Good morning. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the UNFI Fiscal 2024 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now like to turn the conference over to Steve Bloomquist. Steve Bloomquist, you may begin your conference.

Good morning, everyone. And thank you for joining us on UNFI's second quarter fiscal 2024 earnings conference call. By now you should have received a copy of the earnings release issued this morning. The press release and earnings presentation, which management will speak to, are available under the Investors section of the company's website at www.unfi.com. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; and John Howard, our Chief Financial Officer. Sandy and John will provide a business update, after which we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I'd ask you to turn to slide six of our presentation as I turn the call over to Sandy.

Thanks Steve. We appreciate everyone joining us for our second quarter call. In my remarks this morning, I'll provide a brief review of our results, the operating environment, and the progress we're making resetting and restoring our profitability and driving sustainable value creation for our customers, suppliers and our shareholders. I'll also discuss this morning's other release, in which we announced that Matteo Tarditi will be joining UNFI later this spring as our new President and CFO. Our second quarter results again exceeded expectations and reflected a sequential improvement in adjusted EBITDA. This resulted from continued improvements in operational execution, progress on our near-term value creation initiatives, and some seasonality benefits. We accomplished this despite an industry backdrop that continues to be challenging. Inflation rates continue to decline sequentially, with some category-specific deflation occurring. Despite this trend, overall unit volumes remain under pressure and increased competition in food retail persists. Following a prolonged period of high inflation, consumers are continuing to buy less and are shifting some purchases away from the traditional grocery channel. This has led to negative volumes across the retail food industry and share gains by mass merchandisers and discounters. Given these challenges, we are focused on strengthening and adding new capabilities in addition to driving increased efficiency across our business so that we can help our customers remain as competitive as possible. Many of our customers are performing well, even in this environment, especially those with differentiated go-to-market propositions. Importantly, we see successful food retailers positioned across the value spectrum in both large and small markets and in natural and conventional channels. No matter how our customers are positioned, in their markets we are focused on supporting them and their unique strategies with improved efficiency, service levels, and market intelligence, as well as with the introduction…

Thank you, Sandy, and good morning everyone. As Sandy just noted, today will mark my last earnings call as CFO of UNFI. I look forward to partnering with Matteo during the transition over the coming months. Our finance leadership team is awaiting Matteo's start date and we're already preparing for his on-boarding process and expect a quick and smooth handoff. As you also heard earlier from Sandy, our second quarter was ahead of our expectations, driven by solid and improving execution across the business. Our updated outlook reflects this performance, balanced against an environment that remains challenging with consumers seeking value as they manage household spending. This morning I will provide commentary on the second quarter results, our balance sheet and capital structure, and some considerations as we look to the balance of the year and our updated fiscal 2024 outlook. With that, let's review our Q2 results. Turning to slide eight, net sales decreased 50 basis points from last year's second quarter to $7.8 billion, reflecting a continuing negative year-over-year trend in units sold that was partially offset by inflation, albeit at a decelerating rate, and new business. Inflation declined by about 800 basis points compared to last year's second quarter, and we are continuing to see category-specific deflation. As Sandy discussed in his remarks, the environment continues to be challenging for traditional grocery retailers. However, there is diverse performance across our customer base. We see this in our own results as well as with some channels continuing to grow while others face significant pressure in a highly competitive environment. Sales in our retail business declined by approximately 4.4% as we continue to be impacted by a difficult macro and industry environment. This partially reflects a significant decline in government assistance. Flipping to slide nine, let's now look at…

[Operator Instructions]. Your first question comes from the line of Mark Carden with UBS. Your line is open.

Good morning. Thanks so much for taking the questions and, John, best of luck going forward. I wanted to start by digging into what you guys are seeing on channel shifts from traditional grocery to mass. Was this largely in line with what you guys were expecting, say, a quarter ago, or how has this accelerated? And then how much of an impact is it having on demand for your value-added services? Thank you.

Hi, Mark. It's Sandy. I think it's in line with trends for the most part. I think what our customers will tell you is that competition is very fierce right now, and the consumer being stressed is looking for value in a lot of ways. From a pro-services standpoint, it's increasing demand for them, and it's increasing our commitment to make sure that we continue to refresh them to create more and more ways for our customers to save money, so they can be more competitive.

Got it. That's helpful. Thank you. And then at this stage, how are you guys thinking about the level of inflation over the course of the next few quarters?

I think, well John can pile on here. As he said, obviously year-over-year in the second quarter was a significant drop from about 10% down to 2%, and we're expecting the rate of change to moderate as we go towards the end of the year. John, do you want to add anything?

No, I think that's exactly right. I think we'll end up somewhere in between 1% and 2% in the back half of the year, by the time we end our fiscal year.

Great. Thanks so much, and good luck, guys.

Thank you. Appreciate it, Mark.

Your next question comes from the line of Leah Jordan with Goldman Sachs. Your line is open.

Good morning. Thank you for taking my question. I first wanted to ask about vendor promotions and see what you are seeing there. How are your conversations with suppliers evolving, and what's baked into guidance for the back half of the year?

Yeah, what we're seeing, Leah, is a continued sequential increase in promotional activity, but still below what they were pre-COVID. My expectation, and I think the sense we get from meetings with suppliers, is that they are going to continue to promote more aggressively, and they are sequentially increasing, and that's what's in our expectations for the rest of the year.

Okay, great. Thank you. And then for my follow-up, I just wanted to ask about the retail segment. We continue to see some weakness there. Just comment around demand trends and the competitive environment. And then I know you made some leadership changes recently, so maybe any updates on some improvements that you made in the business there and how you are thinking about it longer term?

Sure. From an overall performance standpoint, obviously, it was a challenging quarter for retail. We did appoint a new CEO, Andre Persaud, who's taking a fresh look at both the Cub and the Shoppers brand, and I would say actively consulting with our local franchisees, because Cub is a good brand. It's competing in a very challenging environment in the Twin Cities area with discounters and with masks, and Andre is looking at all aspects of our merchandising and service performance. I think our view long term is bullish relative to Cub and the potential of that brand in the Twin Cities market, and obviously we are looking at all the ways to accelerate performance and value for shareholders through that platform.

Thank you.

Your next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

So Sandy, I wanted to start with, I know you guys in the past had outlined this $40 billion existing wallet opportunity, right. So your view on that now, together with the service opportunity that you see, which I think is not part of that. And then when do you think you've got still work to do, when do you think you'll be ready to provide a three-year outlook or sort of longer term financial targets? Is that still maybe a year away?

Hi, John. Let me start where you started. We continue to see a very significant pipeline of opportunity, both from new customers as well as new category perspective, and you see some of that in our performance and in our outlook, but we remain very bullish, and the service opportunity continues to grow, simply because the need is there. And we have a number of new services that we're working on that we're not quite ready to go public with, but we're talking with customers about to help them be more competitive. From a longer term perspective, and I think I mentioned this in my remarks, we're in the middle of a strategy-focused review with our board and management team, that are going to help us clarify our long-term strategy and financial plan. And I don't want to get ahead of ourselves on this. That being said, we're making good progress on it while we're performing in a strong way relative to the efficiency programs that we've already put in place. As I highlighted last year, when we exited fiscal 2023, for example, in terms of operational improvements, shrink was running about 40 basis points above pre-COVID level. We now believe, based on the progress that we're making, that we actually can trim that below pre-COVID in the reasonable near term. So, lots of work going on by the team to drive operational improvement and efficiency and improve profitability in the short term. Strong process underway with our board through financial review linked to our next strategic plan, and we're committed to giving the street updates and more forward-looking detail when it's appropriate.

Alright. Maybe as a follow-up, other than just growing EBITDA, when you think about deleveraging creatively, whether it be asset sales, accounts receivable, you monetized in the past, is there anything interesting and not stupid, long term to reduce leverage quicker, or it's just going to, by definition it's going to have to be a gradual process?

Yeah John, I would say that we're looking at a range of different value creation ideas through the financial review and I would describe the ones as interesting and hopefully none that are stupid, and again, more to come on that. But we are doing a very thorough review, and we see lots of opportunity for this company.

Alright. Thank you.

Your next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.

Hi. Good morning, everyone. And John, best of luck with moving forward. I wanted to come back to the volume side. There's I think, an expectation that volumes can get better from here. It's hard to know because you don't report volumes, but it looks like unit volumes might be down 3%-ish, something like that. Vendors are leaning into promos. I mean, are you seeing any elasticity benefit out of that? Are you seeing any elasticity benefit out of the fact that pricing seems to be ending? Are your customers leaning into promo as well, like in addition to what the vendor's doing because you share stuff? I'm just trying to get a sense for what the volume picture could look like over time here. And then as it relates to all of that, what's the right level of volume growth and inflation you need in the business to drive sustained EBITDA growth over time?

Thanks Ed. Let me start with sort of a few facts that may help build out the picture and then get to the more strategic element of your question. Unit growth or unit declines are fairly consistent right now as they have been over the past couple of years. And while the inflation rate is clearly significantly lower, prices are still a lot higher than they were a couple of years ago. And I think that's weighing on consumers, certainly in the mid and lower parts of the economy, and that's creating an opportunity for discounters and mass that consumers are responding to. Promotions are increasing, as I mentioned, and retailers are promoting as well to be competitive. Inside the sort of retail detail, customer counts are healthy still, but baskets are going down, and I think that has to do with some category trading. Our growth going forward, and this gets to the latter part of your question, is going to be a function of more customers, more categories, and then our ability to work with them for them to be as healthy and profitable as possible. And clearly, we think profitable growth is part of our algorithm going forward, but I emphasize profitable growth.

Okay. And then as it pertains to procurement gains, have you now fully worked your way through those? So like the EBITDA that you are recording now is what you would consider more normalized. And then, on the flip side of that, you talked about vendor promotions rising. Obviously, levels are below 2019. Is there a way to frame what the opportunity is related to that for you as we think about levels of EBITDA?

Yeah. So, the way I'd describe the procurement gains is they are substantially annualized, although they still had some in the third quarter last year, and then again tapering further in the fourth quarter and into this fiscal. In terms of profitability, I think a good way to look at it is sequentially as opposed to year-over-year. And our profitability improved in the second quarter versus the first quarter and the first quarter versus the fourth quarter of last year. Some of that being driven by holiday seasonality, in what is our second quarter, but also the actions that we're taking to drive incremental profitability into the business, which will continue. From a promotion standpoint, there's a lot of ways that suppliers are investing in the market. They are investing through promotions, they are investing through new items, and they are investing through various media investments, some in partnership with retailers and some over the top, and we're seeing increases in all of those. And our strategy is, as I mentioned, to try to help suppliers see our customer base. Our customer base is vibrant with all kinds of positionings really across the country, over 30,000 outlets. So to the extent that suppliers can see all of them, not just the big ones, they can quantify the opportunity, watch the returns that they get. We believe that gets the flywheel going, and the more successful the consumer products companies are with independence, the more profitable and successful they'll be over time.

Okay. Thank you.

Your next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

Hey, guys. Thanks. Sorry, I think I had it on mute. Just first of all, John, it's been an absolute working with you, so good luck going forward.

Appreciate that, Scott.

So actually, I wanted to jump on the answer that Sandy gave to the last question. It seems, and maybe it's because of the ads that some of these, the advertising businesses that some of these large retailers have. Our research would say the vendor promotions are not necessarily being spread equally across the market, favoring some, maybe some larger retailers. How do you stop that? How do you kind of work against that as we move forward and promotions probably continue to go higher?

So Scott, I'll editorialize a little bit and then come back to your question. My experience in consumer products over many years, is that the diversity of the customer base is an extreme value driver for consumer products companies. So the conversations we're having with the commercial leaders, Chief Customer Officers, North America Presidents is really advocating for that strategic focus. Now, a successful consumer products company is going to work with all retailers and certainly focus on big ones, but the unlock is to drive accelerated growth with independence. Our job is to help them do that, help them see it, streamline and simplify how we work together and have them begin the investment return measurement invest again. Consumer products companies are very sophisticated and they see growth when it works and they see profitable growth when it works well, and that's our focus with them. And I think we will end up being able to earn our fair share or hopefully a little more for our customers by virtue of their ability to see the return that they can get. The final point is, relative to advertising businesses, I think that's an opportunity. Retail media through an independent lens would be incredibly successful if it can be executed, and obviously we're focusing on ways in which we might be able to help with that.

Alright, perfect. And then actually I've got two others if I could slip them in. So first of all, on the CapEx going forward, I guess it’s about $400 million this year. When do you expect maybe that will come down? Do you expect it to come down? So that's number one. And the second is again more strategic, it has to do with Cub. Originally when the merger was done, the thought was that Cub would be sold. Is that still on the table or is that, hey, that's really not on the table?

Scott, let me start with the second one first. We believe the Cub brand is a very viable brand and has a lot of success ahead in its future. One of the interesting parts of the model is that a significant part of it is franchised, and some of the leading retailers in Twin Cities are in the brand. And with Andre joining the company, we're engaged heavily with our franchisees to discuss the best ways to drive the brand forward and a number of very good ideas are on the table. So we will continue to do that in a way that's good for the brand, good for the franchisees, and good for our shareholders. Relative to capital and the outlook there, as I mentioned earlier in my script, we're in the middle of a next three-year plan process and a financial review with our Board. Capital intensity is an important part of the focus of that conversation, and we're employing the zero-base philosophy that we use for overall planning to capital planning as well, and we'll have more to talk about at an appropriate time.

Alright, guys. Thanks so much.

Thanks, Scott.

Your next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open.

Good morning, everyone. In looking at the quest to grow your volume and improve your volumes, can you talk about private label? You don't have much, if any, in the way of manufacturing. How do you get that in the loop, while at the same time not annoying the CPGs? But it seems to be incredibly important as consumers are looking for the value and lower prices, etc.

Yeah Chuck, an extremely good point. I mean, we're focused on private brands as an important part of the value proposition that we bring to our customers, and we've done a bunch of work on it actually. We've recruited top talent into that. We've kind of streamlined out of a lot of little ideas into some big portfolios that fit the various positionings of our customers, and we're focused on helping our retailers be very competitive in private or exclusive brands. So I agree with the thesis of your question.

Alright. Thank you.

Your next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open.

Hi. Good morning. This is Ben Wood on behalf of Kelly. Thank you for taking our questions, and good luck, John, on your future endeavors.

Appreciate that, Ben.

Our first question is, we've been hearing that UNFI recently introduced a new simplified approach to supplier fee structures. Would you be able to expand on that initiative? What's the thought process behind it? What are the efficiencies or incremental business you hope to gain from it?

Sure. And Ben, it's early in the launch process, but you described it well. It's a new way of working with our suppliers that will enable them to have access to data and insights and a faster, more flexible relationship with us. Clearly, the design of which is to simplify their ability to get their new items, to get their investment, their promotions to our customers easier, faster, quicker. We have traditionally had a very fee-based approach to how we work with suppliers, and what we're doing is we're eliminating a lot of that and creating a much simpler relationship, so that they'll be able to make a simple investment, and then we put their focus and our focus on driving value to the shelf. More details to come. It's early, but at this stage, we're in the rollout mode.

Great. Thank you. And then just wanted to dig into gross margins a little bit. Understanding in 2Q you guys were still lapping some procurement gains, but it looks to us like there should be some mixed shift pressure between the segments and then potentially offset by increases in promotions. So our question is, when should gross margins start to stabilize? What are the major puts and takes in gross margin in the second half, maybe compared to Q2 as well?

Ben, this is John. I'll start. So we generally don't provide guidance on gross margin, just the sales and EBITDA EPS. We have, as you might imagine, a lot of puts and takes in margin, all of which I think we've talked about between promo spend, the improvements in strength that we're seeing, the forward buy that we're lapping mostly through the first half of this year. So again, the guidance that we provided for EBITDA reflects how we are thinking about the margin and the rate, and what we're anticipating is as Sandy has mentioned, that promo spend will continue to tick up. We'll start to see or continue to see the improvements in strength, but we still have the margin pressure in general that we're seeing within the industry. Sandy, anything to add to that?

Nope. I think you said it well.

Your next question comes from the line of Andrew Wolf with CL King. Your line is open.

Thank you. Good morning. Sandy, I wanted to – sort of maybe a follow-on to what Scott was asking about capital expenditures. Could you just kind of review and discuss, give us as much additional information or insight as you wish on kind of the business case for automation at the distribution centers? You have some trail you can open. I think you announced a new one. Is this like a C-change in a cost structure? Is it incremental? Is it kind of defensive because the price of the cost of labor has gone up? Now, how do you really view the opportunity for a reasonably large capitalized business as to go through an automation transformation?

So, thanks, Andy. You articulated some of the big strokes of the case. We believe that automation enables us over time to materially enhance capability, load quality, the layout of how pallets are distributed and organized for retailers based on how their shelves are set. It drives efficiency. It's obviously more friendly from a labor perspective, which is a labor scarcity issue more than anything else. It also allows us to drive very efficient growth in the distribution center, and I think that's a big part of the case. Ultimately, we see the network optimization in organizing our DCs and automation as being part and parcel of each other. And the ultimate payoff is return on invested capital, better customer service, and more profitable growth.

Okay, I see them being related. I see them both being helpful. I assume, this is a – could you somehow at least qualitatively discuss where it is between a C-change in the cost structure and just an incremental and/or even a defensive type of investment? Defensive meaning, to maintain your margins, profit margins, and C-change meaning a big increase.

Yeah, I think it's incremental more than a sea change, largely because it's something we have to do in an extremely disciplined way, because it fits certain situations and doesn't fit others. And as a part of our overall financial review, we're working through that in a much more granular and disciplined way. But we have high expectations for it in the market situations we put it in, and we think it incrementally improves our financials and our returns on capital.

Okay. And also a follow up on the $150 million of shrink and other cost savings that, you've I think identified. Just kind of two things about that. One, it sounds like you've added to it. Is that enough that you could say how much more it might have been added to that? And two, where are you at in realizing it? Is it a full run rate? Is it $150 divided by four or is it going to be cumulative? Is it less than that and it's accumulating. It's increasing.

So Andy, let me try to unpack it at least as far as we've been public about it. We've actioned the $150 million run rate savings. Shrink improvement is not in the $150 million of savings. And the incremental work we've done around spans and layers, which is relatively small compared to the $150 million, would be incremental and is going forward, and that's in process now. What I would further say is that streamlining and improving the efficiency of this company is going to be our work forever. And that effort will continue with each quarter and year coming. But the $150 million is actioned. The shrink is incremental. And the spans and layers is incremental but small compared to the $150 million, and it's in process.

Okay. Thank you.

Your next question comes from the line of Alex Slagle with Jefferies. Your line is open.

Hey, good morning. Thanks for the question. I'm wondering if you could talk to turnover levels and productivity improvements just related to tenure and training and how impactful these have been in the relative margin improvements you've seen and maybe what the path looks like going forward, just more room to go or have really the biggest gains been captured at this point?

So I'm going to make a summary comment and then I'm going to ask John to fill in with detail. We saw market improvement in our throughput in our DCs, and a significant component of that is increased tenure of associates. In addition, a driver of it is process improvements, which are a driver not only of productivity, but also a driver of the reduction and shrink. Much like SG&A savings, we think operational productivity is a constant effort, and I would say we continue to have significant opportunity for improvement there. But the specific answer to your question is, we're seeing throughput grow, tenure increase as the workforce stabilizes. John, do you want to put anything more on that?

No, I think that's right. I think we mentioned in the first quarter that we've seen progress on lowering the vacancy rate. And we continue to see that improve in Q2. We also said, as Sandy suggested, that throughput was actually the highest it's been in the last two years in Q1, and we've seen that level continue to improve also in Q2. And that's a direct result of what Sandy just said. It's a result of the new processes, our standard operating procedures, some additional warehouse technology we put in place. So we're seeing the results come through in our OpEx.

Got it. And any high-level guardrails in thinking about 3Q profitability as you sort of evaluate where 2Q came out, if there were timing of cost saves or a bigger ramp in the shrink reduction that maybe had an outside benefit in the quarter? I'm just trying to get a view on the third quarter from that perspective.

Yes, I think John said in his prepared remarks very well. Our guidance implies $255 million of EBITDA in the second half. The fourth quarter has an extra week, which is about $9 million, and that would be all that we've said about the pacing.

Okay. Thank you.

And your last question for today comes from the line of Peter Saleh with BTIG. Your line is open.

Great. Thanks for taking the question. I may have missed this, but did you guys give us an exact amount of where we were on shrink? I know pre-pandemic I think it was 20 basis points. And last we heard we were running, I don't know, maybe 60 basis points or so of shrink. Just trying to understand exactly where we are today given the progress you've made on shrink.

Yeah. I think the numbers you just provided are consistent with what we said before. And what we said today is that we've made significant progress, in fact more progress than we'd expected to make, and I'm happy to see that because this is pure waste, so. And then I think commented further that we actually see the opportunity going forward to get to new lows below pre-COVID. So we made material progress on it. We have more progress to go.

Great. And Sandy, on that progress to be better than pre-COVID on shrink, is that something you foresee in the near term, or is that more of a multi-year kind of initiative? Just trying to understand the timeline on getting to those levels.

Yeah, that's Peter. We haven't obviously given go-forward guidance. I think I'm just pointing to it as an operational opportunity and something that we've got conviction on.

Great. Thanks.

I will now turn the call back over to Sandy Douglas for closing remarks.

Thanks, Operator, and thanks to everybody for joining us this morning. Our team is committed to sustaining our operational momentum as we look to the balance of fiscal 2024. We remain confident in our multi-year improvement plan. As a result, we believe we have a compelling opportunity to create sustainable value for our customers, suppliers and our shareholders through our scale, enhanced capabilities, efficiency initiatives, and profitability focus. We're optimistic we'll build on the progress we've made in our first half, and we look forward to continuing to update you on this. I also want to thank John Howard for his leadership over the last five years, and for the support that he's provided to me when I joined UNFI. John, on behalf of UNFI, we wish you all the best. And finally, for our customers and suppliers, we thank you for your continued partnership and the business we do together. For the UNFI associates listening today, our thanks to each of you for everything that you do for our business, our customers, our communities, and each other. And for our shareholders, we thank you for the trust you continue to place in us. Thanks again for joining us this morning, and I look forward to updating you in June with Matteo.

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