17Q2 Transcript

11212018 Supervalu's (SVU) CEO Marl< Gross on Q2 2018 Results- Earnings Call Transcript I Seeking Alpha
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Supervalu's (SVU) CEO Mark Gross on Q2 2018 Results - Earnings Call

Transcript
Oct. 18, 2017 1:15 PM ET12 comments
by: SA Transcripts
Q2: 10-16-17 Earnings Summary
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EPS of $0.46 beats by $0.11 I Revenue of $3.88 (+ 35.2% YN) beats by $20M
Supervalu, Inc. (NYSE:SVU)
Q2 2018 Earnings Conference Call
October 18, 2017, 10:00 ET
Executives
Steve Bloomquist- Director, IR
Mark Gross - President and CEO
Rob Woseth - EVP, Chief Strategy Officer, and Interim CFO
Analysts
John Heinbockel - Guggenheim Securities
Ajay Jain - Pivotal Research Group
Vincent Sinisi - Morgan Stanley
Chuck Cerankosky- Northcoast Research
Shane Higgins - Deutsche Bank
Mike Otway - Wolfe Research
William Reuter - Bank of America Merrill Lynch
Hale Holden - Barclays Capital
Operator
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11212018 Supervalu's (SVU) CEO Mark Gross on Q2 2018 Results - Earnings Call Transcript I Seeking Alpha
Good morning. My name is Adrienne and I will be your conference operator today. At this
time, I would like to welcome everyone to the SUPERVALU second-quarter earnings call.
[Operator Instructions]. Thank you. I would now like to turn the call over to your host,
Steve Bloomquist. Please go ahead, sir.
Steve Bloomquist
Thank you, Adrienne, and good morning, everyone. I want to welcome you to
SUPERVALU's second-quarter fiscal 2018 earnings conference call. Joining me this
morning are Mark Gross, President and Chief Executive Officer, and Rob Woseth,
Executive Vice President, Chief Strategy Officer, and interim Chief Financial Officer.
Following prepared remarks, we will open up the call for your questions. So that we can
accommodate as many people as possible, I would ask that you limit yourself to one
question with one follow-up.
The information presented and discussed today includes forward-looking statements

which are made under the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. The risks and uncertainties related to such statements are detailed in
our most recent 10-K filing and our interim 10-Q filings.
In addition, certain information presented and discussed today constitutes non-GAAP

financial measures. Information required to be disclosed about these measures is included
in our earnings release and 8-K issued earlier today. A replay of today's call will be
available on our corporate website at www.supervalu.com.
With that, let me now turn the call over to Mark.
Mark Gross
Thanks, Steve. Welcome, everyone, to our second-quarter conference call. Joining me

again this quarter is Rob Woseth, our Chief Strategy Officer and interim Chief Financial
Officer. Earlier today we reported results for the 12-week second quarter of our fiscal
2018, which included the contribution from Unified Grocers for 11 of those weeks. I'm
pleased to report that the core wholesale business is doing well, as is the integration of
Unified Grocers.
Our transition teams have done a great job and continue to focus on communicating so
employees and customers are heard and know what to expect. We have both seen and
heard many encouraging signs that our new customers are confident in the future of the
combined Company. To put this in context, on my first call 18 months ago, I outlined a
vision that SUPERVALU could become the supplier of choice for distribution of
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consumable products across the United States. Part of our growth, I stated, would come
from adding new customers, which we have done, and part would come through
acquisitions, as I felt the industry would continue to consolidate.
In the first 18 months, we've grown the business significantly by organically adding new
customers, which we've described on prior calls. We also announced the acquisition of
Unified Grocers. And I spoke about the reasons for that deal, including the scale of the
combined Company and the broad and integrated service platform that we have and could
provide to Unified customers to help make them more competitive.
The next step on our journey is a deal we announced this morning, that SUPERVALU has
reached a definitive agreement to acquire Associated Grocers of Florida, or AG Florida for
short. Like Unified Grocers, AG Florida is a retailer-owned grocery wholesale company,
commonly called a co-op. AG Florida serves a dynamic and vibrant set of independent
customers that range from single-store operators to chains with as many as 55 stores.
They distribute product throughout Florida, the Caribbean, Central and South America, as
well as Asia. The Company principally operates out of its facility in Pompano, Beach
Florida, part of their approximately 1.5 million square feet of owned real estate.
We are pleased that our diligence has shown that Hurricanes Irma and Maria had a limited
and temporary impact on AG Florida's assets and ability to service customers. Similarly,
our review indicates that generally AG Florida's customers' operations stabilized relatively
quickly, subject to ongoing building in limited areas, principally international locations that
were hit hardest by the storms. For their most recent fiscal year, which ended July 29,
2017, AG Florida generated approximately $650 million in annual revenue, an estimate
based on SUPERVALU's accounting policies. EBITDA for that same period, as a percent
of AG Florida's annual revenue, was a slightly higher than SUPERVALU's 3% wholesale
rate for our second quarter as reported today.
We expect that by the end of the third year, after completion of the AG Florida transaction,
the combined business will achieve a run rate of at least $16 million in synergies. To
deliver these synergies, we expect to incur transition and integration costs of up to $15
million during the first 2 years following the completion of the transaction as well as
transaction costs of up to $7 million. SUPERVALU will purchase 100% of the stock of AG
Florida and pay off the company's existing debt in a transaction valued at approximately
$180 million. We intend to fund the deal with excess cash and incremental borrowings on
our ABL.
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From a capital structure perspective, we expect this transaction to increase pro forma
leverage by about a quarter tum. This transaction provides us with the opportunity to
supply customers in the Southern Florida geography. We believe AG Florida and
SUPERVALU share a similar culture that focuses on a passion for serving the
independent retailer as well as offering a diverse and wide range of products and services
that customers of AG Florida compete very well by understanding and serving their end
consumer. And we believe the scale of our combined operation, coupled with
SUPERVALU's industry-leading service offerings, will position the customers of AG Florida
to be even more competitive in the future.
We believe this is another great transaction for us and is directly in line with our objectives
of a growing our wholesale business and helping our independent customers compete.
We expect to close on the transaction by the end of this calendar year 2017 and look
forward to welcoming the AG Florida customers and employees to SUPERVALU. Let me
now turn to our wholesale results for the quarter, where the team continues to do a great
job of executing on our growth strategy. Wholesale sales increased this quarter by over $1
billion compared to last year's second quarter, with approximately 75% of the increase
coming from the addition of Unified Grocers. Excluding Unified, wholesale sales were up
about 12.5% compared to last year's second quarter.
Total segment adjusted EBITDA increased by $21 million, or about 34% compared to last
year's second quarter. We are pleased with our wholesale results and the second quarter
was another reflection of how we are continuing to execute on our simple, yet powerful
three-pronged strategy. First, we are focused on retaining our existing customers. Second,
we are finding ways to do more business with our current customers; and third, we are
adding new wholesale customers. Regarding the first element of our strategy, our
customer retention rate remains high, a continuing reflection of the work our teams are
doing to make sure we are meeting the needs of our customers.
As to the second prong, we have been successful in growing sales to existing wholesale
customers with the overall growth led by our larger regional customers, those who operate
10 or more stores. Our sales team continued to work with our customers to prove our
value and explain why SUPERVALU should supply more of their business. We have also
increased sales through new stores, having some of our larger customers grow their
business and operate more locations. And we often help with the store development
process using skills we have developed and refined over the years.
In striving to do more business with existing customers, we are also focused on growing
our professional services. I believe these services, as I stated on the last call, will become
increasingly more important to our customers and help them compete as they leverage
our scale, experience, and expertise. During the second quarter, one of our larger
customers, Jerry's Foods, agreed to outsource the monitoring, management, and
administration of their data network to SUPERVALU, citing cost savings and the ability to
focus more on their stores as key drivers for the decision. Although not material to our
overall results, we are encouraged with this new arrangement and will continue to pursue
additional service opportunities, including those now available with our Unified customers
and those that we expect to be available soon with AG Florida customers.
Regarding the third prong of the strategy, we continue to have success adding new
customers across our entire operating areas. Some of these customers were formerly with
Central Grocers in Chicago, and we have also affiliated several others across our broad
network. We are excited to do business with each of these new customers. Finally, our
fourth annual National Expo was held in the Twin Cities in late July and again exceeded
our expectations in many ways. Attendance was up 15% compared to last year's event
and the education day had over 4,000 people attending various expo seminars. We also
had very strong participation from our vendors, whose attendance shows this to be a
unique venue to showcase their latest product innovations and new items.
Moving onto our retail results for the quarter, identical store sales in the second quarter
were negative 3.5%, with customer counts declining by 3.7%, partially offset by 20-basis-
point increase in average basket size. As I have stated before, our retail banners often
play the role of a test lab for ideas that could benefit our wholesale customers.
Let me touch upon several initiatives we are working on to improve sales in our retail
stores that we believe will also benefit our wholesale customers as well. One initiative we
are focusing on is driving innovation in customer solutions, including the Quick'n Easy
meal solutions we first talked about last quarter.
We think we are well positioned to meet the growing trend of full meal solutions, instead of
merely providing ingredients. Whether it's ready-to-eat, heat-and-eat, or prepare at home,
Quick'n Easy will save our customers time and energy when it comes to meal planning,
time in the kitchen, and the weekly shopping list.
Our Quick'n Easy offering is woven throughout our fresh departments, including meat and
seafood, produce, deli, and bakery. Quick'n Easy meals are now available in all our retail
stores and are supported by broad in-store signage, product demos, and local media
campaigns. The Quick'n Easy program has just begun to roll out to our wholesale
customers. They saw a preview of this offering at our National Expo this past summer and
they are excited about the potential this program represents for capturing incremental
sales and furthering helping them serve time-starved consumers.
We are also striving to increase sales from our free from and organic offerings, which for
many customers have quickly moved to a position of must-have. Organic items are
leading the growth in many categories in the industry as well as in our stores. And we are
working in partnership with our wholesale merchants to meet the demand and fill any
gaps. We are adding items to our assortment, utilizing more innovative fixturing to better
display certain products, emphasizing organics more in our weekly ads, and adding
signage that helps customers find the items they are looking for.
Another key element in our overall go-to-market strategy is private brands. This team,
under new leadership, continues to bring new and innovative items to our stores,
particularly within our Wild Harvest and Culinary Circle lines. Wild Harvest addresses the
opportunity in the free from and organic space, while Culinary Circle is a line of more than
200 items targeted at the foodie in many of us. We are also in the process of a package
redesign for Essential Everyday, our line of national brand-equivalent products. The new
packaging will have a more contemporary look and feel that we believe will be more
approachable and shoppable. Consumers will see the new design in the stores in early
2018.
The last initiative I will address is our work around e-commerce. Given its importance, we
have been expanding and strengthening our team, including integrating Unified's digital
group within SUPERVALU. We continue to upgrade and enhance our website and mobile
apps and we are expanding our click-and-collect offering to additional retail stores.
We have also finalized a new multiyear contract with lnstacart, under which we will launch
refreshed e-commerce sites that will provide for integrated store coupons and loyalty
rewards. We are excited to expand this relationship and believe lnstacart is a good
solution to helping us provide online options for our consumers.
On the wholesale side, we currently have about 70 customers on our SV digital platform
and many more have expressed interest after seeing it at our recent expo. Our philosophy
toward retail capital investments and our store portfolio remains the same. We are making
targeted investments, particularly in Cub, where we have just completed the remodel of
Cub's flagship store in Stillwater, Minnesota, including several new merchandising

initiatives. If successful, we plan to roll these out as part of future store upgrades and
remodels where appropriate.
With that, let me tum the call over to Rob. Rob?
RobWoseth
Thank you, Mark, and good morning, everyone. As outlined in this morning's press
release, for the 12-week second quarter of fiscal 2018, we reported a net loss from
continuing operations of $25 million, which included a $27 million after-tax asset
impairment charge as well as a $16 million in after-tax merger and integration charges and
costs related to the purchase of Unified Grocers. After adjusting for these items, net
earnings from continuing operations were $18 million and earnings per diluted share from
continuing operations were $0.46.
Second-quarter adjusted EBITDA from continuing operations, as outlined in table 5 of our

release, was $111 million. Consolidated net sales in the quarter were $3.8 billion, an
increase of nearly $1 billion or more than 35% compared to last year's second quarter.
This included sales of approximately $790 million from Unified Grocers in the second
quarter as well as a 12.5% increase from our wholesale business, excluding Unified,
largely the result of new business.
Consolidated gross profit was 11.3% of net sales, lower than last year by about 280 basis
points, which was primarily driven by the changing total sales mix of business. In last
year's fiscal second quarter, wholesale sales represented about 62% of consolidated total.
In this year's fiscal second quarter, this figure increased to about 72%.
Consolidated SG&A expense, excluding $42 million in pre-tax asset impairment charges
and $23 million in pre-tax charges and costs related to the merger and integration of
Unified Grocers, was 9.7% of net sales for this year's second quarter compared to 12.2%
in last year's second quarter when excluding $9 million of income received from a supply
agreement termination fee and $3 million in store closure charges and costs. The
decrease in SG&A rate as a percent of sales was also driven by the changing sales mix of
the business in addition to higher pension income.
Net interest expense in the second quarter was $31 million compared to $41 million in last
year's second quarter. The lower net interest expense reflects lower outstanding debt
levels.
Finally, we had a tax benefit from continuing operation in this year's second quarter of $13
million, or 32.6% of pre-tax loss compared to $6 million in tax expense or approximately
33.3% of pre-tax income in last year's second quarter.
Moving from our consolidated P&L to the segment results, wholesale operating earnings
were $61 million, or 2.2% of net sales compared to $49 million or 2.8% of net sales in last
year's second quarter when excluding the $9 million supply agreement termination fee.
The decrease in adjusted operating earnings as a percent of sales reflects the contribution
from Unified Grocers at a lower rate.
For our retail segment, we reported an operating loss of $16 million in the second quarter,
excluding an asset impairment charge of $42 million, compared to an operating loss of $8
million in last year's second quarter when excluding $4 million in store closure charges
from last year's results. The decrease in operating earnings were driven by the
deleveraging impact of negative identical store sales and lower gross margins resulting
from higher promotional spending.
Finally, corporate operating earnings, excluding $23 million of merger and integration
costs, were $13 million in this year's second quarter, $1 million higher than last year's
second quarter.
Moving to the balance sheet, at the end of the quarter, our outstanding debt and capital
leases totaled $1.8 billion, an increase of approximately $320 million compared to the first
quarter. This increase was driven primarily by the purchase of Unified Grocers on June 23
and the $315 million delayed draw on our term loan, which largely funded that transaction.
We ended the quarter with no ABL borrowings and approximately $1 billion of available
liquidity from the combination of our ABL facility and our cash balance.
Turning to cash flow, cash generated from continuing operations in the second quarter of
fiscal 2018 was approximately $70 million. Capital spending, excluding the purchase of
Unified, totaled $33 million.
Early in the third quarter, we closed on the purchase of the former Central Grocers'
distribution center in Joliet, Illinois. The purchase price was approximately $61 million,
which was funded with cash on hand. We expect to use this facility as a platform for new
customer growth as well as the introduction of markets and our product in the Midwest.
We remain on track to deliver the full-year adjusted EBITDA outlook we provided on the
last call. On a consolidated basis, we expect fiscal 2018 adjusted EBITDA to be between
$475 million and $495 million. This outlook does not include the impact of the
contemplated acquisition of AG Florida that is expected to close by the end of the

calendar year 2017.
We are on track to achieve the synergy numbers associated with Unified that we spoke
about in July's first-quarter call, which is at least $33 million in run rate cost synergies by
the end of 18 months following the closing of the transaction. And $60 million in run rate
cost synergies by the end of the third year of operations following the closing.
Our full-year outlook on capital spending has increased due to the purchase of the Joliet
distribution center. We now expect fiscal 2018 capital spending to be in the range of $310
million to $335 million.
Finally, by way of letter agreement, we now have greater clarity regarding the wind-down
period of the TSAs we have with Albertson's LLC and New Albertson's, Inc. We now
expect these TSAs to be substantially complete by October of 2018 or approximately 12
months from now. And have an understanding with Albertson's on the general timing and
manner of the remaining wind-down, including flexibility of terms for our short-term
extension for a distribution center and certain stores beyond that date, should Albertson's
need additional time.
This accelerated timeframe does not impact our outlook for fiscal 2018, where revenue
received from the Albertson's TSA is still expected to decrease by approximate $40 million
compared to fiscal 2017. This is expected to translate into an adjusted EBITDA impact
equal to approximately three-quarters of the revenue decline, which is included in the
outlook we've provided.
For the remaining wind-down period, the approximately $125 million of TSA revenue that
will be lost beginning in fiscal 2019. In line with our Q4 comments, we believe the ratio of
lost EBITDA to lost TSA revenue will be less than the three-fourths impact we expect in
fiscal 2018. And we believe it will come in under 70%.
With that, let me tum the call back to Mark.
Mark Gross
Thanks, Rob. Before we take your questions, I wanted to provide a few comments on the
industry, our customers, and our go-forward strategy. First, let me touch on the industry.
Industry changes continue to make headlines as consumers' shopping habits evolve and
convenience gets redefined. Successful wholesalers and retailers, those who best meet
the needs of these consumers, must evolve as well.
The latest trend is omnichannel shopping, where consumers can shop the same retailer in
either a physical store or on line. As I stated earlier, we continue to invest in our digital
capabilities so that our banners and our wholesale customers are better able to compete
in this changing environment. Although today's food shopper has several options for both
center store and perishable products, I fully believe that physical stores will continue to be
an essential part of the shopping experience. And I believe we are well positioned here
with the extensive base of stores we supply.
I think grocery shopping remains for many a sensory experience, with the vibrant colors,
sounds, and aromas of prepared foods and helpful human interaction enhance the
shopping trip and help solve the issue of what's to eat for me and my loved ones now,
tonight, and later this week. I believe that retailers that do this well will continue to
succeed. But that retailer looks very different depending on the community and niche they
serve in a very fragmented and competitive industry. I believe we provide the diversity of
product and support services to allow these merchants to succeed.
As you may remember on our last call, I described our wholesale customers as
merchants, nimble, innovative, creative, and resilient entrepreneurs. Our customers are
diverse and strive to clearly differentiate themselves in their markets. Collectively, they
range from single-store operators to multi-store regional chains. They run small store
formats to big-box concepts. Their operations span from urban and suburban markets,
which represent approximately 30% of their stores, to ex-urban and rural stores,
accounting for the other 70%.
Go-to-market strategies range from cost-plus stores focused on price to fresh and organic
concepts to higher-end specialty and gourmet formats, with over a quarter of our
wholesale customer stores being ethnic or specialty focused. This rich diversity of go-to-
market strategies allows our customers to successfully operate stores across a broad
array of neighborhoods and serve an equally broad range of consumers. Many of our
large customers are in a growth mode and looking for ways to operate more stores. And
we want to and are well positioned to grow with them.
Finally, our strategy remains the same as we have outlined before, to grow our business
by focusing on our current customers and adding new customers through both
acquisitions as well as organic growth. Our customer value proposition remains centered
on providing the benefits of our scale through a comprehensive set of products and
services, services in which we are investing to enhance our expertise and capabilities. We
will continue to evaluate our assets, including owned real estate, underperforming retail
stores, as well as our distribution center network so that we maximize value. We know that
the industrial real estate market is attractive and are evaluating ways to potentially take
advantage of this, recognizing the need to maintain financial and operational flexibility.
Finally, with the acquisition of AG Florida, I believe we will have an even greater
momentum in our core wholesale business. I'm pleased our outlook remains unchanged
from last quarter and I am encouraged by the progress I see within our operations. We are
ready now to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from the line of John Heinbockel.
John Heinbockel
If you pull out some of the chunky business in wholesale today, are you growing top line
low-single digit? And then if you think about the longer term, is it more like maybe a mid-
single-digit growth rate with some more inflation? And is it greater in that post-Whole
Foods Amazon, there may be some opportunities for you that may not have existed
before?
RobWoseth
I can lead off. The chunky business, I imagine you are obviously talking about the Unified.
If you back that out, and we've talked about the fresh market in the past, kind of the
underlying growth is roughly in the mid -- it is like a mid-single-digit type number. So
maybe a little bit better than what you indicated.
I don't know, Mark, if you would give more-.
Mark Gross
Yes, so I don't know if it's - I would specifically tie it to any particular deal that's in the
market, John. But I would say clearly from these results we are seeing growth in all
segments of our wholesale business. We look at our customers and we think they have
this unique opportunity to really be in touch with the communities, with the markets that
they operate in, and to be reacting fast to that.
I think one of the benefits of that should continue with this is in the Unified deal that we
did, we picked up Market Centre. And there's a tremendous diversity of product there in
the Market Centre operations.
And part of where we've really invested in this year is setting up next year for additional
growth there. That's what that Joliet facility is in Chicago. That's part of the newbuild of the
facility in Pennsylvania is to be able to drive that Market Centre opportunity to all of our
customers, our existing customers, and get new customers through that offering.
Then add into that AG Florida. So you have their warehouses there. We think one of their
operations could also be used for Market Centre then down in the Southeast. Then in
addition, what you get out of AG Florida, in addition to that additional geography, is there's
a whole other level of unique products that we think resonate not just in that Southeast
market, but also particularly coming into the Northeast. We're obviously investing
significantly in what I will call the Hispanic market and the diverse changing of people's
desires to have different types of food and authentic food.
And for us to then have a distribution network that allows you to tap that in across the
country. So I think in that bit, you see this core strength in our customers and then I see us
building onto that for going forward.
John Heinbockel
And then just as a follow-up to that, when you think about the Market Centre opportunity,
where do you think that share comes from? And in particular, I think about when you go up
against the natural organic specialty distributors, is it less from them? Or is your pitch
more you can get our breadth of product, not just natural and organic, but everything is an
advantage for us?
Mark Gross
Yes, I think there are a couple of avenues. One, let's look at what's happened to organic
product. That used to be a specialty niche. And now I might not have this exact
percentage right, but I think 80% of natural organic product is now sold in conventional
stores.
So I see a big piece of this market coming into of getting authentic variety available in
places and communities that previously didn't have it or didn't have that breadth. The
groups that -- so I think the market, I see that market itself expanding significantly and us
having the resources to tap it.
Then secondly, the people who have generally been servicing that, it's been very
fragmented, small, specialty operators. And I think some of the same trends that are
causing some of your smaller conventional distributors to realize they don't have the scale,
the same thing will play out to these smaller specialty players.
Operator
The next question comes from the line of Ajay Jain with Pivotal Research.
Ajay Jain
So first on the acquisition front, I think with this latest announcement, you will be acquiring
I think three of your largest competitors over a pretty short period of time. I think Mark, you
mentioned in the prepared remarks that things have been pretty smooth so far post-
acquisition. But I wanted to ask, either for the Unified acquisition or Central Grocers in
Chicago, that's a lot of business to take on at once. So has there been any aspect of that
integration process that maybe hasn't gotten as smoothly as you might have hoped for?
Mark Gross
Yes. Thanks, Ajay. The great news is no, things have been moving very smoothly. And let
me tell you why. When I first arrived here, I shared with the team a vision of what this
business could be and what the opportunity was and what we needed to do to build up
resources to be ready. And so we were able to attract from my prior lives people that I've
worked with who I knew were very good at not just identifying synergies and opportunities,
but also in the integration work. And we've taken that team and melded it in with great
players that we have in SUPERVALU to have a team that's got a tremendous amount of
both industry and integration experience.
And we laid out a very strict set of these are the steps and this is what we are going to do
and this is how we are going to run, for example, the Unified integration. And we are just
executing on that plan with the team that's out there at Unified.
One of the things that I think has helped that is we were very focused on identifying
Centers of Excellence, on where was the best talent. People will talk about that, but we've
been able to do that and grab great people at Unified and made them not just leaders for
integration, but leaders in our business and leaders in a broader piece to weave that into
our network.
I think all of those things have had the benefit of being able to have this integration run
smoothly, to have people buy into it, to have the customers excited about the greater
offering that we can bring to the table. That gives us the confidence as we look at AG
Florida. That's a very talented team down in Florida -- small, but talented. And they've
seen the way we've done the Unified integration and I think they are excited to go as well.
So good news on the integration front.
The other piece I would just tie into that, Ajay, is what's also been good is making sure we
don't lose focus on the core business. And I was very encouraged that the core business
did well, good growth, great profits. And then you put onto that some good integration
work. Now we just have to keep doing that.
Ajay Jain
And I think the sales multiple for AG Florida is higher than Unified. I was just wondering if
the margins are structurally different. Or are there any other reasons that might explain
some of that variability in terms of the acquisition multiples. Maybe that's a function of the
co-op structure, but if you can comment, that would be great.
Mark Gross
Yes, it's interesting. AG's EBITDA multiple, though, was also higher than Unified's. And
there is some very unique stuff about each of those businesses and the totality of the
assets that they bring to the table. But we like both of these deals.
Ajay Jain
Okay. I had one final question, if I could, on the TSA based on the prepared comments. It
sounds like with the Albertson's wind-down next year, you still expect that it will be an
incremental headwind. But that the earnings impact will be about $20 million in fiscal
2019. Does that sound about right?
RobWoseth
So the guidance that we are providing, it's there is about $125 million of revenue after
fiscal 2018 is over. And I think what we are saying is that we've improved our outlook from
a flow-through perspective down to 70%. So basically I think your math is generally right.
So we are hoping to eliminate, I will call it, 30% of those costs related to the TSA.
Operator
The next question comes from the line of Vincent Sinisi with Morgan Stanley.
Vincent Sinisi
Thanks very much for taking my questions. So one on the M&A front and then another
one just on the CapEx front. On the M&A, of course congratulations on today's
announcement. But just wondering. I guess when you look at the pipeline that still remains
out there, is it fair to say that at this stage -- obviously you've taken on another pretty
sizable acquisition that you will focus on getting this closed. And then probably there will
be a bit of a digestion period before you might think to do something beyond that? Or if
something were to materialize that maybe has been in the pipeline, are there opportunities
that you think you would have the capacity to potentially take on something in the not-too-
distant future?
Mark Gross
Hi, Vincent. It's Mark. I think the game plan here is that you do these deals and we focus
on the synergies and integrating this business, on taking care of our existing customers,
and weaving in these new customers. That's where our head is that and that's what we
want to do. That said, if some great opportunity came to us that we thought in maximizing
shareholder value we should look at, we would look at it. But right now, my focus and the
team's focus is on integration.
Vincent Sinisi
Okay. All right. That's fair. Then I think if I heard correctly that the CapEx for this year, a bit
higher than the former. I think you said $310 million to $335 million. Maybe just a little
more detail around that, kind of what the delta there is. And if any of the initiatives within
the retail segment specifically, if any of that might be also factored into that. Thanks a lot.
RobWoseth
Yes, I will take a crack at that. Really what we have done is increase the range for the
Joliet distribution center acquisition. I think previously we provided a range of $250 million
to $275 million and now we are just simply $60 million higher. From a retail perspective,
you mentioned, our focus is going to be on investing in Cub and in Hombacher's. Those
are our two banners that we think will do the best from capital spend. And we are very
focused on capital spend in our other three banners. We are being very strategic in terms
of how we are applying capital in those banners. But nothing has meaningfully changed,
other than really the $60 million of capital for the Joliet distribution center.
Operator
The next question comes from the line of Chuck Cerankosky with Northcoast Research.
Chuck Cerankosky
Good morning, everyone. Mark, I'd like to focus on Market Centre a little bit and make
sure I understand it. To me, it's a somewhat slower turn type of business because of the
range of products and the specialty nature of them. And it is currently operating now out of
one distribution center, but you intend to spread it to the others or at least two more. And
in that context, does it then become a higher return business?
Mark Gross
So you are right in that because of its greater specialty nature, on average, it's been more
slower-moving product. But I would say Market Centre is really three components and let's
talk about it for a second. One is Hispanic. The second is -- and that's really coming out of
Southern California. Then you have got specialty gourmet in the Bay Area and natural
organic that's -- the team is in the Pacific Northwest.
So you take those three parts and they all combine into this Market Centre operation. And
our goal is to have that full offering in all of our regions. So that is to put it here in the
Midwest in Joliet and then in Pennsylvania and now with AG Florida down in Florida and
be able to make it available everywhere. But I think, just because some of it might be
slow-moving, I think the margins of that business, because it comes with -- you really are
helping. There is a piece here where you really are helping the retailer curate their
offering. You are really helping. You are bringing a level of expertise and product
availability. And I think with that greater sophistication and availability comes attractive
margins. And I think we will be able to do well with it as will our customers.
Operator
The next question comes from the line of Shane Higgins with Deutsche Bank.
Shane Higgins
Good morning. Thanks for taking the questions. Just on the Central Grocers' business,
what was the impact on sales and EBITDA in the second quarter? And what should we
expect for the rest of this year? And what if anything is embedded in your adjusted
EBITDA guidance, specifically from the Central Grocers' business?
Mark Gross
Yes, so Shane, we have not disclosed the breakdown of that. So this is where Central is
different from Unified and AG Florida. So Central, we would have been happy to do a deal
with the co-op, but they were not able to do so. So what we ended up doing there was just
purchasing the warehouse itself at what we thought was a very attractive price. And the
focus of that warehouse has all sorts of benefits throughout our operation.
But it's not up and running. By the time -- when we bought the Joliet warehouse, it was
empty and we are reconfiguring its space so that it will be more appropriate for our use.
So you are not seeing anything coming out of Central in our current operations.
That said, we have picked up a number of people who were previously supplied by
Central Grocers. But each one is its own, I will call it, small additional player and none of
them standing alone have been material to our operations for disclosure. That's a great
market, though.
Shane Higgins
Okay, thanks, I appreciate that color. And just a quick question on the East Coast Shop n'
Save stores. Are you guys still in talks with your independents about potentially
purchasing any of those stores? Or just any update there, that would be great. Thanks.
Mark Gross
Yes, so we continue to talk to our customers and people who might want to be our
customers on possibility of how we can help them get stores. And that's true in that market
and others. It's a challenged market and part of it's what's been going on there. But we
have a good team focused on running it. On a long-term basis, I think those stores better
fit with our customers, though.
Operator
The next question comes from the line of Scott Mushkin with Wolfe Research.
Mike Otway
Good morning, guys. This is Mike Otway in for Scott. I appreciate you taking the
questions. Two quick clarifications here and then going to get to my other question. So just
to be clear, if you back out Unified, any customers you've onboarded inside of a year, the
wholesale grew mid-single digits in the second quarter. Is that kind of what I heard earlier?
Mark Gross
Yes, hold on. Let's really -- if you back out Unified, the legacy wholesale business grew
12.5%. So one of the questions that we were talking about earlier was not just if you back
out Unified, but if you back out Unified and then some larger customer wins that have
come onboard, you got to that mid-single digit. But just exclude Unified core business,
wholesale went up 12.5%.
Mike Otway
Okay. Yes, I was really looking for underlying organic growth outside of the folks that
you've on boarded that have not been in the business for a full year yet. But that's kind of
around mid-single digits, it sounds like, excluding some of those bigger customers.
Mark Gross
Yes, which I think the core customer, the core customer we think is doing well. And the
core customer continues to perform.
Mike Otway
Okay. And then second, just housekeeping here. I think last quarter, you guys talked about
$35 million in EBITDA contribution from Unified Grocers for this year post close. How are
you guys tracking against that number? Kind of where are we?
Mark Gross
Yes, so on the comments of the guidance that we previously given, we are reaffirmed and
we think everything is going well.
Mike Otway
Okay, appreciate that. And then I guess my last question, and I appreciate the time.
Clearly there has been a move by the team to build up wholesale. You have onboarded a
bunch of customers. You acquired Unified Grocers and then today's announcement with
AG of Florida. And kind of stepping back, some of the customers that SUPERVALU have
onboarded have seen some pressure in their business, as you guys have in your own
retail assets. So when you look at the makeup of your distribution customers, and I think,
Mark, you just said that they were doing well, but longer term, clearly the industry is going
through some changes. It's putting pressure on a lot of folks.
So when you think about this dynamic of the desire to build scale in wholesale but also
how some of these smaller and regional distribution customers fare in this climate, how do
you think about that? Clearly some are seeing more pressure than others.
Mark Gross
You bet. That's what I was trying to address with the industry overview was a picture of
who I think is really succeeding. It's very difficult in this market to be able to do stuff and
think that you can sit in some central location and figure out what people want all over the
country. And to really make sure that we are connected in each of these communities, and
those customers of ours, those retailers of ours who seem most attuned to their
communities, whether it's on a cost-plus format or it's your most specialty gourmet, they
are the ones who generally have been doing the best. Those that give a shopping
experience.
And that was that whole bit of I still think the grocery experience, that people generally
want to pick up their food, particularly their fresh food. That it is a sensory experience. It is
you walk into a store and you see the sights and the sounds and the aromas of freshly
baked foods or freshly prepared foods. You see the colors of produce. And we look
through - and there are helpful people in the store. Those guys are doing very well.
But it's a challenging industry. I think that's what competition is all about. Our job is to
make sure that our customers have the tools to successfully compete. So that if their
customers want to be able to order product online, we are helping our customers have
that capability.
We often talk in this country about the last mile. In a lot of places, it's a heck of a lot more
than a last mile. And the distribution that's closest to these people is the distribution from
the store that they have been shopping. That they have a truly omnichannel experience.
They can decide do I want this order to be ordered online and delivered or do I want to go
into the store and select it. We just have to make sure that our customers have the toolkit
to provide that. And that's where our focus is and that's what seems to be working out
pretty well.
Operator
The next question comes from the line of William Reuter with Bank of America Merrill
Lynch.
William Reuter
Just two, to make sure I understand what you guys are trying to say. So with the $125
million of TSAs that are not in the fiscal year 2018 but will be in fiscal year 2019, are you
saying that 70% of that will go away? Or that 70% of that will be retained? Meaning, will
adjusted EBITDA go down by $88 million or by $125 million minus $88 million?
RobWoseth
Let me try that again. So the $125 million of revenue, we will begin losing that, if you will,
at the beginning of 2019. The lost EBITDA related to that $125 million will be about 70% of
the $125 million. So your words, it'd be closer to your $88 million number. Now we think
we can do and we are hoping to do better than that 70%. But out of the numbers that you
gave, the $88 million is the math.
William Reuter
Okay. And then one more housekeeping to make sure I understand. Your CapEx guidance
went up by $60 million. The DC outside Chicago is $60 million or so. Is that the increase in
CapEx that you are describing? Or are there incremental costs to get that DC up and
running that are constituting the extra $60 million of CapEx?
RobWoseth
The $60 million is the CapEx -- is frankly is the purchase price for that distribution center.
William Reuter
Okay. And then just lastly for me, you guys have talked a little bit about some assets that
you have on the West Coast associated with the Unified acquisition that at some point you
guys might be able to monetize. Has there been any progress made there?
Mark Gross
Well, we continue to look at those assets. The first focus here is the integration of these
assets into our network and making sure we are crystal clear on what's part of the network
and what's not. And that's got to drive the first part and then you can figure out exactly the
way you want to monetize these assets for the benefit of the business.
Operator
The next question comes from the line of Hale Holden with Barclays.
Hale Holden
Thank you for taking the call. Mark, I just had one. You talked about the high valuation of
commercial real estate and potential for monetization of some of the Company's assets.
Can you talk about what you would think to do with use of proceeds should a transaction
like that occur?
Mark Gross
I will tum it to Rob and he can talk about it. Clearly, mentioning it here in our remarks is
this is something we are working on and looking at and thinking through.
RobWoseth
I will just say, obviously a sale-leaseback transaction, if that's the path we go down, would
be governed by our credit agreements, which effectively would require us to pay down
debt and/or invest in other operating properties. But those are the general two choices that
we would have.
Steve Bloomquist
With that, we will conclude the call. Thank you, everybody. If you have any follow-ups, I
will be in my office later today. Thank you.
Operator
This concludes today's conference call. You may now disconnect.
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Comments (12)
Mark Krieger, Contributor

are they scamming us.? Another Enron. Shares are out a historic low, yet they are blowing our money on dumb
acquisitions? Is this a chapter 11 scenario?
how will they pay for Associated Grocers with borrowed money or with newly printed shares?
The stock is disgusting, vile and sickening.
18 Oct 2017, 01:20 PM
Brandt Ferris
I sold out before the split. glad I did
18 Oct 2017, 03:44 PM

these guys really delivered a gross earnings report- a real stinker if you may.
shares have made the NYSE greatest% losers list today!
all time low, is now in the books.
18 Oct 2017, 01:36 PM
JPTRKN
Please explain
180ct2017, 01:41 PM

the worse trade I ever made and lord knows, I have made a lot of them
18 Oct 2017, 01:48 PM
bullandbear200
What was your rationale for making the trade though?
18 Oct 2017I 08:49 PM
https://seekingalpha.com/arlide/4114318-supervalus-svu-ceo-mar1<-gross-q2-2018-results-eamings-call-transcript?part=single 22123
wanstar
How's that 1 for 7 split working out?? Another Einstein move
18 Oct 2017, 02:08 PM
hexpert
Mark GROSS - President and CEO
18 Oct 2017, 02:38 PM
DW2340
SVU wants to distribute groceries to stores that will eventually close because of the changing landscape. This
company is going nowhere and hiding the fact they're doing poorly by acquiring additional businesses. Margins are
getting worse and distribution carries smaller margins than the retail stores. I don't know how SVU survives .... Didn't
Tyco make a bunch of Acquistions before they imploded?
18 Oct 2017, 03:22 PM
batistuta.009
I do not know what the fright is here
The company reported an operating loss (25M) (0.65) per share
18 Oct 2017, 03:50 PM
Quad 7 Capital, Contributor

Our REACTION:
http://bit.ly/2zyMkDg
18 Oct 2017, 04:13 PM
seakalfa 1122
Are you people nuts- Any independent grocer that wants to survive will need to move to the Supervalu platform. They
will become the national service provider for all independent grocer's. This is how the independents survive against
Walmart, Kroger, and Whole Foods. Supervalu will be providing wholesale and computer related services to all
independent grocer's nationally and eventually international. Economies of scale to complete.
21 Nov 2017, 12:01 PM
https://seekingalpha.com/arlide/4114318-supervalus-svu-ceo-mar1<-gross-q2-2018-results-eamings-call-transcript?part=single 23/23

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11212018 Supervalu's (SVU) CEO Marl< Gross on Q2 2018 Results- Earnings Call Transcript I Seeking Alpha

Supervalu's (SVU) CEO Mark Gross on Q2 2018 Results - Earnings Call

Q2: 10-16-17 Earnings Summary

l•=I Press Release lsEcl 10-Q ll!J Analysis ~ News

Supervalu, Inc. (NYSE:SVU)

Q2 2018 Earnings Conference Call

October 18, 2017, 10:00 ET

Steve Bloomquist- Director, IR

Mark Gross - President and CEO

Rob Woseth - EVP, Chief Strategy Officer, and Interim CFO

John Heinbockel - Guggenheim Securities

Ajay Jain - Pivotal Research Group

Vincent Sinisi - Morgan Stanley

Chuck Cerankosky- Northcoast Research

Shane Higgins - Deutsche Bank

Mike Otway - Wolfe Research

William Reuter - Bank of America Merrill Lynch

Hale Holden - Barclays Capital

The information presented and discussed today includes forward-looking statements

In addition, certain information presented and discussed today constitutes non-GAAP

With that, let me now turn the call over to Mark.

Thanks, Steve. Welcome, everyone, to our second-quarter conference call. Joining me

Cub's flagship store in Stillwater, Minnesota, including several new merchandising

With that, let me tum the call over to Rob. Rob?

Second-quarter adjusted EBITDA from continuing operations, as outlined in table 5 of our

contemplated acquisition of AG Florida that is expected to close by the end of the

With that, let me tum the call back to Mark.

I don't know, Mark, if you would give more-.

like that occur?

This concludes today's conference call. You may now disconnect.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE

USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO

Mark Krieger, Contributor

The stock is disgusting, vile and sickening.

18 Oct 2017, 01:20 PM

18 Oct 2017, 03:44 PM

Mark Krieger, Contributor

shares have made the NYSE greatest% losers list today!

all time low, is now in the books.

18 Oct 2017, 01:36 PM

Mark Krieger, Contributor

18 Oct 2017, 01:48 PM

18 Oct 2017I 08:49 PM

18 Oct 2017, 02:08 PM

18 Oct 2017, 02:38 PM

18 Oct 2017, 03:22 PM

18 Oct 2017, 03:50 PM

Quad 7 Capital, Contributor

18 Oct 2017, 04:13 PM

21 Nov 2017, 12:01 PM

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