United Natural Foods - Earnings Call - Q4 2020
September 29, 2020
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the UNFI Fourth Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Steve Bloomquist, Vice President, Investor Relations. Thank you. Please go ahead, sir.
Steve Bloomquist (VP of Investor Relations)
Good morning, everyone. Thank you for joining us on UNFI's Fourth Quarter Fiscal 2020 Earnings Conference Call. By now, you should have received a copy of the earnings release issued yesterday afternoon. The press release, webcast, and a supplemental slide deck are available under the investor 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. 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 now turn the call over to Steve.
Steve Spinner (Chairman and CEO)
Thank you, Steve. Good morning, everyone, and thanks for joining us on our year-end call. As you saw, in addition to reporting our fourth quarter and fiscal year results, we also announced the succession plan for my role as CEO. I'll speak more about that shortly, but first, we'll discuss our fiscal 2020 results. We finished the fiscal year early last month, and it truly was a monumental year for UNFI in many respects. Our financial results in the fourth quarter and for the year produced record sales and adjusted EBITDA, driven initially by the strength of our integration work and consumer demand driven by COVID, as well as UNFI's execution success. Fourth quarter sales grew 8%, while adjusted EBITDA grew 28%, resulting in a 50 basis point expansion in our adjusted EBITDA margin.
This strong margin performance is a testament to the efficiency of our network and our ability to generate operating leverage as we increase our top line. For the full year, we generated $284 million of free cash flow and reduced our net debt outstanding by nearly $390 million, exceeding our full-year debt reduction expectations. Our net debt to adjusted EBITDA leverage ratio finished the year at 4x, about a full turn lower than at the end of last year. These results would not have been possible without the people and culture at UNFI. I want to thank all UNFI associates for their outstanding focus and execution during what have been unprecedented times for our company and for our country. The passion and caring of our people and our company have been clearly demonstrated in recent months.
During the early days of COVID, we proactively took action to manage the spike in demand from customers and consumers while prioritizing the health and well-being of our associates, as evidenced by our early response with heightened safety, sanitation protocols, and flexibility to our attendance and productivity policies. I'm so proud of our culture. Our response to communities in need, social injustice, diversity, and inclusion puts UNFI on the leading edge of continuing to do what's right. We have a strong, diversified customer base from which we can grow sales. We have an unmatched distribution center network that we've shown can handle demand, capacity, and performance at scale. We've won new business from a variety of customers, including those who self-distribute to their stores who recognize the value we can bring to their operations, and we believe we'll win more business going forward.
Towards that goal, we've successfully hired several new leaders to further enable long-term success, including a new Chief Supply Chain Officer, a new CIO, and a new Chief Marketing Officer, all of which positions us well for the future. There is power in our scale, pride in our partnerships and people, and we have never been better positioned for future growth. We've delivered on our promise to transform the world of food throughout North America and build considerable momentum towards building a better future with better food. Let me now turn the call over to Chris to provide more context on our business performance. Chris.
Chris Testa (President)
Thanks, Steve, and good morning, everyone. It is my pleasure to join today's call to talk about key trends in our business as well as the drivers that differentiate UNFI and give us confidence for long-term growth. I'll also provide brief comments on operations and our retail results. As you saw in yesterday's press release, we've changed our sales channel reporting. John will get into the details and rationale behind these changes that now focus on the size of the customer rather than the nature of the products purchased, but I'll comment on the performance of each channel in the quarter. Fourth quarter sales to chains, our largest channel, accounting for about 40% of sales, totaled $2.7 billion, an increase of 6.9% over last year on a comparable 13-week basis.
Our fourth quarter chain's growth rate includes a 270 basis point headwind from three customer bankruptcies that occurred in the second quarter of fiscal 2020. Without that headwind, sales growth of chain customers would have been nearly 10%. Fourth quarter sales to independent retailers, our next largest channel, totaled $1.8 billion, accounting for about 26% of sales in the quarter. Independent retailer sales grew 11.4% compared to last year. Independents have benefited greatly during the past seven months, driven by a population migration from cities to suburbs and a growing consumer desire to shop in smaller footprint stores and support local businesses. Our third largest channel, at 17% of sales in the fourth quarter, is Supernatural and represents sales to our largest customer. Fourth quarter sales in this channel were $1.1 billion, 3.6% greater than last year.
The growth in this quarter versus prior quarters is due in part to the impact of categories that have been adversely impacted by COVID, such as bulk and ingredients used for prepared foods. We expect our year-over-year sales to this customer to improve as we move through fiscal 2021. Sales within our other channel, which represents roughly 8% of our total revenue, were slightly more than $500 million, down 2.1% from last year. Strong growth in e-commerce sales, the fastest growing part of our business, were offset by anticipated declines in military and food service related to COVID. Finally, retail sales amounted to $640 million, which represents an identical or same-store sales increase of over 21%. This reflects strong retail and e-com sales, particularly at Cub, who aggressively marketed its home delivery and click-and-collect services, both of which led to year-over-year e-com sales growth rates in the triple digits.
The retail team has done a great job protecting the safety of our 6,000+ retail associates and our customers while making sure the stores are running as efficiently as possible. We are pleased with the performance from the retail operations and all the team does for its customers and its communities. Looking across all these channels, our top 100 wholesale customers grew sales by more than 12%. Our top 100 customers represent over 70% of our wholesale revenue, with an average annual purchases of at least $30 million. These customers are winning with UNFI. Part of our sales growth with the top 100 customers this quarter came from our cross-selling efforts, which we've talked about in previous calls. In fiscal 2020, we realized over $250 million of cross-selling revenue, which meaningfully exceeded our goal.
Customers have expressed a desire to expand their offerings, and we believe we have an unmatched selection of products and services to help them do so. Let me elaborate on the opportunities. Earlier this year, we added 1,500-3,500 top-selling natural and organic SKUs into our conventional distribution centers to help customers expand their offerings with on-trend products. Also, the professional services division made almost 1,000 new cross-selling wins into UNFI's natural customer base. As a reminder, our professional services group offers turnkey retail and back-of-the-house solutions to help our customers run their businesses more efficiently. Finally, we are also using our diverse portfolio to help retailers keep their shelves full by replacing long-term out-of-stock items with alternative items that have plenty of inventory. The good news is we are only getting started.
As cross-selling gains in fiscal 2020, with a sum of many small wins, where we introduce new items or services that align with store offerings with consumer trends. Moving forward, we see greater growth opportunity within our existing customer base in displacing other wholesalers or supplementing captive distribution with UNFI's unique ability to build out the store. Wholesale distribution remains fragmented, which means despite UNFI's scale, we have tremendous opportunity to grow through cross-selling and expanding penetration just with our existing customers. Remember, freedom of food choice matters to our customers and their end consumers. Over the past seven months, our wholesale business proved the incredible power of scale we've built and the transformational service we provide to our partners. Another area of differentiation is e-commerce, where COVID has led to an unprecedented spike in demand for online grocery purchases.
It is estimated that U.S. grocery purchases have hit e-com adoption rates that were not expected to be achieved in three years and just three months, and UNFI has multiple ways to capitalize on these trends. First, we have several large dot-com providers as customers, and as their sales grow, our sales grow. We also have B2B businesses, UNFI Easy Options and On a Screen, that sell grocery and wellness items direct to alternative channels such as bakeries or fitness studios that enjoy the flexibility of the program and our direct-to-door delivery.
Finally, we have a well-established and growing turnkey program that allows traditional brick-and-mortar retailers to offer e-commerce buying solutions to their shoppers on a very similar platform used by our retail banners, Cub and Shoppers. This includes website and phone app offerings, as well as leveraging our two-year relationship with leading e-commerce providers to receive preferred pricing for product selection and/or delivery.
As a proof of the success we're experiencing, since the beginning of COVID, we've added 300 storefronts to our e-commerce platform, as many of our customers have asked us to help them with offering additional purchase options to their shoppers. Looking forward, we'll continue to see revenue opportunities. Private brands represent another big opportunity for us. Leading into COVID, our private brands portfolio of over 5,000 SKUs across 20 brands generated over $2 billion of retail sales, which placed our private brands group at revenue levels equal to about the top 50 food and beverage companies. In the fourth quarter, our Brands+ portfolio grew over 17%, and we believe there are sustainable trends that are going to continue to fuel growth, including an economic downturn where consumers are looking for value and quality and the emergency consumer behavior of brand swapping.
According to McKinsey, 36% of consumers tried a different brand since COVID, and 73% plan to continue this behavior. Our Brands+ portfolio benefited from higher service level than national brands, which helped us capture consumers. We love these trends because they create loyalty for our customer stores, and they drive better margins for both UNFI as well as our retailers. We have an experienced team leading our brands business, and we're planning on driving incremental future growth through product innovation and increasing penetration of our base business. In addition to looking at incremental sales opportunities with our customers, we're also aggressively pursuing new business. We use sophisticated CRM technology to track over 1,000 sales opportunities ranging in size and channel type from smaller independents to medium and large chains.
Our diverse customer base and our unique ability to sell multiple channels is an incredible asset that we're just beginning to leverage. Switching gears to operations, we've now completed the Pacific Northwest consolidation of five distribution centers into two DCs in Ridgefield, Washington, and Centralia, Washington. We will be adding automation to our Ridgefield location by the end of the fiscal year, and we have begun introducing automation in our new state-of-the-art Riverside facility in Southern California. Automation will be used primarily for HPEC technology, which will help us provide higher throughputs, better accuracy, and more efficiently service the Southern California and surrounding market that we believe has a great growth potential for UNFI. Our continued focus on managing cost, balanced against the safety of our associates, helped lower wholesale operating costs as a percentage of sales by nearly 35 basis points in the fourth quarter compared to last year.
We're optimistic we can realize the leverage of scale to continue to lower our OPEX rate. Going forward, we'll be placing a heavy emphasis on standardizing processes and using higher-level data analytics to drive decision-making and generate these incremental operating efficiencies. This is the next logical step in the transition we've previously spoken about, moving from integration to optimization, and it applies on both the revenue and the expense sides of the business. As Steve stated, the last two quarters have proven that we can leverage higher sales into expanded operating margins, even with headwinds from COVID-related costs. Finally, before I turn it over to John, I want to comment on our annual National Expo that we originally planned to host in person last month, but instead made into a virtual selling show. This is an event that historically drew thousands of customers and suppliers.
It combined educational sessions with an unmatched buying show and networking capabilities. We were amazed with the participation levels at our virtual event this year and over $400 million in sales recorded at the show, a total that surpassed last year's in-person event as retailers wanted to take advantage of favorable buying opportunities and to secure inventory for the holiday season. I want to thank our suppliers and customers for such a great response. We truly appreciate the trust you place on us. Hopefully, we can all get together in person next year, but until that time, again, many thanks from all of us at UNFI. With that, I'll turn the call over to John.
John Howard (CFO)
Thank you, Chris. On today's call, I'll cover our fourth quarter financial performance, balance sheet, capital structure, and outlook for fiscal 2021.
Before I do that, let me address two of the accounting and reporting changes reflected in our fourth quarter and full-year financial statements found in yesterday's press release. As we discussed on our last call, we've moved our retail operations into continuing operations. As a result, the retail sales, gross profit, and operating expenses from our retail operations will now be part of our statement of operations or P&L. Previously, these retail items were included within the single line entitled Income from Discontinued Operations Net of Tax. There is no change to adjusted EBITDA as a result. We'll begin depreciating the fixed assets of retail, which will add incremental expense to our GAAP and adjusted earnings, which I'll elaborate on more in a moment. We've also changed our sales channel reporting to better reflect the underlying nature of our customer base.
Our new channel breakdown reflects the continued move away from natural and conventional towards one UNFI and presents sales based on customer size defined by store count rather than the predominant nature of products carried, meaning natural versus conventional. Customers who typically operate more than 10 stores are now presented in our chain's sale channel, and those with fewer than that are presented as independent retailers. The definition of our supernatural channel has not changed, with Whole Foods remaining the only customer currently included in this channel. The definition of our other channel remains substantially unchanged as well. This is explained in more detail in footnote one of our press release. Lastly, as a reminder, we previously reported wholesale sales to Cub under the assumption that banner would be sold with a supply agreement. Now that we're presenting Cub's retail sales, those wholesale sales to Cub are now eliminated.
With that accounting backdrop, let's move to the strong results we delivered in the fourth quarter. Net sales for the 13-week fourth quarter totaled $6.8 billion. This represents an 8% increase over last year's fourth quarter on a comparable 13-week basis. You'll recall last year's fourth quarter had an additional week as part of our 53-week fiscal 2019, and that week contributed approximately $475 million in sales to the quarter and fiscal year. Fourth quarter gross margin rate was approximately 41 basis points higher than last year's fourth quarter. The largest driver was our retail operations, where sales grew at a greater rate than wholesale and where lower levels of promotional spending drove a higher retail gross margin rate. These factors contributed 29 basis points to the consolidated gross margin rate.
The remaining increase came from wholesale driven by favorable inbound freight expense and a lower year-over-year LIFO charge as inflation rates came in lower than we had anticipated. These items were partially offset by decreased levels of vendor funding and slotting income. Fourth quarter operating expense rate decreased 20 basis points compared to last year's fourth quarter. Our lower operating expense rate was driven by the benefits of our synergy and integration efforts, as well as strong leverage on the fixed portions of our operating and administrative costs. It is important to note that Q4 included $31 million, or 45 basis points, of COVID-related expenses to promote the health, welfare, and safety of our associates. Our strong sales increases, higher gross margin rate, and focused expense management translated into very strong profit performance.
Fourth quarter adjusted EBITDA was $198 million, an increase of 28% versus last year's fourth quarter on a 13-week comparable basis. Similar to Q3, the expanded adjusted EBITDA margin rate clearly demonstrates our ability to handle higher volumes and efficiently leverage those sales into higher EBITDA margins. Fourth quarter net interest expense was $46 million, a decline of $9 million from last year on a comparable 13-week basis, driven by lower average debt balances and interest rates. The effective borrowing rate for the fourth quarter was approximately 6.6%, down 20 basis points from last year's fourth quarter, primarily attributable to lower LIFO rates compared to last year. Q4 GAAP EPS was $0.89 per share, which included net charges of $0.17 per share as broken out in our press release.
Fourth quarter adjusted EPS was $1.06 per share, a 205% increase from last year's fourth quarter adjusted EPS when excluding the additional week last year. Let me go back to the retail depreciation comment I made earlier, in which you'll recall I previewed on our last call due to its impact being included in the updated fiscal 2020 guidance we gave in June. Without getting too technical, when a business is placed in discontinued operations, the assets related to that business are classified as assets held for sale, and depreciation on those assets is stopped. If that business is later moved from discontinued operations back into continuing operations, like we're doing with the majority of our retail business, the accounting rules require the company to calculate the depreciation of the assets going back to the date that the assets were originally categorized as held for sale and record a charge.
For our retail business, that means that we must calculate depreciation going back to the end of Q1 of fiscal 2019 and include in this quarter's GAAP results the entire depreciation for those seven subsequent quarters. This amounts to $50 million, or approximately $0.71 per share when spread across the two fiscal years. This quarter's adjusted EPS includes just the $0.07 of depreciation that relates to the fourth quarter of fiscal 2020. We're applying the same approach to calculating our full-year FY20 adjusted EPS, which now includes $0.31 per share of charge for retail depreciation. The remaining $0.40 of retail depreciation is included in the full-year fiscal 2019 results, which have been recast to reflect this change. Lastly, with retail being reported within continuing operations, we are now reporting it as a separate segment.
To assist investors, we've included historical quarterly segment information for fiscal 2019 and fiscal 2020 as part of the supplemental slides posted to our website. The presentation of adjusted EBITDA for retail includes the rent expense that was previously reported within continuing operations, as well as an allocation of administrative overhead costs. Turning to the balance sheet, we finished the year in a much-improved financial position with total outstanding net debt of $2.6 billion and total liquidity of nearly $1.3 billion. A combination of strong free cash flows and asset sale proceeds, partially offset by an increase in financed lease obligations, led to a $390 million reduction in our net debt level versus the end of fiscal 2019.
Our lower net debt balance and strong Q4 operating performance drove our leverage down to 4x, which, as Steve stated, is about a full turn less than where we ended fiscal 2019. Overall, we're very pleased with our performance this year. We significantly beat our initial full-year guidance. We reduced net outstanding debt by more than we originally anticipated through stronger free cash flow, while still retaining valuable assets that we plan to sell in the future. We're entering the new fiscal year in a significantly stronger financial position with favorable operating momentum. Turning to our outlook for fiscal 2021, as we all know, today's operating environment is changing faster than at any time in recent history and presents challenges to making financial projections. However, we are providing our outlook for fiscal 2021 based on a set of key assumptions as follows.
First, our sales guidance assumes food-at-home consumption remains elevated and continues to outpace food purchases away from home, particularly in the winter months when outdoor dining becomes less of an option in many parts of the country. We believe this will be the case through this fiscal year, which lines up with recent CDC reports that suggest a widespread vaccine is not likely to be available until next summer, a scenario that obviously could change. At the same time, we are expecting to continue to incur some COVID-related costs, including continued safety and sanitation protocols. As we've talked about before, lower promotional spending at retail and fewer new item introductions will both adversely impact us this year. We're also not anticipating another stock-up surge like the unprecedented buying frenzy experienced in March.
Finally, we're planning to make various operational and commercial investments that will be a continuation of our network integration and optimization work, as well as incurring modestly higher employee benefit costs. With all of that taken into consideration, for fiscal 2021, we expect full-year net sales to be in the range of $27 billion-$27.8 billion, which represents a nearly $900 million increase over fiscal 2020, or about 3.3% at the midpoint. As you'd expect, we anticipate that the first two quarters will show higher year-over-year growth rates. While we expect continued demand and strong results in the back half of the fiscal year, it's important to keep in mind that year-over-year comparisons will moderate as we lap the pantry building that occurred at the outset of COVID during March and April of 2020.
While we still expect elevated demand in the third quarter, sales in that quarter are expected to be lower than the third quarter of fiscal 2020 due to the unprecedented stock-up surge as COVID began to spread. We are expecting adjusted EBITDA for fiscal 2021 to be in the range of $690 million-$730 million, an increase of 5.5% at the midpoint, and a growth rate well above the rate of the sales increase. Adjusted EPS is expected to be in the range of $3.05-$3.55 per share, an increase of 21% at the midpoint. This reflects our expectations for increase in adjusted EBITDA, lower interest expense tied to lower debt levels, and an adjusted effective tax rate of approximately 27%. We expect to reduce net outstanding debt by a minimum of $300 million, primarily through free cash flow.
Capital expenditures are expected to be in the range of $200 million-$250 million. We're assuming minimal asset sale proceeds beyond the monetization of the $40 million note receivable related to the fiscal 2020 sale of the Tacoma Distribution Center. We expect our net leverage to be less than 3.4x by the end of the fiscal year. In summary, we're all very pleased with our fiscal 2020 results and excited for what we believe will be an even stronger year in fiscal 2021. With that, let me turn the call back to Steve.
Steve Spinner (Chairman and CEO)
Thanks, John. As you heard, we will build our business in fiscal 2021 and beyond through wholesale, services, brands, protein, fresh, and so much more. We expect another year of strong growth, which we expect will incrementally expand our EBITDA margin.
We plan to further deleverage the balance sheet through continued focus on generating free cash, managing CapEx, and monetizing assets where it makes sense. We also remain firmly committed to being good stewards of our planet, our communities, and our people. Over the past year, we've taken several steps to advance environmental, social, and governance practices, ESG, in our businesses, including the publication of our first SASB disclosure, which measures UNFI's sustainability efforts against a series of industry-specific standards, two, completing a materiality assessment to prioritize initiatives, and three, establishing board-level oversight of our programs, as well as an internal executive committee to provide strategic review and accountability on ESG topics. Our ESG program is aligned to three pillars: better for our world, better for our communities, and better for our people.
As it relates to our world, we continue to focus on reducing our environmental impact, conserving natural resources, and promoting sustainability across our value chain and in our operations. In early 2020, UNFI joined the Climate Collaborative, solidifying commitments to energy, efficiency, food waste reduction, and sustainable transportation. As for communities, we believe that healthy food and food variety matter, and we play a vital role in delivering safe, quality, and nutritious food options to more tables across North America. We are also working to increase access to better food, particularly for people in low-income and rural communities or in vulnerable situations. The UNFI Foundation provides grants to nonprofit organizations working to build better food systems and to nurture everyday health. As for our people, the safety and well-being of our associates is our top priority.
We are focused on fostering a culture of caring throughout our organization, continuously striving towards safety in our workplace where zero injuries and accidents is possible. We have pledged to promote equality, celebrate diversity, dismantle systemic racism, and support racial justice by activating change from the inside of UNFI and then out through listening, learning, and accountability. We will do this by increasing diversity in leadership roles, addressing food insecurity through financial, in-kind, and volunteer support, and by leading change across our industry and in the food system. All of these practices are integral to our business strategy, and we believe they deliver significant value to our stakeholders, including our shareholders, our associates, customers, suppliers, and communities. Finally, let me spend a moment talking about my decision to retire as CEO. As many of you know, I've had the privilege to lead this great company for the past 12 years.
When I joined UNFI, annual sales were around $3 billion. Working with some great leaders, some amazing retail customers, we've grown the business to nearly $27 billion in sales this past year. Through it all, we've adhered to a set of principles that have defined my life and my career: doing the right thing, treating people fairly and with dignity, helping one another, and winning together as a team. I couldn't be happier with our leadership team, old and new, and the strong governance and operating disciplines in place. I have complete confidence that UNFI will continue to grow, to innovate, and lead our industry into the future. Our future has never been brighter.
As we near completion of UNFI integration activities and move our attention to expansion of our services, technology, e-commerce, perimeter, and services businesses, 2020 demonstrated to me that all the work done during the last several years around building a holistic wholesale business was the right strategic decision. Within a year, it feels like the right time to turn the reins over to the next generation of leadership. I'm excited to remain involved in our continued journey as Executive Chairman and will work to ensure a smooth transition when my successor is named. I'll also remain involved in the search for talented new board members who share our passion for this business and who will contribute their talents to support our growing $27 billion business. The future of UNFI has never been stronger.
As we think about the next decade, I'm confident that UNFI will continue to lead by remaining true to its culture while advancing investments in supply chain, services, technology, and a commitment to bring value to its customers every single day. With that, I thank you and will prepare to take your questions.
Operator (participant)
At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Your first question comes from Bill Kirk of MKM Partners. Your line is open.
Bill Kirk (Managing Director)
Hey, thank you for taking the question. I wanted to talk a little bit about the upcoming holiday season and what you're seeing maybe in terms of actions by your retail customers. Are you seeing anything from them in terms of increasing inventory days that they're willing to hold or pulling forward some of their holiday spending or holiday assortment?
Chris Testa (President)
Hey, Bill, this is Chris. Good morning. The retailers are, you know, they've got limited space. They would probably like to increase their inventory, but they're limited in what they can do. I can tell you from our perspective, two major things are happening. One, we began talking about the holidays early in the summer and began to build up on those holiday-like items: broth, cranberry sauce, pumpkin spice, and so forth, because we think it's going to be a big holiday season with a lot of small gatherings versus big gatherings.
From a retailer perspective, the one behavior that we're seeing is at our recent show, there was a huge interest from our retailers to secure inventory ahead of time. In other words, commit to the inventory to be delivered to make sure their shelves were stocked. Finally, for any of those products that are still long-term out of stock, and we all know what they are, we've been finding alternative supply for our retailers to make sure the shelves are full for the holiday season.
Bill Kirk (Managing Director)
Okay, great. I guess related, what are you seeing in terms of freight lanes or freight availability for this holiday season?
Eric Dorne (COO)
Bill, this is Eric. We are seeing increased requests for freight lanes. We obviously have a great deal of strength in that, and we are leveraging our size to secure the lanes we need. At this time, we do not see an issue with that, but we're watching it very carefully.
Steve Spinner (Chairman and CEO)
Yeah, and remember, Bill, that the vast majority of the fleet we own and operate, and for the product that we move cross-country or by rail, we do have contract carriers with contracted volume. That's not a problem that we're going to face.
Bill Kirk (Managing Director)
Awesome. Thank you. I'll hop back in the queue.
Operator (participant)
Your next question comes from Karen Short of Barclays. Your line is open.
Karen Short (Managing)
Hi, thanks very much. Congratulations, Steve. I've been talking to you for a long time. I know we'll get a few more quarters in there. Congratulations. I'm sorry to start off with this, but there's just so many things model-related. I do have to start with some housekeeping questions. I guess the first question I have with respect to retail EBITDA, are you burdening that EBITDA margin? When I look at the margin, are you burdening that with distribution costs, meaning allocating for distribution costs to retail, or if a seller and a buyer are looking at your EBITDA margins, would they need to hit that with additional distribution assuming you did not retain the distribution?
Steve Spinner (Chairman and CEO)
No, that is a true EBITDA number. If we were to look to sell that business today, that would be the EBITDA that we would sell it from. The other comment that I would make about retail, just to remind everybody, is that we do have some very valuable retail real estate. In other words, corporately owned stores that, when the time is right, will also sell with the sale of the banner.
Karen Short (Managing)
Okay. You are burdening with distribution. Then the second question, just in terms of modeling, can you give a color on what comps were for retail in Q4 of 2019?
Steve Spinner (Chairman and CEO)
John, do you have that offhand? I do not.
John Howard (CFO)
Yep. Q4 of 2019, for Karen, when you asked that question, you are talking sales?
Steve Spinner (Chairman and CEO)
Index. Index.
Karen Short (Managing)
No, just to get a sense of what the two-year comp is, right? Because obviously, 21% is a very strong comp, but I am trying to get that from a two-year basis.
John Howard (CFO)
Okay. The comp from 2019, for 2019 with the 2018 data post-acquisition, we do not have the 2018 data.
Karen Short (Managing)
Okay. Okay. I guess switching gears to the top line, obviously, you gave us where you were trending in August. This is more of a chain comment, but you gave us where you were trending on the top line, and that was that 11% number, and you saw some deceleration. Maybe can you just talk in terms of where you reported the quarter? I guess the first question is, where did you see the deceleration most prominently, and then where are you trending in the quarter to date on top line?
Steve Spinner (Chairman and CEO)
Let me take the first cut of it, and then I'll turn it over to Chris. Again, in our chain number, we still have a couple of those bankrupt customers in there that we're not getting the revenue from. We are also seeing some retailers that are negatively impacted by COVID. In other words, those retailers that are heavily focused on bulk prepared foods, those categories that are just not selling. Obviously, food service and military are still fairly negative, even though food service has come back a bit. There's certainly no inflation in the numbers. There's no promo. We don't expect to see that. I think those are the primary drivers in that 8% number, Chris.
Chris Testa (President)
No, that's good, Steve. I mean, look, the general market dynamics as well. If you look at the quarter in its entirety from May through July, even if you look at retail comps that are reported out there, there's definitely been a deceleration across the entire industry. What I would look to is our top 100. If you look at our top 100, which is over 70% of our customers, it was 12%. I think you can use that as your comparable to what is happening at retail after you factor in retail inflation and the difference between retail and wholesale there.
Steve Spinner (Chairman and CEO)
One thing I would add, Karen, is that the interesting thing that we've learned as a result of the dramatic increase as a result of COVID is that our view of building capacity is different today than it was perhaps six months ago. We have more capacity than we thought. That was one of the great takeaways. As a result of that, we think that, and we're very optimistic, that our business that we thought would be constrained in many markets, we're now actively addressing. In other words, we're working hard to put protein and produce and a lot of other categories into these buildings that we thought were at capacity, which really aren't.
Karen Short (Managing)
Okay. That's helpful. Sorry, just color on the top line in the quarter to date.
Chris Testa (President)
John, you want to handle that one?
John Howard (CFO)
Yeah. I think we're not providing any information beyond the annual guidance at this point, Karen. I think, as we said in our scripts and our opening comments, we're continuing to expect the elevated demand through FY 2021. It's unprecedented. We're in uncharted territory as it relates to the pandemic, but we do believe that the FY 2021 guidance is sustainable. As far as what we've seen so far in the first four or six weeks, we're not going to provide commentary on that right now.
Steve Spinner (Chairman and CEO)
I would just add we're not seeing anything materially different.
Karen Short (Managing)
Okay. Great. Thanks very much.
Operator (participant)
Your next question comes from Rupesh Parikh of Oppenheimer. Your line is open.
Rupesh Parikh (Senior Equity Research Analyst)
Good morning. Thanks for taking my question. Steve, also congrats on your future retirement.
Steve Spinner (Chairman and CEO)
Thanks, Rupesh.
Rupesh Parikh (Senior Equity Research Analyst)
I guess to start out, John, you gave some color, I think, at a high level in terms of some of the EBITDA margin drivers. If you can maybe flesh out what you think are the key positive and negative drivers as we look out for the balance of the year. It sounds like, at least based on your guidance, you guys are expecting some very modest EBITDA margin expansion.
John Howard (CFO)
Yeah. I think when we think about FY 2021, we certainly have some tailwinds related to the foundation that we laid from the integration as we continue to go through the productivity and benefit from the synergy work that's already been done. We're going to continue to see those tailwinds. Certainly, the elevated demand will provide that continued tailwind. At the same time, we've got some headwinds going year-over-year as well.
We have, as we have talked about in previous quarters, the continued lower promotional spend and sliding fees that would normally benefit us, but they have substantially disappeared in this environment. We are also seeing, as you look through our discounts that have been reported, we benefited in FY 2020 by certain shopper stores that provided EBITDA throughout the year but have since been sold or shut down. That is a $10 million-$15 million headwind for us going into FY 2021. We have an additional headwind related to the life insurance proceeds that we talked about earlier in FY 2020 to the tune of about $8 million. We have certainly some tailwinds going in, but we have some of those headwinds as well from an operational promotional spend, sliding dollars, discounts.
We still believe, with all of the work that we've done leading up to this point, we still believe very firmly on the guidance range that we provided.
Steve Spinner (Chairman and CEO)
Hey, Rupesh, I would just add that keep in mind that 2020, even though it's behind us, was an incredible year, excuse me, with a lot of adversity. Obviously, you see that in the results. Again, we're not going to have a repeat of what happened in March and April. At least we don't think so. It is possible as the restaurants start to close for the winter, people start going back inside. It is possible that we'll see some surge, but we still live in a pretty volatile environment, whether it's because of COVID, election, weather, additional cost associated with all those things. We live in a pretty volatile day. There's also no inflation.
There's no promo spend that John mentioned earlier. We're growing EBITDA faster than our revenue. As I said earlier, we realized that we actually have more capacity than we thought. We provided guidance because it was important for us to provide guidance. It's guidance that we believe in, but it does take into consideration all the things I just mentioned.
Chris Testa (President)
Okay. Great. I guess just going to CapEx spending, doing $200 million-$250 million for this year. Just given your commentary about that you guys have more capacity maybe than what you guys saw previously, is there an opportunity, I guess, to reduce that CapEx spending number over time or just any thoughts there?
John Howard (CFO)
Our CapEx rate—I'm sorry.
Steve Spinner (Chairman and CEO)
Go ahead, John. Go ahead, John.
John Howard (CFO)
Yeah. Our CapEx is at $200 million-$250 million. It's about 80 basis points of revenue for us. Some of that is some work that was targeted in FY 2020 that we thought we were going to be able to do, but we did have, as you might imagine, with the elevated demand, some of those projects were delayed, and we are going to be implementing those in FY 2021. We are still working through some of the additional synergies as we go after that last stage of the initiatives that we will do in FY 2021 and 2022. I think as we think about CapEx longer term, I think in that 80 basis points range of revenue, 90 basis points is probably reasonable. As we get on the other side of the last stage of the synergy work, I think we will see it normalize a little bit below that.
Steve Spinner (Chairman and CEO)
Automation is really important to us, Rupesh, as evidenced by the couple of pretty significant projects that we had going on during COVID that are going to be completed in the not-too-distant future. Services business, technology, that's where we're going to see really the primary spend of CapEx over the next couple of years.
Rupesh Parikh (Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from Scott Mushkin of R5 Capital. Your line is open.
Scott Mushkin (Founder and CEO)
Hey, guys. Thanks for taking my questions. I have a couple of them. I just wanted to look back a little bit on the chain's growth rate, which I know we talked about last quarter. It does seem like it's underperforming the industry a little bit, even if you take into account the 270 basis point drag. I was wondering what you guys think is maybe driving that. I mean, it's obviously a good number, but I just wanted to think what you think maybe is driving that what looks like a little bit underperformance.
Chris Testa (President)
Hey, Scott, this is Chris. Yeah. I mean, look, we've got a diverse customer base, right? I think looking at, again, I would point to the top 100, which includes chains predominantly as well as some of our indie co-ops. That 12% is really reflective of what you're seeing at retail minus the inflation that retail enjoys that wholesale hasn't had. Again, you look at chains at 10% with if you included the 270 basis points of the bankruptcies, it's actually a pretty strong number. Within that, we've got some chains that are growing 18%, 20%, 25%, some are 60%-70%. These are, again, all in our top 50 or 100 customers.
I think we feel really good about the chain's growth. If you combine our chains and indies combined, you're looking at a number of around 9%, and then you add in the bankruptcies and you get to over 10%. I think what you're seeing in our larger customers is indicative to what you're seeing happening at the retail at large.
Scott Mushkin (Founder and CEO)
Thanks, Chris. Just to follow up on that, and then it gets to my other question, do you think you guys are seeing losses of customers or you're not seeing any losses?
Chris Testa (President)
No. We're not seeing any losses.
Scott Mushkin (Founder and CEO)
My questions about the future are, number one, margin improvement in the distribution business. You guys tend to operate at a pretty low margin. SUPERVALU did too, but I do believe there's lots of kind of low-hanging fruit there. Any thought processes on how 2021 will look on getting some improvement there and then into 2022? Also, no one's talked about it, but the replacement process for Steve. By the way, Steve, congratulations.
Steve Spinner (Chairman and CEO)
Thank you, Scott. I will start with the replacement process. We have gone out and hired one of the leading firms to conduct the search. That process has begun. We have serious internal candidates. We have external candidates that we will consider. Culture and experience are incredibly important to me and to the board. The good news is that I want this to be a very, very smooth process. We have a year in which to do it, which I think is more than enough time.
I certainly plan on staying on as Executive Chairman to continue through the transition and for as long as the company needs me to do it. I cannot think of a better circumstance or scenario by which to pass the torch to the next leader. I feel really good about it. I think for me personally, the 2020 numbers and what I expect to happen in 2021 really proved out the acquisition of Conventional. We went out on a limb a little bit to do it. I think investors initially did not like it, as evidenced by the stock price, but it was right on. It was 100% right. You saw that in our numbers. We were able to leverage the top line into the bottom line. We are going to continue to do that. That goes right into your first question, which is on margin improvement.
I think all the work that we're doing in technology and integration and singular systems and network optimization are all going to have the net effect of improving our operating margin, reducing our expenses, and improving our operating margin.
Chris Testa (President)
Yeah. Steve, I just want to add to that is that three big opportunities we have in the margin expansion is cross-selling. That's selling more products to the existing customer base. We think there's a tremendous opportunity there, as well as our brands and services business, which are both margin accretive to the typical wholesale margin. Just some other areas that we're aggressively pursuing to help with that margin expansion.
Steve Spinner (Chairman and CEO)
Our pipeline is incredible. I mean, our pipeline has never been stronger than it is today. I think a lot of those opportunities came as a result of COVID. Certainly in the cases of the captives that relied heavily on UNFI, it helped them get product to the stores. A lot of that, we think, will grow. New customers and expanded relationships with existing customers, especially in light of the new capacity. I'm more optimistic than I've ever been about pipeline for growth.
Scott Mushkin (Founder and CEO)
Thanks, guys. Appreciate the answers.
Operator (participant)
Your next question comes from Jim Salera of Northcoast Research. Your line is open.
Jim Salera (Senior Equity Research Associate)
Hey, guys. Congrats on the quarter. Two questions. I wanted to dig in on the cross-selling opportunity. For the $250 million, can you guys break down how much of that is more the technology, e-commerce, professional service? How much of it is more the organic and traditional products?
Chris Testa (President)
Yeah, Jim, this is Chris. Sure. The vast majority of it is food on a truck versus the services business. Services business has a lot of small wins from a revenue standpoint, although very high margins. The vast majority of the 250 came from cross-selling products, either natural products into the conventional system or vice versa.
Steve Spinner (Chairman and CEO)
Okay. I would also add that back to a comment that Chris made earlier on our brands business. I mean, we now have brands that are over $2 billion in retail. These are all brands that we own that many of the retailers view as their own private label. That obviously is quite margin accretive to us as well.
Jim Salera (Senior Equity Research Associate)
Yeah. Can you guys actually get a little more granular both on the kind of the margin profile for some of the professional services and then the private labels just relative to the traditional distribution margin?
Steve Spinner (Chairman and CEO)
Yeah. I think that's a competitive edge for us. We're not going to disclose what the margins are on our brands or our services, but rest assured they're considerably greater than the margins that we earn on our wholesale distribution.
Jim Salera (Senior Equity Research Associate)
Okay. If I can just sneak in one more question. You guys talked about the 300 or so online storefronts that you had. Just kind of generally, what do you think the opportunity is there? Obviously, we've seen a lot of people shifting to that online platform. As you guys touched on, the online shopping has really taken off three years and less than a year's time. What do you guys think just the overall opportunity is when you look at your existing customer base and, I guess, additional customers that you could pick up along with?
Chris Testa (President)
Yeah. It's a good question. I mean, e-com was roughly 3% of total grocery sales going into COVID. Now it's estimated to be up around 8% or 9%. Certainly, having an e-com solution is going to be critical for us going forward. In most cases, we enjoy e-com sales because a lot of those click and collect and deliver to homes are happening through the registers that we currently service. In other words, they're retail customers that are wholesale customers of ours that have an e-com solution. Those 300 storefronts that we've added since COVID are typically the independent retailers that are looking to get more competitive and adapt to consumers' needs. I think that's one of the ways that we'll capture e-com. That's in addition to servicing some very large e-com delivery companies, customers.
In addition to having our own e-com platform through OnScreen and Easy Options, we are also, Jim, looking at additional ways to capture e-com because it is here. It is here to stay. We are going to continue to find ways to participate in it.
Jim Salera (Senior Equity Research Associate)
Perfect. Thanks, guys.
Operator (participant)
Your next question comes from Edward Kelly of Wells Fargo. Your line is open.
Steve, congrats as well. I wanted to ask you about guidance for next year. Can you just talk a bit more about the cadence of sales in EBITDA? I mean, obviously, the first half will look different than the back half. Just any additional color that you can provide on what you are assuming in the back half as you lap the COVID demand?
John Howard (CFO)
Yeah, absolutely. I think you touched on the key point there, Ed, which is as we lap the Q3 and Q4 and that demand that we saw, that surge that happened in March and April, which is our Q3, that'll be a difficult comp for us. While we're still anticipating the elevated demand throughout fiscal 2021 as food at home stays high, it's going to be a tough comp year-over-year for that Q3. As we think about it, we are expecting that the first half will be a higher growth rate even though demand will stay at that elevated level. Q3 will tamper down some, and then Q4 will come back up. As we think about that full year, that's sort of what we're thinking.
I think from a sales perspective, I do not want to lose sight of the fact that as we think about FY 2021 and we are anticipating that growth that we have in our guidance, we did see in Q3 and Q4 year-over-year growth of $1.2 billion. We are still growing on top of that with FY 2021. We are still seeing that elevated demand, and we are still going to benefit from that and feel very good about that growth.
Steve Spinner (Chairman and CEO)
Hey, one other thing, Ed, is when you think about volatility, there is still a fair amount of volatility associated with fill rate. While fill rate has sequentially improved and we are now seeing fill rate on the natural side, I think it is like 600 basis points or so better than the fill rate on the conventional side. Our expectation is that fill rate will continue to improve generally. We may see it decline around the holidays, but that's still a moving target.
Edward Kelly (Managing Director and Senior Research Analyst)
Okay. I wanted to just take a step back. I know you're not going to give any guidance for FY 2022, but this is when, hopefully, life is more normal again. It's probably the year that we should think about sort of valuing the company at. What, if anything, I guess, has transpired within sales and margins over this period do you think is sustainable? How would you encourage us to sort of think about the new normal for this business as we look past the pandemic?
Steve Spinner (Chairman and CEO)
I would start by saying returning to normal takes quite a few current headwinds and turns them into tailwinds, right? Promo spend, advertising, new product introductions, fill rate, those are all things that are a pretty significant headwind for us that will turn into a tailwind. As we continue to complete the integration work, and that is the migration onto a singular technology platform, that turns from a headwind to a tailwind, all things we expect to happen. Capacity. Certainly, by 2022, we expect a considerably additional amount of customer wins through cross-selling as well as new contracts. Even though the restaurant industry will regain volume, I think we'll still be in a great position to take advantage of all those things that are currently headwinds that will then be tailwinds, led by what I said.
John Howard (CFO)
Yeah. The only thing I'll add to that, Ed, was in the interim, we are making permanent reductions in our debt as we're benefiting from that free cash flow. We are reducing that debt as we did in FY 2020, as we're forecasting and guided through an FY 2021. We are continuing to go after that debt.
Steve Spinner (Chairman and CEO)
Yeah. Remember that by 2022 or into 2022, we're selling Cub. You can do the math of what you expect Cub to sell for, plus another probably close to $200 million on real estate. That in itself will help continue to reduce the load of the market.
Edward Kelly (Managing Director and Senior Research Analyst)
Great. Thank you.
Operator (participant)
Today's final question comes from Kelly Bania of BMO Capital Markets. Your line is open.
Steve Caputo (Equity Research Associate)
Good morning. This is Steve Caputo on for Kelly. Just to start, would you be able to provide us with what you achieved for synergies in 2020 and what your expectation is for 2021, and if there's any change to sort of your longer-term targets?
John Howard (CFO)
Sort of related to that, on a scale of one to 10, how would you rate your integration in terms of the level of completeness and what we should expect to see going forward and what you need to do? Sure. As it relates to synergies, we'll provide a little more color at a Q1 call. As it relates to synergies, we have outperformed the $185 million target that we put out there, both in dollars and in the speed in which we thought it would take to get there. We're going to provide a lot more information on that as we get to our Q1 call and get into FY 2021. What was the second part of your question, Steve?
Steve Caputo (Equity Research Associate)
Just in terms of the integration, sort of on a scale of one to 10, if you can, where you sort of would rank where you've gotten to so far and where you have to go and the key sort of areas left to sort of integrate.
John Howard (CFO)
Yeah. It's tough to rank on a 1 to 10. I think what we have laid out there that we expected to achieve, I would say we're at a 10, but it's evidenced by the scale value, the leveraging value we're seeing through our P&L with the elevated demand through FY 2020. A lot of that value was coming as a result of all the Synergy work that went into place leading up to it. As we think about what's left, the last big component, there's a thousand things that need to happen beforehand to get there. The last big piece is that standardization of our DCs that Steve mentioned a little bit earlier. That is one that we are expecting to kick off towards the end of fiscal year 2021 and into fiscal year 2022 as the final stage of that Synergy work.
Steve Spinner (Chairman and CEO)
All right. Let me just add that the cultural integration is complete. The completion of all of our SG&A sales, legal, finance, etc., has all been completed. Processes have been completed. The biggest single thing that remains is primarily from a technology platform. That process has started. We expect that, again, to happen throughout fiscal 2022. The vast majority of the work is done.
Steve Caputo (Equity Research Associate)
Okay. That is very helpful. Sorry, just to clarify, you have said you have achieved greater than your expected target of Synergies already, which is great.
John Howard (CFO)
Should we be continuing to think about additional synergies in future years on top of that, or have you just achieved what you expected even faster than you thought? I think there's still value to be had out there for synergies. I think we're also continuing to look at optimization and productivity initiatives that will allow us to expand the value that we could achieve, not just from synergies, but just into a broader productivity and initiative. We will talk a little bit more of this in Q1. We are currently working on scheduling an analyst day sometime towards the middle of FY 2021 for us.
Steve Caputo (Equity Research Associate)
Okay. Thank you.
John Howard (CFO)
We will go through that in great detail.
Steve Caputo (Equity Research Associate)
Got it. Okay. One very quick follow-up to what Karen asked earlier. On the retail side, even if you do not have specific numbers for any quarter, would you be able to give us a sense of where comp sales were trending pre-COVID? Just a general range would be really helpful for modeling purposes.
John Howard (CFO)
I think the way I would think about that would be it was trending. Cub is a market leader for us here in the Minneapolis market. I would think about it as pre-COVID, I think it would be considered trending at or slightly above what the market would have been doing, especially given the market standing it has here in the Minneapolis-Saint Paul. As COVID hit, as many folks saw the value in their retail business, I think Cub was able to capitalize perhaps a little bit more because they were the market leader and a trusted retail store.
I think they also, as they went through some of the civil unrest situations, and we've talked about this on some of our non-BL road shows, did a great job managing through some of the civil unrest in downtown Minneapolis, providing access to food when obviously some of the stores were in total disruption and disarray. They provided access to food to many folks that needed it. We provided buses to other stores in order to provide access to food. That helps build those relationships and gives us the edge on the growth.
Steve Spinner (Chairman and CEO)
I would just add that not only were indexes up over 20%, but our market share also increased significantly as well.
Steve Caputo (Equity Research Associate)
Okay. That's very helpful. Thank you guys very much for the color.
Steve Bloomquist (VP of Investor Relations)
Hey, Chris, we appreciate your help on today's call. That concludes the management comments and Q&A.I will be in my office if anybody has any follow-up questions later today. Have a nice day, everybody. Thank you.