sell them conventional and take some relief on their captive distribution. So absolutely what we've learned through the pandemic is when the supply chain stress, that typically is a tailwind for us that creates opportunities for us.

Awesome. If I could sneak in one more quick question. Really impressive on the operating margin side. Can you maybe just touch on real quick a couple of levers you guys are pulling to keep that number with that? Because if I look is basically flat year-over-year. And I would imagine you guys lose some of the shrink benefit just compared to the big COVID quarter last go-around. So any detail on that you could provide would be great.

Yes, if you look at the EBITDA margin, when we think about what's driving that, we've talked before about the Value Path initiative, which has various underlying multi-pad that we're running related to margin, SG&A, OpEx, et cetera, all of which is bringing that value that you're seeing as we can leverage the P&L. And then as we talked about for FY '22 and the go forward for '22, we know we've got some of those headwinds that I mentioned, particularly the -- we looked at '22 as a transition year. We've got some health and wellness that will be coming back as some rent for the Marino Valley site. We are losing the -- save a lot TSA contractually from a contract that's been out there for years. We knew all of that was coming as we establish those long-term targets. So when we think about EBITDA margin, from '21 to '22, we know we've got those headwinds in '22, but we also know once we go through that transition year and get into '23 and '24, we're going to be right on track for those targets.

The next one, we have Eric Larson from Seaport Research Partners.

Congratulations on a good quarter, guys. And Sandy welcome aboard. We are looking forward to working with you over the next, hopefully, number of years. So welcome aboard. The first question I have is, I believe you said the fourth quarter inflation was 2.4%. And obviously, this is really the first inflationary period you've had in many, many years. So maybe this question is for Chris. In your guidance, are you building in maybe a 2% plus inflation rate for this year? And of course, then that should really help your gross margins. And then maybe John can comment on that.

Yes, Eric, this is John. I'll start, and Chris can add some color as well. I think the way we think about '22, we're including about 1% inflation for the year. We know the situation we're in right now. But as it relates to a full year, we think we're going to on par come back to roughly a 1% for the year. As we've talked about before, broadly, inflation is a little bit of a tailwind for us. So anything above that could provide a little bit of upside. But for us, the way we think about inflation internally. It's more about how we can coordinate and work with our suppliers so that we can then provide competitive pricing for our customers. And that's really our focus to support our growth initiatives. And that's the way we view that. But as it relates to purely the numbers you're seeing in the guidance. We've got 1% for the full year in our numbers.

Okay. And then just a quick follow-up to that. Your largest customer has been trying to increase the value of their grocery portfolio relative to other conventionals for some time. Are you seeing the same rate of inflation across all the channels? Or are there other large disparities?

So Eric, I think you're talking about the register sales, right, the inflation and what the retailers are doing to pass them on or not pass them on. I don't think we're in a position really to comment on the retailer pricing strategies on that. To your point, there are many different approaches, whether they pass it on or not, but I don't think that we can comment on the strategies of our customers.

Okay. I just thought I'd try. And then just a final follow-up. Sandy, maybe it's related to the first question that was asked on the conference call. So do you endorse the new 2024 guidance that was put out at the Investor Day in June? Or are you reserving the right as you get to learn the business more over the next 3 to 4 to 5 months the right to adjust those guidance numbers?

It's John. The answer to that is both. I am excited about the strategic plan. I think we have tremendous opportunity. I haven't seen anything that would signal to me that the numbers that we put out there aren't exactly right for 2024. But as a team, we're going to always be agile and work together to make sure that our plans make the most sense for all of our stakeholders, our shareholders, our customers, our employees, et cetera. So very supportive and certainly reserving the right to tighten the plan in a different way based on conditions.

Next, we have John Heinbockel from Guggenheim Partners.

I want to start top line in the environment. So if I think about the cross-sell embedded in the guidance, right, for '22, it seems to me it's got to be maybe half or less than half what it was in '21. Is that fair in order of magnitude? And then I'm curious in this environment, right, where there's so much uncertainty, is it easier or harder to win new accounts? Are people more likely to stay with where they're at for now or they're looking to move more than they did before? I'm curious what you're seeing on that front?

John, it's Chris. So on the guidance moving forward, I think that you're looking at it the right way. And as we think about our sales growth over the next 3 years, I think your estimate on half of it coming from existing customers is the right way to look at it. Our growth platforms like Services, Brands, Fresh, the majority of that is going to come from deeper customer penetration, in addition to the daily, weekly blocking and tackling of getting more categories, fixing the mix and just improving our share of wallet with our existing customers. That said, our growth will be balanced by new customers as well. Key Food is going to be a big part of that in fiscal '22. So we'll be more weighted that way in the short year. But long term, I think about half is the right way to look at it.

And then as far as the environment. Look, it's -- I've been here over 12 years. It's still a competitive environment. And -- but what we have found, as I said earlier, under these conditions, in this environment of a stressed supply chain, our customers are looking for security. And when you have the distribution network that we have, when you have the buying scale and purchasing power that we have, when you have the broad portfolio of products that we have, including a huge portfolio of Fresh, which is where the consumer is going to the perimeter of the store, we have proven to win a lot more than we're losing. So it's not easy. It remains competitive. We've got to show value to our customers to get those new accounts. But what we've seen over the last 17 months is that when the supply chain is stressed, it's typically -- we're the answer for a lot of customers' problems.

All right. Maybe as a follow-up then, the -- where do you guys sit today on capacity utilization or availability in the network, right? And I know it will vary by DC. But are there any places that are getting stressed? And then your thoughts on if labor is going to stay elevated, what more can you do on automation, right? I know you've done the big supercenters with automation. Can you bring automation on a more limited basis to more DCs? Or is that not financially feasible?

It's a good question. I'll take the first part and turn the automation question over to Eric. So look, one thing during the pandemic is we learned that our network -- if I go back to the third quarter of fiscal '20, we learned that our network can pump out more volume, and we haven't yet hit that ceiling that we saw back then. And I actually wouldn't even call it a ceiling. I would call it a realization that we had in the third quarter of last year. So we know that the existing network can handle more volume. And we're also building, right? So we just started our new DC in Allentown, Pennsylvania, to service the New York metro market. And we continue to invest in CapEx for building expansions and/or new buildings were needed. So it does vary by market from -- to your point, but we have a long-term capacity plan that's embedded in our fiscal '24 guidance that we believe we can achieve those numbers with that guidance in our CapEx reinvestment. And Eric?

And John, I would just add on to Chris' comments that going through Centralia, we saw the network pivot very quickly during that disruption to service our customers on the West Coast, further demonstrating our capacity as well as some of the strategic investments were underway. Besides Allentown, Texas is getting an expansion. We're investing heavily in our Carlisle, PA automated building, which should hopefully come online mid summer next year. And just a reminder, we did add full-scale automation for our repacks offering in Riverside, California as well as Richfield, Washington, that are months in operation now and yielding terrific, terrific benefits both from a productivity, quality and labor standpoint. So thought important to add that.

The next one, we have Kelly Bania from BMO Capital.

This is Kelly Bania. Also, I just wanted to add my welcome to you, Sandy. Look forward to working with you. Also, just a question on the top line outlook for fiscal '22. I think in your slides here, you have an estimated market contraction of about 1% to 2%. And I was just hoping you could help us understand your thought process there. I'm assuming that's volume related. But just the thought process and what you see -- how you see that impacting retail versus wholesale?

Well, the numbers we're providing, obviously, wholesale, but it is consumer-driven, Kelly. That is the cycling of COVID and the consumer trends that -- what we're seeing is the shift between away-from-home spending and in-home spending. And we are seeing tremendous moderation as we get out of the pantry loading and the COVID spikes. But we do think there's going to continue to be moderation throughout the year.

Okay. That's helpful. And then, I guess just another question on wages and benefits. And can you just help quantify to what extent you are investing on a year-over-year basis? Just kind of what headwind is baked into the guidance in terms of wages and benefits in overtime and so forth?

Kelly, this is John. We won't get into specifics on that. But what I can tell you is given the challenges that we all know about happening in the market, we've made what we consider to be a reasonable assumptions in that guidance figure for what those costs will be for us in '22 compared to '21, and that's embedded in those numbers. But beyond that, as far as providing specifics for that, we generally won't do that.

Okay. I'll try one more, just on retail here, if you don't mind. I believe you mentioned the gross margin was flat to last year in retail. I was just wondering if you could talk about puts and takes there, as I would assume shrink would be a little bit more of a headwind this year, but maybe there's some other factors. And then just more broadly, as you think about retail EBITDA margins, it's pretty much doubled over the past few years. And just wondering if you expect them to stay at these higher levels in fiscal '22?

Yes, sure. Kelly, happy to answer that one. So a lot of what you're seeing is a combination of factors, and I'm going to give you the first one, which is our retail leadership team, which has just been outstanding throughout the pandemic as well as just the broader unknown as to timing of potential sales, et cetera, coming out of the acquisition. And as we talked about on the Investor Day, we are now in a position where we believe we're going to keep and continue to run those at this stage. So when we think about that EBITDA performance, I think a lot of it is just the broader stability and the expert leadership from that retail team that we have that's just been outstanding in the 2 markets that we continue to operate in.

We think just about the margins, either gross or EBITDA margin, those are expected to be relatively flat just from a -- there are puts and takes related to promo spend. There's a little bit of strength noise in there, but the reality is there's also corresponding offsets. There's no dramatic movement one way or the other within those margin rates. It's relatively stable beyond just the market contraction that we're anticipating and Chris talked too.

Our next question is from William Reuter from Bank of America.

You mentioned some disruption in terms of the service levels from some of your vendors. I guess what levels of, I guess, fulfillment of orders are you seeing? And I guess how has this impacted your ability with your customers in terms of service levels?

Yes, I think it has been a roller coaster, William. I would tell you that in the fourth quarter, we ended significantly above our service level than we were in the fourth quarter prior post pantry stuffing, but we're still well below where we were pre-COVID. So as I said earlier, we saw supplier fill rates continue to improve, and everybody expected that trajectory to continue. But over the last 3 months, we've seen the deterioration based for the macro factors that I mentioned earlier, labor, freight, raw materials and so forth.

As far as our ability to service our customers, look, the customers and the wholesalers are disappointed that we're at this place 17 months post the start of the pandemic. But our ability to service our customers goes to swapping out items, replacing items, replacing planograms with items that we do have in stock, taking high demand, low inventory items off promotion, working with our suppliers every day from the top down on making sure that we have our fair share of product coming in. This is where scale helps our customers because for most of our suppliers, we're a top 1, 2 or 3 customer to them. And so that gives us larger broad buying power and larger allocations for those high-demand SKUs.

I would imagine, just following up on this, that these are industry trends that your customers generally understand and don't create great risk of customer losses when contracts end. Am I understanding that right? Or has there been frustration from customers?

There is. You're right with your understanding. It is an industry-wide, and our customers are patient and understanding on that. But I would say that the entire industry -- our customers and the entire industry, the folks that we don't even service is just fatigued by it. And we're used to it. We're resilient. We're a central industry. So we've been through this. But I think your assumption is correct that the industry-wide trends do not get -- we don't get penalized for those.

Okay. And then just lastly for me. You provided a lot of the components of free cash flow in terms of EBITDA and CapEx, et cetera. I guess the piece is that we don't know are working capital assumptions for the year as well as proceeds from the sale of the facility out West. So I guess can you provide anything that's going to get us to that leverage below 3x, meaning like how much below 3x are we thinking? Or what the range of working capital or proceeds from asset sales might be?

Yes. We -- not necessarily the specifics of that, but you're -- those are the 2 remaining components. When you think about the 1.3 million square foot facility we have, we've got to put inventory in, bringing on a large new customer. You can imagine the working capital impact of just those 2 things alone, coupled with the broader growth that's embedded in our top line guidance. So certainly, working capital will be a large component. And we're thinking about the Riverside sale leaseback arrangement. We'll talk about that when the deal closes in FY '22. But I think the other component, like debt reduction is the ability to pull the capital lease off our books as well. So it's going to be a really good transaction for us from a debt perspective. I think guiding towards below 3 is comfortable for us given some of the uncertainty. As we move through FY '22, if we have an opportunity to tighten that up, we're happy to do that.

The next one, we have Greg Badishkanian from Wolfe Research.

This is Spencer Hanus on for Greg. I just wanted to drill down into inflation. Can you talk about what's driving the implied slowdown in inflation from the 4Q run rate to meet the full year guidance of 1% for all of next year? Any additional color there?

Yes. The way we think about that, again, it's an assumption we have in our numbers. We've gone through what we think the next 12 months can look like, and we know we're in an inflationary environment right now. But when we think about on balance for the year, we think that 1% looks to be relatively reasonable for what we know today. So when we think about what -- how Q1 -- and again, we don't provide that quarterly guidance. But I think it's reasonable to assume that we are seeing similar inflation situations as you're seeing and reading about elsewhere. But we still believe on balance for the year will be somewhere around that 1%.

Okay. That's helpful. And then do you think your fill rates are lagging the industry today? Or are you guys in line? And then has the worsening of service levels impacted your ability to get cross-sell wins over time? And then just a follow-up on the Centralia DC. Has that reopened yet? And is it back to full operating capacity?

So I'll take the fill rate question, Spencer. No, we do not believe we are below the industry. And a matter of fact, we think we're above the industry because of our purchasing scale. So we also do quite a bit of our volume through Fresh, and the Fresh categories have been not impacted to the level of the center store CPG category. So we think our fill rates are actually above the standard in the industry, albeit the industry is much lower than we wish we were. You want to take the question, Eric?

Sure. And Spencer, this is Eric. I'm just happy to report that our Centralia DC has returned to normal operating business. Again, it was a 2-day shutdown, full shutdown, and then we had a partial week that was disrupted and I think so we can -- on behalf of the whole company, we can't thank our customers enough for their cooperation as we work through that situation.

We have time for one last question, and that will be from Peter Saleh from BTIG.

Congrats, Sandy. I just want to come back to the comments on inflation. I know you guys have guided to 1% inflation for FY '22. It does sound like inflation, at least from your last comments, is kind of running similar in the first quarter. So are you assuming inflation kind of trails off in the back end of the year? And then what would be driving that? Just any more color on that would be helpful.

Yes. I'll tell you how we think about that. Again, we do get it on balance for the year. So -- and as I mentioned, we're seeing relatively similar inflation as you're reading and hearing about elsewhere. Do I think it will trail off? I think it's not sustainable at its current pace. At what point that trails off and how that happens, what drives it? Your guess is as good as mine. But I think certainly, where we are right now in the current environment does not seem to be sustainable for 12 months.

Understood. All right. And then just on the labor environment, can you guys give us a sense on where your staffing levels are today versus where they were maybe pre-pandemic? And maybe what you're seeing on churn or turnover? And has that slowed or moderated at all in the recent past?

Yes. I mean -- this is Eric. Our turnover has not slowed. I mean the workforce has a variety of options, and it's very competitive. And as Chris described earlier, we've taken a lot of steps to not only improve our associate experience, but also improve our retention. So I think this is an ongoing problem that we're going to continue to work through. And as I already stated, we've seen some pockets of improvement with all the actions that we've taken. But we, as an organization, are very focused on this and are putting all of our resources against supporting our supply chain and our distribution centers as we work through this.

Thanks to all of you for joining us on today's call. As I hope all of you can sense, we have a solid plan on how to create value for our customers and grow UNFI. We have the leadership team in place to continue to execute on that plan. And our customers are some of this country's finest food retailers, from publicly traded chains to single-store independents, from value and ethnic operators to general market-focused retailers to high-end operators and everything in between. Our job is to help them compete, grow, serve their customers and add value to their businesses in the process. We're confident in our ability to deliver on our fiscal 2022 outlook, and the entire leadership team and I are committed to driving those results. I look forward to meeting many of you in the investment community throughout the coming months and to continue to update you on our key initiatives and performance over the course of the fiscal year.

For our customers, we thank you for your continued trust and the business we do together; and for our suppliers and especially UNFI associates listening today, my thanks to each of you for everything that you do for our business, our customers, our communities and each other. Thanks, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.